New regulations

[abanky]

First please forgive me if i seem a little ignorant regarding Nqdc's.

My main question is regarding this point:

Any provision that permits acceleration of the timing or form of benefit will result in immediate taxation of the entire account balance. This would include, for example, a provision that permits a participant to elect to switch from installment payments to lump sum. (i'm summarizing from a bulletin I received.)

Now I have an employer funded plan who has a nqdc plan set up as follows:

say a participant has a 5 year average salary of 100,000 at time of termination. They then project it 5 years at lets 6% interest and the employee receives a cash amount equal to what they would had they worked for the next five years.

Now according to my understanding of the new law, an employer can't give a lump sum like that.

Any answers or do i need to clarify?

Thanks,

Andrew

[abanky]

My main question is... are lump sums no longer allowed?

[Guest jfsinger]

My main question is... are lump sums no longer allowed?

Lump sums are definitely allowed. What is not allowed is accelerating payment from an installment option to lump sum.

In the scenario you described, the payment of the lump sum would have had to be chosen at the time of deferral election. You can't shorten payments from installment to lump sum.

[Guest Retina]

What if the plan provides a choice of either a lump sum or periodic payments? If the participant satisfies the plan's requirements for a distribution and elects to go lump sum, is that considered an acceleration?

[Everett Moreland]

Retina:

According to the Conference Report, the time and form of benefit payment must be specified by the time the compensation is deferred or, if elected by the employee, by the time the employee elects to defer the compensation. If the plan allows a participant to elect to change the time or form of benefit payment, the election must satisfy rules set forth in section 409A.

[Mark Whitelaw]

I agree if you are discussing an elective deferral. The initial question in this thread dealt with a DB SERP design--someone is not deferring paychecks, but has now qualified at retirement to receive a supplemental employer provided benefit and has the choice of lump-sum or periodic payments. 409A doesn't address this. It's my understanding that the treatment of SERP's (DB of DC) is part of the follow-up coming from the Secretary shortly. I remember in conference discussion the choice would be permitted as long as they had an equivalent present value. If someone wanted to remain and unsecured creditor during retirement, fine. But we won't know for sure until the Secretary's guidance is published.

[Guest curious jorge]

Has there been any movement on this issue (i.e., whether offering a lump sum payment option in DB SERP context that is actuarially equivalent to SLA constitutes an impermissible acceleration under 409A)?