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Termination of NQ plan in 2005 and vesting acceleration trigger material modification?


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Q/A18c of Notice 2005-1 allows a grandfathered plan to be terminated in 2005 provided all deferrals are paid out. Does this mean all vested and non-vested deferrals? If non-vested deferrals are vested and paid out does a material modification occur?

Posted

The provision allowing termination of participation during 2005 is intended to allow an employer to end the plan rather than deal with the new limits in 409A.

If the plan is terminated before 1/1/2006, each employee would be taxed on their benefit in 2005. In my opinion, a plan could (but is not required to) accelerate vesting and pay the non-vested portion of the benefits.

If the entire plan is terminating, I do not think that there is any 409A issue. However, if you allow participants to elect to terminate their participation in an otherwise grandfathered plan, I think that you have a material modification that would result in a loss of the grandfather status for any non-terminating participants.

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