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Changing installment payment election

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1. The final regs say that installment payments that are not an annuity are considered a "single payment" unless the plan specifically states that each scheduled payment is considered a "separate payment." Reg. 1.409A-2(b)(2)(iii) What does this mean?

2. I have an arrangement where employees elected deferred compensation payments in 5 annual installments. An idea was that the employee could elect to change the payment date on the first installment under the 1 year/5 year rule, so in a sense the employee making that sort of election every year could indefinitely delay payment, with the only downside being that he or she would have to be paid out over 5 years.

3. Now if the installment payments are considered a "single payment," does this mean that the election to delay under the 1 year/5 year rule would mean that none of the installment payments could begin until 5 years after the originally elected payment date, but that the entire thing could be paid as a lump sum then?

4. If the installment payments are designated as separate payments, does this mean that you could get the "rolling" payment effect described in paragraph 3, but that you could never get a lump sum payment unless you elected to get paid 5 years following the end of the original payment period for the last installment?

If anyone has thought about this, I would appreciate your thoughts.

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1 and 2. Only if the NQDC plan specifies that each payment in the series will be a "single payment" will the subsequent election rules (the 1 yr/5 yr rules) apply on a payment-by-payment basis. This allows the "laddering" that you describe in #2.

3. Your question in #3 goes to whether the time of payment is the only thing that can be changed with a subsequent election or whether the form of payment may also be changed. Treas Reg sec 1.409A-2(b)(9), Example 19 illustrates that the form of payment too may be changed. So it could be made in a lump sum 5 years after the first payment was scheduled previous to the subsequent election.

4. Yes, if designated as 'separate payments', you could get the "rolling" payment effect described in paragraph 3, but that you could never get a lump sum payment unless you elected to get paid 5 years following the end of the original payment period for the last installment.

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