After 2005: agreement rescinded, plan terminated

[Guest who me?]

After 2005:

1. Can a deferral agreement/election that is made, be rescinded? And,

2. Under what circumstances can a nq plan be terminated.

Huge thank you

[Alf]

Can a deferral agreement/election that is made, be rescinded

Prospectively, yes. Not a 409A problem.

Under what circumstances can a nq plan be terminated

At a minimum, it has to be beyond the control of the participant. Ultimately, it is a contract that can be terminated, but the particpant can't control her distribution timing under 409A.

[JDuns]

On the termination question, some have opined that the plan can be frozen (depending on the plan terms) but that no distributions may be made of pre-plan termination balances until all of the participants would have otherwise been entitled to distributions (since plan termination is not one of the special distribution events). Therefore, if a participant who is 30 has elected to defer compensation until age 65, the plan would be forced to stay open for another 35 years.

While a participant can elect to cancel a deferral election for this year (or even his entire plan participation if the employer allows that option), I think that, after the transition rule, under 409A an election to defer is irrevocable when made. So if the participant elects before 12/31/2005 to defer 50% of base pay for 2006, that election cannot be revoked but the participant can always choose to defer a different percentage (including 0%) for future years' base pay.

Hope this helps.

[Guest jfsinger]

JDuns, you're correct regarding 409A plans; termination and distribution would be considered an acceleration and subject the benefits to penalties. Moreover, in a teleconference after 2005-1, one of the Treasury reps (Hogans, I believe) said that after 12/31/05, termination and distribution of assets of even a grandfathered plan would result in penalties. Although this sounds unreasonable (if the plan document allows it), he said that the exercise of discretion to distribute would be considered a "material modification".

Did others hear this? Any clarification?

[Kirk Maldonado]

I've not researched that issue myself, but others that have, have told me that they don't think that plan can be terminated.

Hopefully, somebody will make a compelling case to the IRS to allow plans to be terminated at least in some situations.

[TCWalker]

The 2005-1 guidance and opinions of Treasury to date seem resolute that post-2005 terminations are accelerations. Considering the practical problems these rules foster & the comments I suspect Treasury's received, I guess we can speculate there will be some sort of exceptional relief offered in the further guidance expected this year.