covid unforeseen 409

COVID-19 and the Unforeseen Financial Emergency Under IRC 409A

Fulcrum Partners Deferred Compensation News

COVID-19 Distress May Be Considered an “Unforeseen Financial Emergency” under the IRC §409A Regulations

Internal Revenue Code Section §409A (IRC 409A) regulations govern the design and administration of nonqualified executive benefit plans. Nonqualified executive benefit plans have very specific rules on the form and timing of participant distributions and, generally, offer little flexibility on changing the form or timing of the distributions following the submission of the election form. One of the exceptions in the 409A regulations for altering previously submitted distribution elections is addressed under the unforeseeable emergency provisions.

IRC 409A Participant Distributions

The 409A regulations allow for a payment to be made upon the occurrence of an unforeseeable emergency. Specifically, an “unforeseeable emergency” is defined as a severe financial hardship of the employee resulting from:

  • An illness or accident of the employee or the employee’s spouse, beneficiary, or dependent;
  • The loss of an employee’s property due to a casualty; or
  • An other similar extraordinary or unforeseeable circumstance arising as a result of events beyond the control of the employee.

Each request for a plan distribution under the unforeseeable emergency provisions must be evaluated on the relevant facts and circumstances of the case. The regulations do provide specific examples of events that qualify as an acceptable unforeseen emergency. These examples include:

  • The need to rebuild a home as a result of a natural disaster not covered by insurance;
  • The Imminent foreclosure or eviction from the employee’s primary residence;
  • The need to pay medical expenses not covered by insurance; and
  • The need to pay funeral expenses for a spouse, beneficiary, or dependent.

Is COVID-19 an Unforeseeable Emergency?

During this current COVID-19 crisis, would severe economic hardship caused by COVID-19 be classified as an extraordinary or unforeseen circumstance?

Again, the decision to approve the request must be based on the specific facts and events documented in the request. The plan sponsor’s committee that is responsible for the governance of the nonqualified executive benefit plan should first submit the employee’s request to their legal counsel for review and guidance on the applicability of the employee’s request within the 409A provisions. Ultimately, the decision will rest with the committee. Documentation of the request and the review process should be clear on the facts and circumstances of the request and the rationale for the committee’s final decision.

Finally, its important for the plan sponsor to remember that cessation of an employee’s deferral elections for the remainder of the plan year could be an acceptable form of satisfying the financial emergency and not all requests under this 409A provision may require an actual distribution from the plan.

Neither the U.S. Treasury nor the IRS have given any indication that guidance on this issue will be forthcoming. Until such guidance is issued, plan committees should rely on guidance from their legal counsel and the facts and circumstances of the case. Fulcrum Partners will certainly alert its clients if it learns of any forthcoming Treasury guidance.

The team at Fulcrum Partners is always available to provide further clarity on the issues discussed in this article or any other issue impacting your nonqualified plan, funding arrangement, or associated trust agreement.

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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 CapAcuity, LLC; Lion Street Advisors, LLC (LSF) 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, LSF and BDO Alliance USA are non-affiliated entities and separate entities from Fulcrum Partners and CapAcuity, LLC.

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