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401 Chaos

Amending Provisions to Comply with 409A in Cases of Death

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Would appreciate thoughts on the following. Suppose employer has old deferred comp plan that has not yet been amended for 409A. (Company has not gotten around to it yet but plans to amend before year-end.)

One of the provisions that presents compliance issues is provision which provides for certain pro-rata portion of participants' deferred comp account in the event they die while employed by company and have not attained age 65. Plan provides for death benefit to be paid to designated beneficiary but does not provide for specific time for payment. If participant died (say now) and was entitled to get benefit, could the amount just be paid out (say within 90 days) and be considered compliant with 409A? Alternatively, could the agreement possibly be expressly amended by the participant's estate or possibly the participant's designated beneficiary to provide for payment within specified period that complies with 409A (say within 30 days of death) without violating 409A?

There is no problem here with the company paying out amounts within reasonable timeframe or with estate / beneficiary agreeing to whatever provisions might be required to avoid excise taxes; however, due to the death, there is obviously no way that the company and the original participant can actually amend the original agreement to comply with 409A.

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The agreement has been amended to operate in good faith compliance with 409A. Evidently no one knows what that amendment is at the moment, but be sure to comply with it. I would bet it is the same as the amendment that applies, and will be documented, for any other benefits payable on death under similar arrangements.

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Based on the following, I think paying within 30 days after death is good faith compliance where the agreement does not provide a payment date. It also might be the case under local law that, where the agreement does not provide a payment date, the payment is due upon death.

From Notice 2005-1 Q&A-19(b):

"For example, if an employer retains the discretion under the terms of the plan to delay or extend payments under the plan and exercises such discretion, the plan will not be considered to be operated in good faith compliance with § 409A with regard to any plan participant."

From Notice 2007-86, section 3.01(B)(1).01:

"For example, if an employer retains the discretion under the terms of the plan to delay or extend payments under the plan in a manner that violates section 409A and exercises such discretion, the plan will not be considered to be operated in good faith compliance with section 409A with regard to any plan participant."

From 1.409A-3(b):

"A plan may also provide that a payment, including a payment that is part of a schedule, is to be made during a designated period objectively determinable and nondiscretionary at the time the payment event occurs, but only if the designated period both begins and ends within one taxable year of the service provider or the designated period is not more than 90 days and the service provider does not have a right to designate the taxable year of the payment (other than an election that complies with the subsequent deferral election rules of § 1.409A-2(b))."

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First, I would look at what the plan says. A number of plans I've seen have language that seems to indicate that the payment would be due on the date of death absent any other timing indications. Since that makes the date of the death the designated payment date, that brings me to 1.409A-3(d):

...a payment is treated as made upon the date specified under the plan ... if the payment is made at such date or a later date within the same taxable year of the service provider or, if later, by the 15th day of the third calendar month following the date specified under the plan and the service provider is not permitted, directly or indirectly, to designate the taxable year of the payment.

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The Final 409A regulations state, "Most of the comments with respect to amounts that are payable due to the death of a service provider related to whether a beneficiary of the service provider could be given the opportunity to elect a time and form of payment under a plan without violating section 409A. The final regulations clarify that elections with respect to the time and form of payment to a beneficiary are subject to the general rules governing subsequent deferrals and accelerated payments, including elections by either the service provider or the beneficiary (with an exception for amounts payable under a domestic relations order).

"

"Commentators requested that beneficiaries be permitted a limited period of time in which to change the time and form of payment withour being subject to the subsequent deferral and anti-acceleration provisions. The Treasury Department and the IRS do not believe that the statutory language supports this type of late deferral election or payment acceleration. Accordingly, these suggestions are not adopted in the final regulations."

Don Levit

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Thanks to everyone.

Don, your provisions are the one that stump me a bit. Here the plan says the amounts shall be paid to beneficiary as soon as practicable. Perhaps we could argue that payment was triggered on date of death and that the as soon as practicable provision should not modify this. I would prefer to provide for payment to beneficary within 90 days of date of death (30 days is probably doable, at least here, but general plan of action was to make it payable within 90 days). In this case, I don't think we really are accelerating or making a subsequent deferral--we just want to tighten up the payment tmeframe so that it clearly complies. Don, do you see a problem with this under these facts?

Maybe just paying within 90 days of date of death without amending or doing a separat agreement would work. Clearly everything will be paid in 2008 in this case.

Thanks

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The Final 409A regulations state, "Most of the comments with respect to amounts that are payable due to the death of a service provider related to whether a beneficiary of the service provider could be given the opportunity to elect a time and form of payment under a plan without violating section 409A. The final regulations clarify that elections with respect to the time and form of payment to a beneficiary are subject to the general rules governing subsequent deferrals and accelerated payments, including elections by either the service provider or the beneficiary (with an exception for amounts payable under a domestic relations order).

"

"Commentators requested that beneficiaries be permitted a limited period of time in which to change the time and form of payment withour being subject to the subsequent deferral and anti-acceleration provisions. The Treasury Department and the IRS do not believe that the statutory language supports this type of late deferral election or payment acceleration. Accordingly, these suggestions are not adopted in the final regulations."

Don Levit

I don't think this is relevant to the question at hand. These provisions eliminated the opportunity for the beneficiary to elect the form of payment upon the death of the participant.

401 - I don't believe "as soon as practicable" is 409A-compliant as it's not a specified time. For example, you'd run into problems if payment was made 2 years after death due to lack of notification to the relevant parties (may have been as soon as practicable, but it's not timely). I've seen a number of docs that were amended to say "as soon as practicable but in no event later than 90 days after the date of death".

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