Share this Post
Section 162(m) grandfathering rules set in place on December 30, 2020 bring much needed clarification to compensation payable under account balance and non-account balance nonqualified plans. The clarifications implement amendments made to Section 162(m) by the Tax Cuts and Jobs Act (TCJA). Although we’ve updated you previously on this guidance, the information is so helpful, we believe it bears further scrutiny.
Deep Dive: Account Balance Plans and Non-Account Balance Plans
Typically, deferred compensation is provided under either (1.) an account balance arrangement, or (2.) a non-account balance arrangement. In either case, grandfathering rules apply, as long as the deferred compensation agreement meets the terms described in the following text[i].
With respect to an account balance plan, the final regulations provide that the grandfathered amount under an account balance plan is the amount that the corporation is obligated to pay pursuant to the terms of the plan as of November 2, 2017, as determined under applicable law.
If the corporation is obligated to pay the employee the account balance that is credited with earnings and losses and the company has no right to terminate or materially amend the contract, then the grandfathered amount would be the account balance as of November 2, 2017, plus any additional contributions and earnings and losses that the corporation is obligated to credit under the plan, through the date of payment. The final regulations include a comparable rule for non-account balance plans.
If the account balance plan is a written binding contract as of November 2, 2017, and the terms provide that the corporation may terminate the plan and distribute the account balance to the employee, then the grandfathered amount is the account balance determined as if the corporation had terminated the plan on November 2, 2017, or, if later, the earliest possible date the plan contractually could be terminated.
Whether additional contributions and earnings and losses credited to the account balance after the termination date, (through the earliest possible date the account balance could have been distributed to the employee) are grandfathered depends on whether the terms of the plan require the corporation to make those contributions or credit those earnings and losses through the earliest possible date the account balance could be distributed if it were terminated. The final regulations also provide a similar rule for non-account balance plans.
If the terms of the account balance plan provide that the corporation may not terminate the contract, but may discontinue future contributions to the account balance and distribute the account balance in accordance with the terms of the plan, then the grandfathered amount is the account balance determined as if the corporation had exercised the right to discontinue contributions on November 2, 2017 or, if later, the earliest permissible date the corporation could exercise that right in accordance with the terms of the plan (the freeze date).
Additionally, if the plan required the crediting of earnings and losses on the account balance after the freeze date through the payment date, then those earnings and losses credited to the grandfathered account balance are also grandfathered. Likewise, the final regulations provide a comparable rule for non-account balance plans.
On the other hand, whether the terms of the account balance plan provide that the corporation may terminate the plan or, instead, may discontinue future contributions, the corporation may elect to treat the account balance as of the termination date (or freeze date, if applicable) as the grandfathered amount regardless of when the amount is paid and regardless of whether it has been credited with earnings or losses prior to payment. Again, the final regulations provide a similar rule for non-account balance plans.
The final regulations also adopt an alternative grandfather rule that disregards earnings and losses in order to minimize the administrative burden of tracking the earnings, losses and new contributions (if made) on an account balance plan or the increase or decrease in a non-account balance benefit after November 2, 2017.
With respect to an account balance plan, the Treasury Department and IRS understand, “this grandfather rule may result in contributions made after November 2, 2017, not being subject to the section 162(m) limitation if the contributions offset losses; however, the Treasury Department and IRS concluded that under many common arrangements the continuous separate tracking of earnings, losses, and contributions on the November 2, 2017, account balance through the payment date would be burdensome to administer while having a limited, if any, impact on the available deduction.”
We know, there’s a lot to take in here. Guidance from legal and tax professionals is key along with the targeted understanding experienced executive compensation consultants provide.
#fulcrumpartners #onedigital #162m #deferredcomp #executivecompensation
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through Lion Street Advisors, LLC (LSA) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI and LSF/LSA are non-affiliated entities and separate entities from OneDigital and Fulcrum Partners.
Unless otherwise noted, VAI/VSI, LSF/LSA are not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.
Share this Post