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409A


Guest KLCarter

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Guest KLCarter

If an employer has a frozen account balance grandfathered plan, and it adopts a new account balance plan in 2005 (subject to 409A) for basically the same employees, can the new plan allow for initial elections in the first 30 days? or does the grandfathered plan mean that this is not a new plan for the purposes of the 30-day initial election period?

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That's a good question. A quick review suggests you'd generally aggregate all plans -- both grandfathered and not. 1.409A-2(a)(6) says the election must be made within 30 days of first becoming eligible to participate in the plan as defined in 1.409A-1©. So you can only use it when first becoming eligible in any plan of that type. 1.409A-1© doesn't exclude grandfathered amounts from the definition of "plan." The grandfather rules under 1.409A-6 merely exclude pre-2005 "amounts" from application of 409A. So the grandfather rules apply at the dollar level, not plan level? To be conservative, I'd say the 30 day rule doesn't work here?

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under the proposed regulations, you clearly can't adopt a new 409A plan every year and use the 30 days. You have to aggregate all plans of the same type for that purpose. So you have to be a new participant in that type of plan. The only question is whether grandfathered plans are aggregated.

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If I had a client with a problem that it was too late to unwind, I think I'd try to argue that it was a good faith interpretation to say that you don't have to aggregate with grandfathered plans.

For right now, I think that the problem is that we don't really have a lot of guidance either way. As I noted in my first post, the proposed regulations don't have a specific carve out for grandfathered plans in the plan aggregation rules. The carve out is in a later section and just applies to amounts. (And I would also add that Q-18 of 2005-1 has a specific exception to the aggregation rules for terminations of grandfathered plans). So I would say a conservative reading says you aggregate both grandfathered and non-grandfathered except where it specifically says you don't. (And I don't see that in the 30 day rule).

So one of the first steps in any analysis would always be to categorize and aggregate all your plans (grandfathered and non) before applying any rules. Then a later step would be to carve out grandfathered amounts for most purposes. But for just a few rules like the 30 day rule, the aggregation with grandfathered plans could be very meaningful.

But they haven't made a big point of this. Haven't affirmatively warned that aggregation occurs first. And haven't made it clear how far back you have to go in aggregating. Does it matter if the employee participated in a plan that was terminated long ago before 409A? What if there have been two or three corporate transactions in the mean time? Do you have to go back and figure out if the old plan is one that has to be aggregated for this particular employer? The gut reaction right now might be that you don't have to go back. But what do you do in 5 or 10 or 20 years when these same questions come up? I think that I'd like the IRS to clarify this a little.

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Are you relying on anything more definitive than what I've pointed out (the sections in the proposed regulations and Q-18 of 2005-1)? I haven't scanned through everything on this issue.

Have you considered what other issues might be affected by this -- other than the 30 day rule? What about termination of a grandfathered plan after December 31, 2005. Would you have to follow the restrictions on plan terminations?

It would be nice to have a list. And then get the IRS to clarify cutoffs.

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