Spillover Plan to Qualified 401(k) Plan - Application of Subsequent Deferral Rule

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An employer maintains a qualified 401(k) plan for its employees to which any combination of before-tax 401(k), Roth 401(k) and/or after-tax contributions may be made. Participants contribuing up to a specified percentage of compensation receive an allocation of matching contributions. Under the 401(k) plan, once a participant's compensation reaches the 401(a)(17) limit, all further contribution cease for the remainder of the year. Thereafter, the equivalent amount of matching contributions that could have been made to the 401(k) plan but for the limit are continued to a spillover nonqualified plan. Under the plan, the sole triggering event is separation from service. In spite of the final 409A regulations, there is no initial deferral period -- instead, employees are paid in a lump sum at separation from service unless a transitional election of time and form of distribuxtion was made prior to 2008. In bringing the plan into compliance with the final 409A regs, an issue has arisen on when a participant must make the subsequent deferral election.

Based on counsel's interpretation of the proposed 409A regulations, the spillover plan proposed adopting a "push-out" rule in which a participant could make a subsequent deferral election up to the date of his/her separation from service, with the election becoming effective 12 months form tthe date it was made. The spillover plan would like to continue using the "push-out" rule when the plan is restated to comply with the 409A final regulations. An examination of the text of the final regulations on this issue provides conflicting interpretations. For example, in Reg. Section 1.409A-2(b)(1), the following language, which arguably supports the continued viability of the "push-out" rule, was added by the final regulations to what had appeared in the proposed regulations: "For purposes of this paragraph (b), except as otherwise provided in this section, a subsequentl deferral election is not considered made until such election becomes irrevocable under the terms of the plan. Accordingly, a plan may provide that a subsequent deferral election may be changed at any time before the last permissible date for making such a subsequent deferral election." This is contradicted by Reg. Section 1.409A-2(b)(9), Example 23, which was also added to the proposed regulations and involves a subsequent deferral election to change the payment trigger from separation from service to payment at the later of separation from service or the attainment of a specified age. The example provides as follows: "Employee W participates in a nonqualified deferred compensation plan that provides for a lump sum payment at separation from service. Employee W wishes to make the payment payable upon the later of separation from service or a predetermined age. Provided that Employee W makes such election on or before the date 1 year bfore a separation from service, Employee W may elect to receive a lump sum payment upon the later of the date 5 years following a separation from service or at a specified age."

Does anyone have any thoughts about whether the plan can continue using the "push-out" rule in the 409A compliant plan?