Change in payment schedule under 409A - lump sum to installments

[Guest jfsinger]

I've heard practitioners advise participants to elect lump-sum distribution at time of deferral since you can always change to installments at a later date. However, there seeems to me to be a major problem. An example.....

A DC plan defines a payment only in the event of separation from service, death or hardship. If a plan participant elects lump sum distribution at separation from service, and 1 year before separation from service elects a switch to installments, it appears that the first installment would begin 5 years after the separation from service. The only exceptions to the 5 year delay are distributions in the event of death, disability and hardship. Do you agree?

If true, this seems punative, as the election is not acceleration (in fact, lengthening the payment period). It takes away an opportunity for effective income/tax planning on the part of a participant.

Do you know of communication with Treasury that addresses this issue?

[Kirk Maldonado]

jfsinger:

Do you think that it is possible that the IRS could view the switch from lump sum distribution to installments as a "second election" (further deferring the date of the payment) as to the portion of the total benefit that will not be paid in the current year (as a result of the switch to installments)?

Taking it a further step, do you think that the IRS could view each installment that is to be paid in a subsequent year as a separate "second election?"

[i honestly don't know the answer to these questions, I'm just posing them.]

[Guest LeeNunn]

A switch from lump sum to installments has been termed a deceleration, and Treasury has addressed this in several of the recent teleconferences.

jfsinger, your analysis is correct. The scenario you describe is more attractive than switching from installments to lump sum, where the lump sum must be deferred until the date of the last installment.

As a practical matter, second elections will work only for in-service accounts for younger participants. Most participants will not want to wait five years after separation from service or change in control to begin receiving payments.

[Guest jfsinger]

jfsinger, your analysis is correct.  The scenario you describe is more attractive than switching from installments to lump sum, where the lump sum must be deferred until the date of the last installment.

Lee,

So, are you saying that the reverse - switching from lump sum to installments - does not trigger the 5 year wait for the first payment?

Joe

[Guest LeeNunn]

I'm saying that a switch from installments to lump sum might be even longer than five years. Switching from a 20 pay installment to a lump sum might require that the lump sum occur no earlier than 20 years after the distribution event.

[Guest jfsinger]

Of course. Thanks,

Joe