Game plan for DB NQPs in Light of The American Jobs Creation Act.

[Guest cjk]

It seems clear that the aim of the American Jobs Creation Act relative to NQPs was in the direction of "defined contribution" forms of NQPs. But as we all realize, DB NQPs were caught up in the "net." I am working towards constructing a "game plan" as to the most effective and efficient way to work with clients to assist them in bringing their DB NQPs into compliance with the Act. My role is that of actuary/consultant/administrator relative to these DB NQPs.

From my perspective, it seems premature for any client to make significant changes, at this point in time, to their SERPs or "restoration" plans (i.e., excess plans or those restoring benefits limited by the IRC §401(a)(17) compensation limitation). I say this because I anticipate that the next set of released NQP guidance will be more directed towards "defined benefit" NQPs. From what I can tell, the guidance is expected to be released around June 30, 2005.

It seems to me that the best steps to take now are to:

- Identify sections of the existiong DB NQPs that may be affected by the Act

- Participate in ongoing dialogs with the client and counsel so that we can:

-Discuss the pros and cons of "grandfathering" benefits in the DB NQP

-Discuss the ongoing complexity associated with having "grandfathered" benefits in the DB NQP that are still "coupled" with the qualfied plan as to distribution dates and forms of benefit (e.g., complexities in an "excess" plan)

-"Head-off" or redirect changes that could be an administrative nightmare.

I am interested in how others are approaching this challenge.

[Kirk Maldonado]

I think that scheduling and conducting meetings with clients is premature. I think that it would be more productive to wait until the guidance is out. Most of my clients don't want to have meetings if the answer to most of their questions will be "We won't know the answer to that until the guidance comes out."

This isn't to say that you shouldn't notify them of the developments and that you will need to meet with them after the guidance is out, I just think that having meetings now won't be the best use of the client's time.

[mbozek]

I dont think its productive to meet with clients at this time - they will not feel too confident in your inability to answer their questions. The best thing to do is advise clients of the existance of 409A and ask them to identify programs that may be subject to 409A such as employment contracts, severance agreements, confidentialty agreements, 457(f) plans, director plans, etc. so that you can review them when further guidance is issued. You should also advise clients not to make any changes to the existing programs before contacting you.

[TCWalker]

I see it differently, though I don't disagree with the above. Time doesn't stand still, and employers need to make decisions about compensation programs, internal communications, how they handle exec and Director questions. I think it's helpful for them to have such a meeting, discuss issues unique to their company's deferred comp and other related comp programs, sketch out the likely scenarios.

And, they may wish to take advantage of Q&A21 during March.

I guess another way of saying it is, as their advisor you can lay out the gameplan for '05 regardless of what ambiguity & omission may exist with respect to Treasury guidance. If not you....who?

[Guest George Chimento]

I recommend that you should do more than just wait for further guidance. These plans still have to be administered "in good faith" for new law amounts. Considering that many pre-2005 accruals may not vest until 2005 or later (bringing everything into the 409A net), the financial impact of a wrong decision could be horrendous.

Consider the "typical" (is there such a thing ?) SERP. which allows lump sum equivalents to be paid with Committee consent. Isn't this a prohibited "acceleration?" The Notice says that use of a haircut provision would be bad faith administration. Committee acceleration of an annuity to a lump sum is probably in the same category. (Or is it just a benefit form issue, with special lenience in 2005 under the Notice?)

There are other, similar instances, when current plan provisions won't pass muster under any "good faith" standard for 409A accruals. Consider plans which have soft disability provisions. And what about SERPS that allow postponement of a starting date, if elected within 6 months (i.e. less than 1 year) before a payment date ?

Because of this concern, I am telling my clients to call me before making payment decisions on any SERPS. Maybe it's overkill, but counsel's letters will go a long way in proving "good faith" compliance if a decision is second-guessed by the Service.

Finally, for those plans where most of the money was vested prior to 2005, and where grandfathering makes sense, I am being very careful that elections and payment decisions are bifurcated between "old law" and "new law" vested accruals.

Hope this helps.

George Chimento

[Guest cjk]

Thank you for the insightful replies. I am proud to be part of a professional community that is very willing to share ideas and expertise. I will be using bits of each response in formulating a "game plan" for my clients.