Comments Concerning IRS Notice 2001–10
I. Characterizing Equity SDAs
- Section 83
- Substantially Vested
We suggest that the Treasury and the IRS provide guidance on the meaning of the term "substantially vested" under the Interim Guidance. Paragraph A.3 of the Interim Guidance provides that an employee will be subject to immediate income tax under Section 83 when the employee acquires a "substantially vested" interest in policy CSV. The term "substantially vested" is not defined. Presumably, this is a reference to longstanding "substantial risk of forfeiture" concepts under Section 83.
Applying "substantial risk of forfeiture" concepts to Equity SDAs raises several questions. Does the employee's lack of access to CSV (i.e., no right to withdraw funds or take policy loans) without continuing to provide services constitute a "substantial risk of forfeiture"? Does it make any difference if the Equity SDA provides that the employer has the right to use CSV for future premium payments or buy paid up additions with CSV? Is the character of income when the CSV becomes substantially vested "wages" for purposes of federal income and payroll tax withholding? Would future appreciation of property previously reported as "wages" be eligible for capital gains on withdrawal or policy surrender?