Guest Article

(From the September 29, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRC § 409A: IRS Clarifies Calculation of Grandfathered Amount in Non-Account Balance Plans

IRS clarified the methodology for calculating the grandfathered amount in non-account balance deferred compensation plans for purposes of IRC § 409A. For taxable years after December 31, 2004, the grandfathered amount may increase based on "reasonable actuarial assumptions." Reasonable assumptions used under the plan as of December 31, 2004 -- or assumptions used under a qualified plan whose benefits are part of the benefit formula of the plan -- are presumed reasonable for purposes of determining the post-2004 grandfathered amount. 73 Federal Register 54945 (September 24, 2008).

IRC § 409A applies with respect to amounts deferred in taxable years beginning after December 31, 2004. It also applies to amounts deferred in taxable years beginning before January 1, 2005 if the plan under which the deferral is made is materially modified after October 3, 2004. For various reasons, an employer may seek to "grandfather" amounts which were deferred in taxable years beginning before January 1, 2005 -- for example, to protect the employee's expectations regarding the time and form of payment (which are restricted under IRC § 409A).

In a non-account balance plan, the amount deferred before January 1, 2005 is the present value of the amount to which the service provider would have been entitled if he or she terminated services without cause on December 31, 2004, and received payment on the earliest possible date allowed under the plan in the form with the maximum value. For subsequent taxable years, the grandfathered amount may increase to the present value of the benefit the service provider actually becomes entitled to under the plan as in effect on October 3, 2004, without regard to further services rendered or other event affecting the amount of or entitlement to benefits.

IRS clarified that, for purposes of determining the grandfathered amount in taxable years after December 31, 2004, reasonable actuarial assumptions and methods must be used. Reasonableness is determined as of each date the benefit is valued for purposes of determining the grandfathered benefit.

Under the regulation as amended by IRS, the following assumptions and methods will be presumed reasonable:

IRS is reportedly considering an extension of the December 31, 2008 documentary compliance deadline. A one-year extension of the good faith compliance period has been requested by members of the legal community.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.