Can elective deferrals into a deferrred comp plan be terminated mid-year?

[Guest FAQ]

I have seen several plans that allow participants to terminate deferrals during the year, on the condition that deferrals cannot be resumed until a future calendar year (sometimes the next year; other times requiring suspension for the following plan year as well).

Would this be allowed under §409A or, for that matter, under existing law? §409A speaks to the timing of elections and distributions, but does not state that elections to defer must be irrevocable for the period to which they relate.

On the other hand, revocation could be an end-around that would allow participants to fine-tune their deferral amounts, by electing a high deferral percentage at the start and terminating deferrals once they reach a deferral amount that they decided fit their needs after the year started.

Thanks in advance for any thoughts on this!

[Guest jfsinger]

The short answer seems to be "we will have to wait for the regulations" to know whether or not a deferral election can be terminated. I have seen reference somewhere to deferral elections being irrevocable, but can't find it in any of the most recent publications (including the conference report).

409A does not seem to prohibit it outright, but might not the termination of a deferral election be considered an "acceleration"?

Termination of '05 deferral elections will certainly be allowed during the transition period as defined in the coming regulations.

[mbozek]

Cancellation of salary reduction cannot be an acceleration under a NQDC because deferral has not occurred. Logically there is no reason to prohibit cancellation since ending the deferral will increase the employee's taxable income which furthers the primary goal of the legislation to raise revenue. It remains to be seen if logic will prevail when IRS guidance is issued on Dec 21.

[E as in ERISA]

I think the fact that they have been making a big deal of saying that terminations will be allowed during the transition period tends to suggest that is something that they will not otherwise allow. But as everyone says, no one will know for sure until the regs are out.

[Just Me]

It is possible that the "no cease" rule is being inferred because otherwise a participant can intentionally select a higher rate of deferral than needed and cut off deferrals later in the year, thereby reducing the actual rate of deferral. This would be contrary to the *new* requirement that the amount of deferral be elected before the service year begins. Several commentators have stated that stopping a deferral is now prohibited, and you are right, this is not in the statute or the Conference Report per se.

But then again, that's *Just Me*

[mbozek]

No one has ben able to explain the reason for requiring that the election to defer under 409A be made prior to the performance of services in the tax year while NQDC plans under 457b only require election of deferral prior to the month in which the services are performed.

[Just Me]

My cynical answer is that there have been fewer reported "scandals" and perceived "abuses" regarding deferred compensation plans in the nonprofit/governmental world than in the corporate world, thus Congress is being more of a bully with 409A than 457.

Merely my own opinion...

[Alf]

I think the fact that they have been making a big deal of saying that terminations will be allowed during the transition period tends to suggest that is something that they will not otherwise allow.

I think that the transition rule will let employees cease deferrals AND get their 2005 money back. The distribution of deferrals made during the transition period would otherwise violate the distribution rules.