WHO decides that NQ-Deferrals stop?

[Guest JedMacy]

Topic: WHO decides that NQ-Deferrals stop?

In Prop. Treas. Reg. §1.409A-2(h)(vii) on page 224 is the following sentence:

"An arrangement may permit a cancellation of a service provider's deferral election due to an unforeseeable emergency or a hardship distribution pursuant to §1.401(k)-1(d)(3). "

Because the word "distribution" was omitted after "emergency", I interpret this to mean that a plan may (but need not) permit NQ deferrals to stop when a participant has an unforeseeable emergency regardless whether a distribution occurs from the NQ plan. And if my interpretation is accurate, then it is the participant who decides to stop future NQ deferrals just by his act of requesting them to stop and stating his unforeseeable emergency.

But if he wants an emergency distribution to be paid from the NQ plan, does this mean that the plan document (as approved by the Board) must require the stoppage? Or that the participant may elect to stop future deferrals? And if the participant may elect to stop them, must the NQ-Plan Administrator require it as a condition of approving the emergency withdrawal if it would reduce the amount of the withdrawal?

In the preamble on pages 91-92 is the following:

"In response, these regulations provide that a plan may provide that a deferral election terminates if a service provider obtains a payment upon an unforeseeable emergency."

The first thing that this sentence, from the preamble, seems to do is put the word "distribution" in the regulation; i.e., require an actual emergency distribution before allowing a stoppage.

Second, it appears that the safest interpretation (absent clarification in the final regs or additional guidance) is that, if stoppage is to be included, the plan document must stop future NQ-deferrals when approving an emergency withdrawal, period; with no election by the participant.

Does anyone see this differently? It would be preferable if the regulation and the preamble were consistent. It seems that the draftsmen didn't use all the words necessary to express the intent that is evidenced by the preamble.

[QDROphile]

I recall that the proposed regulations say you can't distribute for an emergency to the extent that ceasing deferrals will relieve the need. So it seems that if an individual wants to cease deferrals, the individual must claim an emergency and then show that ceasing deferrals will relieve it. I would not let the individual unilaterally decide about the emergency or the amount of deferral that may be stopped.

On the other hand, stopping deferrals may not be necessary. If the participant has an immediate need for $1000 and a monthly deferral of $100, the administrator could decide to distribute $900 and allow deferral to stop for one month stop cover the remaining $100. I don't know if deferrals should/could/must stop for the remainder of the year, but I would worry if that decision were made by the individual.

[Guest RBJ]

I read the regs at pp 208-209 and page 224 to permit, but not require the cessation of deferrals. But, it also seem clear in the regs that this is only permitted if the plan provides that deferrals will ceasse. The participant would not have a say. The language of the plan will need to dicate whether deferrals cease. If the plan permits an unforeseeable emergency distribution, but is silent on the cessation of deferrals, I would argue that deferrals must continue.

[Kirk Maldonado]

Why doesn't somebody post a comment to the IRS on this point so that it can be addressed in the final regulations?