acceleration of death benefits

[Guest George Chimento]

Prior to 409A, beneficiaries could typically petition plan committees to accelerate payment of deferred compensation. Often this was necessary to raise money for estate taxes. Beneficiaries who did not do this were never found (to my knowledge) to be in constructive receipt of lump sum equivalents because of this right to petition.

Under 409A, does a Committee violate the no acceleration rules if it grants such a petition? 2005-1 does not list such an acceleration as a permitted exception. However, death is an event that always permits payments under 409A.

I'd like to think that beneficiaries still may petition for acceleration without risking 409A penalties.

Your thoughts?

[Guest Harry O]

For "grandfathered" benefit, this exercise of discretion should be permissible if it was reflected in the plan document on Oct. 3, 2004.

For non-grandfathered benefits, the answer is unclear. I know this exact situation was described to IRS and Treasury reps and they were sympathetic. However, they felt constrained by the statute and asked for help in crafting some sort of reasonable exception to the non-acceleration rules.

[Guest George Chimento]

Thanks, Harry

I think IRS would be wrong to analyze this simply as an acceleration question under 409A(a)(3).

It could also be a change in the form of payment (installments to lump sum) under 409A(a)(4).

The key factor is that death (like hardship) is a permissible distribution event under 409A(a)(2).

Provided that the conditions of 409A(4) are met, I can't see anything in the statute to say that it's OK to ask for a hardship distribution (which is an acceleration of sorts) but that it's not OK to ask for a lump sum death benefit. They are both 409A(a)(2) events.

Once an event has occurred in 409A(a)(2), there cannot be a violation of 409A(a)(3) to make payment upon application. Expressed another way, if hardship payments can be initiated by a participant prior to a scheduled payment date, the same should hold true if a beneficiary applies for a lump sum death payment.

409A(a)(3), in my view, should be solely limited to requests for acceleration prior to a 409(a)(2) event.

I hope that IRS comes around to this position, and appreciate your input.

George

[Guest Harry O]

I'm not sure I agree with your analysis but I hope the IRS does!

I think the problem is that you want to give the beneficiary the choice of an immediate lump sum or installments. A hardship withdrawal offers no such choice - the plan says it SHALL pay a lump sum upon a valid hardship (employees don't get to choose between a lump sum and installments).

Finally, limiting the non-acceleration rule to distributions prior to a 409A(a)(2) distributable event doesn't make sense. You simply can't distribute anything before you have a triggering distributable event under 409A(a)(2). Limiting the anti-acceleration rule to such events would make this rule a dead letter since the act of paying before a permitted distributable event already caused a violation of 409A.

[Guest George Chimento]

Harry,

Under my read, 409A(a)(3) would have a great deal of vitality. It could simply be interpreted not to permit acceleration of fixed date deferrals under 409A(a)(2)(iv) to an earlier fixed date. And, if an employee had elected that deferrals be paid at separation from service, 409A(a)(3) could also be read to prohibit payment at an earlier fixed date.

Example: employee elects a deferal to be paid on January 1, 2008 and then wants it at an earlier date while employed. Forbidden.

Example: employee elects a deferral to start at termination, and then wants the money earlier in a non-hardship situation. Forbidden.

Read literally, if 409A(a)(3) prohibits acceleration for 409A(a)(2) events, then hardship distributions would be prohibited.

My read (not yet embraced by Treasury) is that 409A(a)(3) should not prevent payment if a 409A(a)(2) event has occurred.

Not only is this the way the statute is written, it makes sense as a policy matter. Why should Treasury prohibit early payments (if elected by an employee or beneficiary for death, change in control, disability, or separation from service)?

Tax collections would be accelerated. IRS career types, congenitally incapable of simple thought, are gumming this up. 409A(a)(3) shold not be interpreted to prohibit acceleration if a 409(A)(a)(2) event has occurred.

George

[mbozek]

As a tax policy matter accelerating distributions to beneficaries or participants for hardship will not increase tax collection since the employer's deduction for the payment offsets the amount taxable to the recipient. Tax collection will increase under 409A to reach the 1B estimate in the Jobs legislation only for the 20% penalty tax and the inclusion of imputed interest on the payment which are not deductible by the employer.

[Guest George Chimento]

Tax collection will increase under 409A to reach the 1B estimate in the Jobs legislation only for the 20% penalty tax and the inclusion of imputed interest on the payment which are not deductible by the employer. >>

I won't quibble with that, and probably should not have added that gratuitous comment about tax collections.

More importantly, I would prefer not to divert this thread. Please help me to keep it on the topic and respond to my reading of the statute, and whether 409A(a)(3) is applicable if a 409A(a)(2) event (such as death) has occurred.

Thanks

George

[Kirk Maldonado]

George Chimento:

I urge you to submit your analysis of the issue regarding the "acceleration" of the death benefit to the IRS for inclusion in their subsequent guidance. There is a website where you could submit your comments, apparently in e-mail format.