Distribution Options

[waid10]

If a nonqualified plan offers several distribution options, how far in advance of a distributable event is the participant required to make the election as to distribution option? And where can I find guidance on this?

Thanks.

[MGB]

Watch the new JOBS bill (also referred to as ETI). Congress is completely changing the rules on this. Under the new rules, the distribution option must be selected the year before the compensation is earned and deferred.

[Guest Harry O]

You are asking one of the great metaphysical questions in the tax law. There is no "right" answer; you'll get as many different opinions as people you ask. We would also need to know much more about the terms of your plan before offering any thoughts.

P.S. The ETI bill would still allow a second election after services are performed as to how benefits would be paid (subject to certain restrictions such as a minimum 5 year further deferral period).

[401 Chaos]

I agree with Harry that there is no clear answer. To be completely safe, you generally would want to lock in the election prior to deferral as noted above. Other plans allow changes to prior distribution elections shortly before taking a distribution provided the participants are penalized or take a "haircut" on the amounts distributed. As a practical matter, much of this depends on how high-up the executive is and thus how much pull they have to force the company to take an aggressive position. There is a Nonqualified Deferred Compensation Answer Book (in the Panel Series I believe) as well as a nonqualified deferred compensation plan book by Bruce McNeil from West's Employment Law Series that may be helpful. There are also reems of caselaw discussions on nonqualified plans in general that are well summarized in the BNA Tax Management Portfolio.

[mbozek]

IRS rule requiring distribution election to be made prior to deferral has never been enforced by the courts. Courts permit the election to be changed at any time prior to the date the distribution becomes available to the participant, e.g., at termination. Safe rule is to have the employee make the election before end of year which preceeds year of terminaton. However, current rules may be changed by the provisons of the tax legislation currently being considered by Congress.