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Section 409A of the Internal Revenue Code was created under the American Jobs Creation Act of 2004. ARLINGTON, Va. – NAFCU is concerned that new Internal Revenue Service rules that address nonqualified deferred compensation plans may clash with several established rules on 457(f) plans, an increasingly popular executive benefit offered by credit unions. At issue is section 409A of the Internal Revenue Code (IRC) as added by the American Jobs Creation Act of 2004, which provides that all amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless certain requirements are met. In response to the IRS’ request for feedback on 409A, NAFCU President/CEO Fred Becker said that while the trade group supports the new guidelines, some clarifications are in order. Specifically, clarity is needed on guidance related to the substantial risk of forfeiture under IRC section 409A and how it relates to the rules in place regarding the substantial risk of forfeiture under IRC section 457(f). FCUs frequently offer 457(f) plans to certain employees or officers, Becker explained. Under section 457(f), income is taxed when there is no longer a substantial risk of forfeiture. Many plans are structured with a “rolling vesting” option so that the vesting of income may be postponed until retirement. Although it is clear from the IRS guidance that plans with a “rolling vesting” option are not deemed to subject to a substantial risk of forfeiture under section 409(A), it is unclear as to when the income will be taxed under section 457(f) if there is a fixed distribution date. NAFCU believes that if a 457(f) plan contains one of the six permissible distribution events under 409(A), yet also contains a “rolling vesting” option, the plan would still comply with the new IRC, Becker wrote. “This interpretation of the statute creates more opportunities for employees to create retirement savings,” Becker said. “It is vital for FCUs to be able to attract and retain management talent. However, even if the IRS were to create a more restrictive rule regarding plans with a “rolling vesting” option, NAFCU urges the IRS to offer guidance to clarify this issue to ensure certainty for credit unions that offer these types of plans.” Another issue of concern is when “acceleration events” are permissible, Becker noted. IRS Section 409(a)(3) currently permits the acceleration of benefits in several situations: a domestic relations order; conflict of interest; certificate of divestiture; section 457 advance to pay taxes upon vesting event; de minimus amounts; and payment of employment taxes. Becker said the acceleration list “should not be all-inclusive” and has urged the IRS to allow a participant to elect from several optional payment forms, all payable as of the same benefit commencement date, without violating the anti-acceleration rule. Provided the benefit commencement date is not changed, a participant should be able to make a choice among the optional payment forms without violating the rule, Becker suggested. “For instance, if a plan contains an option to have distributions occur as a lump sum or as installments, it appears from the guidance that a participant cannot make a post-deferral election to waive the normal installment payment form in favor of a single sum without causing an unlawful acceleration,” Becker pointed out. NAFCU believes that this type of election should not violate the anti-acceleration clause of 409(A). “As long as the participant does not change his/her benefit commencement date, we believe it should be lawful to make a choice, for example, between a single sum distributed on January 1, 2007 and a series of installments beginning on January 1, 2007,” he said. However, an “unlawful” acceleration should occur only when the participant chooses to receive his/her benefit at an earlier starting time, Becker said, adding more clarification is needed here for the final IRS guidance. More clarity is also needed within section 409(A) on distributions, Becker suggested. The new section deals with changes in the time or form of distributions elected subsequent to the initial deferral. These rules apply in the case of a plan that permits, under a subsequent election, a delay in a payment or a change in the form of a payment. One of the requirements, in subparagraph (ii), requires “that the first payment with respect to which such election is made be deferred for a period of not less than five years from the date such payment would otherwise have been made.” NAFCU believes that it is “unnecessarily restrictive” to require an individual seeking only to change the form of payment to also have to defer the commencement of payment for five years. “The IRS should clarify that an election to merely change the form of payment, if elected at least one year in advance, is lawful and does not necessitate the individual to also suffer a five-year delay in benefit commencement,” Becker wrote. Finally, NAFCU believes that severance arrangements should not be included in the provisions of 409A. A typical severance arrangement is designed to provide a temporary income source to an employee who is involuntarily terminated, Becker said. The provisions of 409A would inhibit an employee from having access to funds directly after his/her release from employment, he added. “If the IRS is concerned that severance plans are being used to give a former employee a windfall, the IRS may want to consider exempting severance plans that provide less than one year’s salary from the provisions of 409A,” Becker recommended. [email protected]

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