Maintaining Granfathered Status

[Guest KLCarter]

Def Comp plan provides for payment of benefits $x per year for y years upon retirement (with an objective formula for reduced benefits payable to participants who terminate before retirement.)

Since amounts will continue to vest (and therefore become deferred) in future years, at least part of the plan will be subject to 409A.

there are no deferement or payment options available under the plan as written. since there is nothing impermissible under 409A, is there any advantage to segregating the pre-2005 plan and maintaining the grandfathered status for those amounts? Is it correct that a violation of 409A in the non-granfathered portion of the plan would subject all defered amounts to penalties and taxes, whether grandfathered or not?

[Steelerfan]

is there any advantage to segregating the pre-2005 plan and maintaining the grandfathered status for those amounts? Is it correct that a violation of 409A in the non-granfathered portion of the plan would subject all defered amounts to penalties and taxes, whether grandfathered or not?

The advantage to keeping track of grandfathered benefits separately would be to prevent those assets from being subjected to much harsher tax penalties if something were to go wrong. If you voluntarily make the whole plan subject to 409A and the executive find that out, they will go after the company to pay big tax bills if 409A is violated. An extra 20% is applied making it taxable at the top rate of 55%.

Your last question doesn't make sense-how can a violation of 409A with respect to amounts subject to 409A taint grandfathered assets unless you specifically decide not to do separate bookkeeping ? 409A does not treat NQDC plans the way 401(a) treats qualified plans that can be disqualified as to all participants (which has never happened anyway). A violation of 409A with respect to the assets suject to 409A affects only the participant not the entire 409A portion of the plan, let alone grandfatered assets.

[Guest Harry O]

If your plan is sponsored by a publicly traded company, keeping track of the grandfathered money avoids the 6 month delay for post-termination payments to key employees. You should also check to see if employees can accelerate payments with a haircut penalty. If so, this feature could be preserved as well. I also agree with Steelerfan's point.

[Just Me]

My understanding is that you cannot elect whether to grandfather or not. The deferred compensation is either subject to 409A (because it was deferred and/or vested after 2004, or because it was "old" money under an arrangement that was materially modified after October 4, 2004), or it's not. Absent a material modification, you cannot just designated otherwise grandfathered amounts as being subject to 409A.