409A and Frozen SERP

[Guest AEA]

I have a frozen supplemental retirement benefit plan from the 80s that has never been terminated. The plan once received the excess benefits from a pension plan, then excess deferrals from a "savings" plan. No new money, other than earnings, has gone into this plan since the mid-90s.

The plan ties form and timing of distribution to the election the participant makes under the employer's qualified plan. I know that this is not allowed under Code section 409A. I understand that there is a transition rule allowing this type of tied distribution to be made or commenced during 2005. However, there are balances in the plan that will not be distributed until after 2005.

The plan is clearly grandfathered as there have been no "deferrals" in over a decade. I do not want to subject the plan to Code section 409A and would like to avoid amending it and accidentally subjecting it to these rules (although it appears that compliance amendments are not material modifications). My question is whether I have to amend the plan to comply with Code section 409A?

I know that I will have future distributions that do not meet the rules; and, the guidance appears to say that for future years, distributions must meet the rules. However, the plan would be distributing grandfathered money, which is not subject to the new rules.

I realize that I may be going around in circles BUT it seems like I should be able to simply leave the plan as is because the balances are all grandfathered. If I can not, why not?

Thanks!

[Alf]

You leave it alone and operate it pursuant to its (pre-409A) terms. The IRS has just warned us that grandfathered arrangements aren't free from scrutiny if audited based on pre-409A standards.

[Effen]

The plan ties form and timing of distribution to the election the participant makes under the employer's qualified plan. I know that this is not allowed under Code section 409A.

I admit that I know very little about Non-Qualified Plans, but I didn't see anything in 409A or 05-1 that disallowed this type of arrangement.

I am having trouble figuring all this out and I have a client w/ a "top hat" type SERP. They have qualified db plan and a SERP that provides additional benefits based on comp over the comp limit. The plan ties everything back to the qualified plan's election. What ever form of payment and beneficiary they elect in the qualified plan is automatically applied in the non-qualified plan. The SERP also permits a lump sum if the Board permits it. (This is not at the participant's election and the qualified plan does not contain a lump sum provision.)

I understand that the lump sum may be an issue, but I didn't think the tie-in to the qualified plan was. Can you give me some guidance where you found this?

[QDROphile]

See Q&A 23 of Notice 2005-1, effective through 2005.

[Effen]

I'm sorry, but I still don't see it. It seems to say that this is NOT a violation of 409A.

Q-23 Under what circumstances will payments be permitted based upon elections under a qualified plan for periods ending on or before December 31, 2005.

A-23 For periods ending on or before December 31, 2005, an election as to the timing and form of a payment under a nonqualified deferred compensation plan that is controlled by a payment election made by the participant under a qualified plan will not violate §409A, provided that the determination of the timing and form of the payment is made in accordance with the terms of the nonqualified deferred compensation plan as of October 3, 2004 that govern payments. For purposes of this paragraph, a qualified plan means a retirement plan qualified under §401(a). For example, where a nonqualified deferred compensation plan provides as of October 3, 2004 that the time and form of payment to a participant will be the same time and form of payment elected by the participant under a related qualified plan, it will not be a violation of §409A for the plan administrator to make or commence payments under the nonqualified deferred compensation plan on or after January 1, 2005 and on or before December 31, 2005 pursuant to the payment election under the related qualified plan. Notwithstanding the foregoing, other provisions of the Code and common law tax doctrines continue to apply to any election as to the timing and form of a payment under a nonqualified deferred compensation plan.

[Effen]

Did this discussion stop because my follow-up was so stupid that it didn't justify a response or because no one knows the answer?

[E as in ERISA]

Q-23 provides a transition rule so its not a violation for 2005. Because without that rule, it would be a violation for plans subject to 409A. My understanding is that the IRS doesn't think that situation is particularly abusive. So they are willing to consider whether this should be allowed. But they haven't issued substantive guidance on that yet making this a permanent exception.

[Effen]

Thank you,

You said that "Because without that rule, it would be a violation for plans subject to 409A", does the problem come from 409A(a)(2)(A)(iv), 409A(a)(4)©(i) or somewhere else?

[JDuns]

If a grandfathered plan does nothing to blow its grandfathered status AND the pre 10/2004 terms of the plan satisfied pre-AJCA legal requirements, the plan may continue to operate without changes both before and after 12/31/2005 (and the link between payment elections in the qualified and nonqualified plans may continue unchanged).

For plans that are not grandfathered for any reason, unless the IRS extends the current exception, the link between the qualified and NQ plan payment provisions must be cut on or before 12/31/2005.

Hope this helps.

[Guest AEA]

Thank you to everyone who responded!

I thought that the plan should be grandfathered, but .... There were some amendments that I have been trying to get the employer to make for several years (i.e. - does not even referrence the correct qualified plan anymore), but I may leave it be for now out of an excess of caution.

Thanks again!