Two 409A questions about Notice 2005-1

[Everett Moreland]

I would appreciate your thoughts on two questions:

1. Does A-18A© allow a plan covering several employees to be terminated as to less than all the employees?

2. Would amending a plan to delay the deadline to elect to defer 2005 compensation from December 2004 to January 2005 (as permitted in A-21) be a material modification as to pre-2005 deferrals?

[Guest LeeNunn]

Treasury has expressed concern that allowing a plan covering several employees to be terminated as to less than all the employees creates a constructive receipt problem to the extent that you're trying to avoid the application of 409A.

Amending a plan to delay the deadline to elect to defer 2005 compensation from December 2004 to January 2005 (as permitted in A-21) WOULD be a material modification as to pre-2005 deferrals. Treasury has been very clear that they don't want participants to procrastinate elections beyond the terms of their existing plan.

[Everett Moreland]

Thank you for your reply.

As to my first question, I think the answer depends on whether the A-9 separate plan rules apply to terminations under A-18©. A-18(e) (applying the A-9 separate plan rules to A-18) seems to suggest that a plan can be terminated on a participant-by-participant basis. But a close reading (hey, I'm a lawyer) makes me less than sure this is what the IRS intends.

Do you have any information on whether the IRS intends that A-18© and (e) allow a plan to be terminated on a participant-by-participant basis?

[Guest LeeNunn]

I think Treasury is trying to discourage situations in which employers continue the old rules for some participants and cash out other participants, especially where the participants elect which way they want to go. If you adopt 409A for a plan, you might be able to argue that participants are eligible for the "money back guarantee" that expires Dec 31, 2005.