Termination of NQDC

[JustMe]

We have a NQDC plan and the Plan Sponsor wants to terminate it since no employees are funding to it any further. There is one participant remaining with contributions invested in an annuity. Participant doesn't want to take a distribution so there is no request to accelerate pay out. Can the plan be terminated with an account balance remaining in the plan, or must the assets be distributed upon plan termination? If so, would the suggestion be just to freeze the plan rather than terminate it?
 

[XTitan]

The devil is in the details.  In general, a company can "freeze" A NQDC plan (not permit new deferrals) without terminating/liquidating the plan, as long as this is done in compliance with 409A if the plan is required to comply.

[FORMER ESQ.]

To piggy-back on XTitan's response, the 409A Treasury Regulations allow for a payment of benefits on the termination of a NQDC, but as I recall there are a few requirements that must be met. For example, the termination cannot be proximate to an employer's financial downturn. All of the same types of NQDC of the employer must also be terminated. The payment on account of termination cannot be made (other than otherwise allowed under the plan) within 12 months of termination and must be completed within 24 months. Also, I think there is a restriction on the time period (I think 3 years) during which another NQDC of the same type cannot be established.

[Luke Bailey]

JustMe, I think the answers you have already received from XTitan and FORMER ESQ. are completely correct, but may make it seem more complicated than it is. If your plan already complies with 409A, then all you are doing is stopping new participants from entering and stopping existing eligible participants from making new contributions. As XTitan points out, that is just "freezing" the plan, not terminating it. 409A does not even address freezing. You can just do it, although obviously you need to consult the plan document regarding notice and any other conditions it may contain regarding amendments to the plan. The complexity comes in if you want to also make distributions earlier and in a different form than they otherwise would have been made, e.g., distribute everything out as soon as you can as lump sums. In that case, then the somewhat complex termination requirements discussed by FORMER ESQ. would come into play.

[ReallyChill]

My two cents:

One caveat to the "termination" response: the definition of "employer" in the "must terminate all similar plans of employer" means all plans of all employers in the entire controlled group. We've had situations where this detail prevented a sister company from terminating its NQDC plans.

That said, even if you can "terminate" the NQDC plan, holding any promise to pay an individual in a future year is still a deferred compensation agreement, probably subject to 409A. I believe that's why a distribution is required under the plan termination provision. I think the taxable amount would only be the current value of the annuity when distributed, so the participant would have basis in future distributions, but that's not particularly helpful if he/she doesn't want a distribution at all.  

Now, if you just want to get rid of the annuity contract, that's just the funding mechanism. If it's held in a rabbi trust that's revocable, or that doesn't contain the "no payments until all liabilities to participants are satisfied," then the annuity contract could probably be cashed in, but that wouldn't relieve the employer of responsibility for administering the plan and likely causes other issues, primarily benefit calculations if the plan measures them based on participant selections of specific hypothetical investments.

Bottom line: without a distribution, you freeze, you don't terminate.