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jpod

Adding a Permissible Distribution Event

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Nonqualified deferred compensation agreement provides for payment of benefits only upon separation from service or death of employee. No mention is made of change in control. Can the parties now amend the agreement to provide for a payout on the earlier of change in control or separation from service, without violating the non-acceleration rule (or any rule)? (A change in control is being negotiated.) I thought the answer was clearly "yes," but I can't find an explicit statement to that effect in the proposed regs. Citations would be appreciated.

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Guest Gompers

This is from the preamble, didn't check to see where or if it is in the reg....

C. Change in payment elections or conditions on or before December 31, 2006--Notice 2005-1, Q&A-19© provided generally that with respect to amounts subject to section 409A, a plan could be amended to provide for new payment elections without violating the subsequent deferral and anti-acceleration rules,

provided that the plan was amended and the participant made the election on or before December 31, 2005. The period during which a plan may be amended and a service provider may be permitted to change payment elections, without resulting in an impermissible subsequent deferral or acceleration, is hereby extended through December 31, 2006, except that a service provider cannot in 2006 change payment elections with respect to payments that the service provider would otherwise receive in 2006, or to cause payments to be made in 2006. Other provisions of the Internal Revenue Code and common law doctrines continue to apply to any such election. Accordingly, with respect to amounts subject to section 409A and amounts that would be treated as a short-term deferral within the meaning of §1.409A-1(b)(4), a plan may provide, or be amended to provide, for new payment elections on or before December 31, 2006, with respect to both the time and form of payment of such amounts and the election will not be treated as a change in the form and timing of a payment under section 409A(a)(4) or an acceleration of a payment under section 409A(a)(3), provided that the plan is so amended and the service provider makes any applicable election on or before December 31, 2006, and provided that the amendment and election applies only to amounts that would not otherwise be payable in 2006 and does not cause an amount to be paid in 2006 that would not otherwise be payable in such year.

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Guest Harry O

I think your question really should be whether adding a 409A permissible distribution event (change in control) to your plan causes the plan to lose its "grandfather" status under 409A. I don't have the regs handy but I seem to recall that this qestion was addressed. Gompers is referring to a special transition rule in effect for 2005 and 2006 but use of this rule presupposes you are already subject to 409A. It looks like you have a plan that has some grandfathered money so you may want to be careful about what you do to this plan.

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Harry O: This deferred comp. agreement has some g-fathered money and some non-g-fathered money, so to at least some extent it is subject to 409A anyway. The transitional rule is not of any use here because the cc will occur in 2006 and if we can amend to allow for payment on a cc the payment would be made in 2006, thereby violating the transition rule. I suppose we can take advantage of the transition rule and hold up on payment until 2007, but client wants to know whether payment can be accelerated and made at the closing table in 2006.

Also, I am aware of the rule allowing the employer use of its discretion to terminate plans upon a cc (subject to certain requirements), but right now the employer does not have that discretion. The employee would first have to agree to amend the agreement to give the employer that discretion, but if that works it seems like too easy of a way around this problem, and I don't feel comfortable with it.

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