Does Q&A-20 allow revocation of a bonus deferral election?

[Guest FAQ]

Notice 2005-1 allows a participant to revoke a deferral election in 2005 and receive a distribution of the amount that would have been deferred, but one of the requirements is that the full amount of the distribution must be "included in the participant's income in calendar year 2005, or, if later, the participant's taxable year in which the amount is earned and vested (as defined in Q/A 16)."

May an election to defer a discretionary 2005 bonus that is payable in 2006 be changed under this provision?

Assume a participant is guaranteed to receive a set percentage of a bonus pool, even if he terminates during 2005 (in such case, he would receive a prorated bonus). Assume also that the compensation committee determines the size of the 2005 bonus pool in 2006, has discretion to eliminate the bonus pool altogether, and that the discretion is legitimate and would prevent the bonus from being a legally binding right under the regs.

Would such a participant have an "earned and vested" bonus, even though he has no legally binding right to the bonus? Or does it necessarily follow that if you do not have a legally binding right to an amount, then it cannot be earned and vested? If the bonus is earned and vested in 2005 but paid in 2006, then Q&A 20 would not be available.

It would have been clearer if Q&A-20 referred to both earned & vested and legally binding right, but it does not.

[Just Me]

Just my opinion, but I think you will need to have a "legally binding right" as a threshold step before you look at whether it's "earned and vested." Seems like you can't earn and vest something you don't have, i.e. a legally binding right.