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Failure to Make Grandfathered Distributions


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What are the consequences of failing to make a distribution of pre-409A deferred compensation? It appears that the distribution should have been made in 2007. Would this failure be considered to be a subsequent deferral and thus a material modification which would then subject the benefit to 409A?

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Yes, I think so. The grandfathering only applies to the NQDC plan if it is not amended. I think that the failure to make the 2007-scheduled payment would be an amendment taking the plan out of grandfathered status.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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What are the consequences of failing to make a distribution of pre-409A deferred compensation? It appears that the distribution should have been made in 2007. Would this failure be considered to be a subsequent deferral and thus a material modification which would then subject the benefit to 409A?

Would being subject to 409A be the only consequence or would there be a 409A violation as well?

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  • 6 years later...

Any further thoughts on this topic?

I don't think a failure to make the distribution of a grandfathered plan subjects it to Section 409A. My thoughts are that this is corrected under pre-409A tax principles and there is nothing to bring it within its purview. Pre-409A would view the individual as being in constructive receipt of the amount in the year it was due because he could have drawn upon it at any time, and therefore, the employer would go back and amend the tax return for the year in which the amount was due (here, 2007). If there was interest owed on the amount, the employer could provide interest since the distribution date and this would be reportable in the current year (as the year in which the right to interest arises). I don't see how a failure to pay would constitute a material modification under Section 409A, as that term is defined. I also don't see it as a further deferral since the fix would be to report it in the year it was due (without the benefit of further deferral), so there is no further deferral.

Unfortunately, given the odd results in the Section 409A correction program, I am not sure if the IRS would agree or not.

*not tax advice.

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