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AgTrader

Change/delay distributions of NQDC 409A triggered by separation

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I am an employee who has a sum invested in an unfunded NQDC plan with my employer.  The plan document states distribution triggered by separation will be distributed in 5 annual (yearly) payments.  For obvious reasons I would prefer distribution to be extended to smaller annual payment over a greater time period.  For example if sum held in NQDC plan balance at separation equals $1M it will be distributed in 5 annual payments of $200K.  I would prefer 10 annual payments of $100K or 20 annual payments of $50K.

If in principle both the employee and employer agree to this, can it be done?  I am aware of the risks due to the plan being unfunded and extending the time from 5 years to longer.

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In general, no. However, many NQDC plans do have some payment flexibility built in, where you are allowed to the change the timing and form of payment that was otherwise locked in at the time of deferral. The requirements to that are you must make this new election one year prior to the current distribution start date and must defer receipt of payment for at least 5 years thereafter.

If you have already terminated, or will terminate within the year, I believe it is too late. If you expect to retire say 5/1/2020 then you can elect now to, instead of 5 annual payments beginning 5/1/2020, get 10 annual payments beginning 5/1/2025, if my understanding of the 409A rules are correct.

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If the plan says that each installment payment is a separate payment for 409A purposes, and if the plan permits election changes, in AgTrader's example can't he/she make an election to further defer the second and subsequent installment payments (as long as each is deferred for at least another five years)?  For example, the second payment can be split in two and deferred for 5 and 6 years respectively, the third payment can be split in two and deferred for 6 and 7 years respectively, etc. 

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To summarize -

1) You need to find out if the plan permits changes to the time and form of the distribution.

2) You need to find out if the plan treats the 5 annual installments as a whole, or if each payment is treated individually (think of 5 separate lump sums).

3) You need to find out if the plan has any limitations on the number of payments or other restrictions on the payment stream.

If the plan permits distribution changes, you are subject to the 1 year/5 year rule: changes don't take effect for one year, and the commencement date must be pushed out by at least 5 years.

As CuseFan points out, if 1 is true, then you may be able to change the 5 pay to a 10 or 20 pay (subject to any restrictions you find out in 3)).  It just wouldn't commence for at least 5 years from your separation, and the change won't take effect unless the you terminate at least a year the election.

As jpod points out, if the plan has a provision that treats each of the 5 payments separately, in theory you may be able to make separate elections for each payment to create a new payment stream (each one would be delayed by at least 5 years and the election needs to be in place for a year).  Woe to the NQ recordkeeper who would have to administer this provision.

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If the plan in it's current state does NOT permit changes, can the plan be modified to allow such changes?  Assuming both employee & employer agree to said changes?

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It depends.  Does the plan give the company the ability to amend the plan? If so, the company can do so likely without employee approval.

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