Plan Aggregation

[Guest jmb0110]

Employer maintains two nonaccount plans. One is an excess plan to make up for benefits limited by 415 and 401(a)(17) that provides for commencement of payments upon the later of separation from service or age 55, the earliest retirement age under the qualified plans. The form of payment is limited to equivalent annuity options. The other plan is a SERP for the very senior executives which provides for an immediate lump sum payment upon separation from service. The participants in the SERP also participate in the excess plan.

My reading of the plan aggregation rules under the final regualtions is that like kind plans are treated as one plan for all purposes except certain enumerated exceptions. Since timing and form of payment are not one of the exceptions, this would lead me to believe that the above design would not work and that there would need to be a single form and time of payment for each executive that participates in both plans.

I hope everyone disagrees.

[Steelerfan]

I disagree. The rules provide for separate payout elections for separate deferrals. Even under the same plan you can elect separate forms of payment for separate payment events, such as a lump sum on a change in control or installments on separation from service.

[Guest jmb0110]

I disagree. The rules provide for separate payout elections for separate deferrals. Even under the same plan you can elect separate forms of payment for separate payment events, such as a lump sum on a change in control or installments on separation from service.

Steelerfan==That is good news. Let me change my facts a little. Instead of rrequiring the executive to wait until age 55, both the excess plan and the SERP commence benefits on separation from service. The excess plan still pays benefits in the form of an annuity and the SERP pays benefit in a lump sum. So I have the same triggering event--"separation from service" but different forms of payment. So we can have separate elections of forms of payment for separate deferral amounts under a single nonaccount balance plan.

Thanks

[Steelerfan]

I think so, but I don't think of them as one plan unless I'm forced to--like if there was a failure under one plan or you wanted to get rid of them.

[Guest gaham]

Sorry but I have to disagree with Steelerfan here. I think the regs require that any aggregated plan only have a single time and form of payment for each distribution event unless there is some sort of subsequent event (e.g. death, attainment of a certain age, etc.) or other specified exception.

[Guest mbw]

Is there any argument the excess plan is an account balance plan?

[Steelerfan]

Is there any argument the excess plan is an account balance plan?

I'm not convinced yet that I'm completely wrong. I could be, but where in the regs does it say you can't have separate forms of payment for separate deferral amounts? Note the last sentence of the long excerpt below "The addition or deletion of such a different time and form of payment applicable to an existing deferral is subject to the subsequent deferral election rules and the anti-acceleration rules." That leads me to believe that where new and/or separate deferrals are involved, a participant could choose a different form of payment. But it seems that you still be limited to exceptions in the regulations.

Anyway, the preamble says:

The final regulations retain the rule, however, that permits a plan to provide for a different time and form of payment, depending upon whether the permissible payment event occurs before or after a specified date. In addition, the final regulations also provide for a limited ability to designate different times and forms of payment based upon the conditions under which a service provider’s separation from service occurs.

5. Different times and forms of payment on separation from service under

specified circumstances

The final regulations continue to provide that a time and form of payment must be specified with respect to each permissible payment event. Under the proposed regulations, a second time and form of payment could be established for a payment due to a permissible payment event where the distinction was based upon the event occurring before or after a certain date, such as the service provider reaching a certain age. Commentators requested that different times and forms of payment be permitted if based upon different types of separations from service. The final regulations generally provide that the time and form of payment upon a separation from service may vary depending upon

either or both of the following: (1) whether the separation from service occurs during a limited period of time not to exceed two years following a change in control event as defined for purposes of section 409A; or (2) whether the separation from service occurs before or after a specified date (for example, the attainment of a specified age), or before or after a combination of a specified date and a specified period of service determined under a predetermined objective formula or pursuant to the method for crediting service under a qualified plan sponsored by the service recipient. The addition or deletion of such a different time and form of payment applicable to an existing deferral is subject to

the subsequent deferral election rules and the anti-acceleration rules.

[Guest kodle]

I agree with Steelerfan.

Section 1.409A-3(a) applies the permissible payment rules to "an amount of deferred compensation under the plan...". The initial deferral election rules under 1.409A-2(a) discuss making elections for the time and form of the payment no later than December 31 prior to year in which the services giving rise to the compensation are performed. These provisions appear to follow pre-409A law where separate payment elections could be made for each year's deferrals.

That said, it is not very clear how the "only one time and form of payment" sentence (new in these final regulations) works with these other sections. The title to that section, "Designation of alternative specified dates or payment schedules based upon date of permissible event," implies that the "one time and form" rule is intended to restrict the ability to apply different payment terms based on the calendar date on which the permissible payment event occurs. Surely, the IRS did not intend to destroy the ability to elect different payment terms for different amounts of deferred compensation. The examples in the preamble and in that regulation seem to contemplate much more complicated distribution provisions that they were attempting to address.

Thoughts?

[Guest gaham]

If you are referring to my earlier comment, the plan aggregation rules require that all deferrals under all plans that are nonaccount balance plans "are treated as deferred under a single plan". See 1.409A-1©(2)(i)©. This rule coupled with the rule under 1.409A-3© which says that, with certain exceptions, "a plan may designate only one time and form of payment upon the occurrence of each event" specified in the statute, appears to say that any plans that are required to be aggregated can generally have only one time and form of payment per distributable event.

[Steelerfan]

If you are referring to my earlier comment, the plan aggregation rules require that all deferrals under all plans that are nonaccount balance plans "are treated as deferred under a single plan". See 1.409A-1©(2)(i)©. This rule coupled with the rule under 1.409A-3© which says that, with certain exceptions, "a plan may designate only one time and form of payment upon the occurrence of each event" specified in the statute, appears to say that any plans that are required to be aggregated can generally have only one time and form of payment per distributable event.

Along the lines of what Kodle is saying, the Treasury seems to be assuming that the "one" form of payment is in relation to one deferral, such as an employer's SERP benefit. There is no mention of the applicability of that rule to completely different benefits that have a totally different source or formula.

Again the fact that all deferrals under all plans (of the same type) are treated as deferred under one plan does not mean you can't have separate deferrals with different legal terms attached to them. We had this discussion in relation separating payments under separation pay plans for purposes of the short term deferral rule. Why would you think the aggregation rule means you have to have all the same plan terms--it's a rule for applying failures, not for designing plans?