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Correct Plan Document Failure for Agreement in Payment Status?


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An old agreement was never updated and has some definitions that do not comply with 409A (CIC, separation from service).  Executive has separated from service and is receiving installment payments (in year 4 of 5).  I assume the arrangement still needs to be corrected under the plan document correction procedures? Is that correct?

What about a scenario where the benefits are entirely paid out when the failure is discovered? 

Thanks in advance!

 

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When you say an old agreement; how old?  Is there any possibility that the plan is grandfathered and does not need to be brought into compliance with 409A?  I know the information you seek is specified in Notice 2010-06, Section V, but since payments have already commence pursuant to separation (which may or may not compliant with 409A), the language may not be helpful.

409A does provide that the employer is required to encode 409A violations on the employee's W-2 Box 12, Code Z.  I'm not one to speculate as to what happens if violations are not reported in a timely manner or at all.

n-10-06.pdf

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18 hours ago, QDROphile said:

Being old (the document) does not get you a pass for benefits (or the portion thereof) accrued after the effective date.  

It really depends on the terms of the plan.  For example, pre-2005 DC plans with no additional employer or employee contributions that continue to grow or shrink based on market performance can remain grandfathered.  

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Thank you for the input. Agreement was from 1998, but I believed benefits did accrue post-2007 and would not be grandfathered.

In operation, the participant's separation from service and commencement of installment payments complied with 409A. The only issue is that a few definitions in the plan document were not 409A compliant, however those definitions were never relied on in plan operations. For example, CIC definition is not 409A compliant, but there was not a CIC.

Any insight into whether there an argument can be made that correction for the plan document failure is not required? Would it be different if the benefits were entirely paid out?

 

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kmhaab, was this the only individual who had NQDC benefits, or are there other folks who have not been paid yet? It sounds like (but of course, I have very little to go on) your issue may fall under Section VII of Notice 2010-6. It would be very important to know if one of the faulty definitions was the provision under which the participant commenced receiving the distribution (e.g., a bad definition of separation from service, even though the participant's facts were good), or a provision that was not triggered, such as only a CIC. Also, if the problem is prohibited discretion, even though not exercised, that may not be correctable for a participant for whom distributions have commenced, but could be removed, generally without a tax cost, for participants for whom distribution does not commence within a year.

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