Any transition relief for elections in the case of new (not amended) plans?

[Guest cstrong]

Is there any transition relief for elections in the case of new (rather than amended) plans? We intend to freeze existing deferred compensation plans and adopt new plans (to be effective as of 1/1/05) in compliance with 409A once most, if not all, of the guidance is issued; however, since we will be adopting new rather than amending plans, does that mean that initial elections will have to be made within 30 days of 1/1/05, the date individuals become eligible to participate? Is amending a plan the only way to be eligible for the March 15, 2005 transition relief? I'd appreciate any thoughts.

[Guest John Nelson]

I'm not sure freezing the old plan and adopting a new plan works. Check out Notice 2005-1 Q&A 18, specifically paragraph (b). Doesn't this say that the adoption of the new plan is treated as a material modification of the old plan, thereby making the old plan subject to 409A?

I'm stuck on this point. Any help you have would be appreciated.

Thanks.

[Just Me]

I don't believe the adoption of a new plan would be considered a material modification of an old plan (I think you need to look at the phrase "under an existing arrangement" in Q&A 18(b) as applying to the whole sentence, not just the part about the new grant - and look at the difference between the word "arrangement" and the word "plan").

However, a plan that is effective January 1, 2005 does not enjoy the transition period for salary deferral elections to March 15, 2005, because it was not in existence as of December 31, 2004. Therefore, yes, salary deferral elections with respect to services provided in 2005 for new plans must have been made no later than December 31, 2004. However, since all participants are "new" it is possible that the special 30-day rule would apply, so that salary deferral elections could be made by January 30, 2005, with respect to services not yet performed (i.e. it would need to be prospective). Note that this was discussed in yesterday's JCEB presentation, and the Treasury speaker (Dan Hogans perhaps) said that he wasn't so sure the 30 day rule applies in this case, an you would need to rely on it as "good faith" compliance with the rules, "if you think that is good faith."

[Just Me]

After further pondering on this issue, I think what Notice 2005-1 is saying is that any plan adopted after 10/3/04 is considered to be a materially modified plan, and therefore subject to 409A. I do not believe that the Treasury Department intended that any new plan adopted would somehow materially modify an existing plan sponsored by the same employer.

[E as in ERISA]

As noted below, they are "thinking about" this situation. I think that the good faith argument (if you want to risk it) is that if the transition rule (3/15) for the general requirement (that elections be made prior to year end) is better than the exception (for new plans/participants) to the general requirement, then the transition rule should apply. In other words, you should only have to apply the exception if you can't meet the general requirement (including its transition rule).

My understanding is that freezing of the grandfathered part is not a material modification. They have said all along that you can either use one plan with new terms applicable to the 409A part, or start a new plan for the 409A part.

[mbozek]

On reason to have separate plans is that the pre 409A deferrals would not be subject to accelerated taxation if they are kept in a separate plan from a plan with 409A deferrals which are taxed because of a failure to meet the 409A rules.

[E as in ERISA]

Just to clarify, for penalty purposes "plan" generally includes all arrangements within one of the three categories (all account balance plans would be aggregated). So a 409A violation in one plan might taint other 409A plans. That is definitely the rule when you have an individual violation. However, they have indicated that they don't necessarily intend to have all plans aggregated when there is a plan level violation affecting all participants. But they are still thinking about that and they haven't clarified how they will apply the definition of "plan."