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Does anyone understand IRS Answer to ABA Q&A #13 on 409A?


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Does anyone understand why having a different time and form of payment for each annual deferral election doesn't violate "one time and form of payment per plan" rule under 1.409A-3(I)(1)(i)?

I'm confused by IRS answer to Q #13 in 2015 ABA Section of Taxation, Committee on Employee Benefits May 8, 2015 meeting:

"13. Section 409A - One Time and Form of Payment

Treasury Regulation Section 1.409A Section 1.409A-3(c ) provides that a plan may designate only on time and form of payment upon the occurrence of events such as a separation from service, with a limited exception if the event occurs before a specified date, such as a retirement age. How does this rule apply if participants are allowed to designate for each year's deferral a different post-retirement starting date and form? For example, what if a participant designates that 2014 salary deferrals be paid 5 years after retirement in a lump sum, and that 2016 deferrals start at retirement date in a 10-year installment form? Has the plan violated the requirement that only one time and form of payment may be offered after separation from service?

Proposed Response: Although Treasury Regulations Section 1.409A-3© refers to a limit per plan, it was not meant to provide that all deferrals under the plan be so limited, provided that the payment of each yearly deferral, with deemed investment earnings on that amount, can be objectively determined under Treasury Regulation Section 1.409A-3(i(1)(i.

IRS Response: The Service representative agrees with the proposed response. Deferrals for each year are separate deferred amounts to which the time and form of payment rules apply separately."

Can anyone explain why? If the deferrals are all in an account balance plan, aren't they aggregated, within the plan and with other account balance plans, for purposes of this rule? Can we rely on this IRS answer? Thanks.

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I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I drafted this question and the suggested response.

Frankly, the regulation is very clear: one post-separation mode of payment per plan, not per deferral.

However, after speaking with various TPAs, I believe there are many plans which have allowed the more permissive approach.

Realistically, this was just a minor drafting gaff in that horribly complex regulation. There is nothing in the statute to limit plans to one post-separation mode of payment.

In future, I wouldn't be surprised to see a written clarification more official than the ABA colloquy. In the meantime, I intend to rely on this more realistic approach, and welcome it.

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