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Subsequent Deferral Election - Change in Form of Payment


EBspecialist

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The question is how does the 5-year delay rule for subsequent deferral elections (under Reg. Section 1.409A-2(b)(ii)) apply to a form of payment change where the plan pays on the earlier of a fixed date designated by the employee and separation from service.

Fact pattern: Plan pays upon the earlier of a specified distribution date designated by Employee and Employee's separation from service and offers payment in either a lump sum or fixed installments. Employee timely makes an initial election to be paid in a lump sum and designates January 1, 2020 as his specified distribution date. Employee files a subsequent deferral election by December 31, 2018 changing his elected form of payment from a lump sum to fixed installments and moves his designated distribution date to January 1, 2025. If Employee incurs a separation from service in, for example, 2023, must his benefit be paid in a lump sum pursuant to his initial election or installments pursuant to his subsequent deferral election?

Example 15 makes clear that with respect to a payment deferral he still gets paid on separation from service.

Any citations, guidance or authority on point would be helpful.

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Section 1.409A-2(b)(6) discusses the application of the subsequent distribution rules to multiple payment events. In effect, when you have an "earlier of" election, the distribution change rules apply independently.

In your example, does the form of payment change upon separation? If the change from lump sum to installments affects the separation payments, then the separation payment is delayed 5 years as well. If it's still lump sum, then the change in the scheduled date distribution did not impact the separation election and the lump sum could be paid at separation; the plan document may mandate the 5 year delay anyway.

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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