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Guest cphcs

Change of Control Questions

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Guest cphcs

(1) Grandfathered nonqualified plan provides for distributions upon a change of control. A change of control will likely occur next year, but participants do not want distribution.

Proposed regs indicate that reduction of an existing benefit, right or feature is not a material modification. The example given in the proposed regs is removal of a haircut provision. Also, the conference committee report provides: "As another example, amending a plan to remove a distribution provision (e.g., to remove a “haircut”) would not be considered a material modification."

Any thoughts on whether it would be a material modification to provide that no distribution due to that specific change of control? any change of control?

(2) For non-grandfathered plan, same issue. Any thoughts on whether participant could avoid distribution on the basis that transition relief permits a new distribution election for amounts payable in the next year?

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Guest Harry O

1. What feature are you trying to protect in the grandfathered portion of the plan? If there is really nothing valuable there (like a 10% haircut provision), why not take advantage of the transition rule and have everyone make a change in control payment election before 1/1/07 for a change in control that will happen in 2007? People who want there money next year can so elect and those that want to defer it can pick any year after 2007 that their heart desires.

2. Ditto.

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You lost me there, Harry. If the plan is grandfathered, it is not subject to Section 409A. The transition rules apply to Section 409A plans. I don't see how the transition rules could be used by a grandfathered plan.

Having said that, taking away a benefit isn't a material modification, as the original posted wondered. But I wonder whether amending the plan to take out the distribution upon a COC is tantamount to allowing an extended deferral (from what it would have otherwise been without the amendment), and be seen by the IRS as a benefit.

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Guest Harry O

If you offer transition elections under a grandfathered plan, you blow the grandfather and become subject to 409A. Once you are subject to 409A you have no problem since the transition elections presumably comply with 409A. Again, you would only voluntarily subject yourself to 409A if there is no feature of the grandfathered plan worth protecting.

Removing a provision that would require payment upon a CIC is effectively a further deferral of previously deferred compensation. Such a change would seem to be a material modification.

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