Termination of Deferred Comp Plan Post-409A

[Guest AEA]

Company has sponsored a deferred compensation plan for over a decade. Plan allows select employees to make elections to defer amounts that exceed what can go in Company 401(k) plan and receive a vested matching contribution up to a percentage of compensation. In December, passed resolution to freeze or separately account for grandfathered amounts under plan and comply with 409A for future benefits. Participants make deferral elections for 2005 before end of 2004. Fast forward to summer of 2005, Company is being purchased, effective before year-end, in stock sale. Company now wants to terminate the deferred comp plan effective ASAP. Can this be done?

Notice 2005-1 appears to allow for the amendment of the plan to terminate it and make distributions with no referrences to pre-409A vs. post-409A amounts. In addition, sale will meet change in control definition later this year. SO, plan can be amended to terminate, without adopting 409A amendments, and distributions made of total account balances either at termination or by the sale?

OR does Notice 2005-1 only allow termination and distribution of grandfathered amounts? Thus, plan can be terminated, but only pre-2005 amounts can be distributed and 2005 deferral must wait until change in control event?

Can Q&A-18 be used to amend the plan to allow participants to revoke their 2005 elections and receive these deferrals (but maybe not the match) immediately or concurrently with the termination of the plan? Should both amendments be made?

The Notice seems to NOT answer these questions and I am seeing commentary all over the possible spectrum.

Do I sound like I am seriously wishing for some real transitional guidance from the IRS???

[TCWalker]

So....what's the problem?

I suspect someone will earn respectable legal fees for delivering these answers, at least enough to cover his or her E & O premiums.

[Guest AEA]

The problem is that it is my premiums and I would rather not have to depend on liability insurance. If I wasn't so frustrated, this would be rather funny.

Any suggestions?

[401 Chaos]

AEA,

While I, of course, cannot provide any definitive guidance, we were in a similar situation earlier this year. In that deal, counsel on both sides generally concluded that 2005-1 basically allowed termination of all nonqualified plan amounts--both pre and post-409A accounts--without any real distinction. In that case, all amounts were to be paid out in a lump sum upon termination of the plan under the grandfathered amounts while the 2005 deferrals were presumably to be subject to standard post-409A terminations. The Plan was never formally amended to incorporate the 409A provisions. I think everybody's generally take on 2005-1 there was that it basically gave the company carte blanche to terminate and distribute amounts upon a termination during 2005 as transition relief provided all the distributed amounts were included in income for 2005. I believe this interpretation was driven largely by a general assumption that the IRS would ideally prefer that all these plans be terminated and disappear thus they likely would not insist on a plan delaying distribution to comply with post-409A distribution triggers if a company and participants all agreeed to terminate. Not sure that helps any. I will be interested if others have taken a different view.