Single time and form of payment

[Guest CABatty]

The final regs require a single time and form of payment for each payment event. What constitutes a single form of payment? Specifically, would an amount paid upon separation from service in 12 equal monthly installments be the same form as an amount paid upon separation from service in 6 equal monthly installments?

[Guest CABatty]

Anyone have any thoughts on whether installment payments of varying length (equal monthly installments for 6 months vs. equal monthly installments for 12 months) would be considered the same form of payment? Any thoughts would be greatly appreciated...

[QDROphile]

Seems like the shorter payment schedule would have the effect of accelerating payments compared to the longer schedule, so I would play safe and treat it as a separate form for purposes of the rule. If you don't, then can you argue that a lump sum is an installment form with a single installment?

[Guest CABatty]

QDROphile - Thanks for the reply. I see what you're saying about the acceleration of payments. But, what if the payout schedules are for different amounts?

For example:

Executive receives 2 times base salary if the employer terminates his employment without cause, paid in 12 equal monthly installments.

Executive receives 1 times base salary if the employer terminates him after he becomes subject to a disability (non-409A compliant definition of disability), paid in 6 equal monthly installments.

The monthly amounts are the same, the only difference is the amount of severance the executive receives. Could the two payments be treated as two separate amounts of deferred compensation, so that the different installment schedules do not violate the single time and form of payment rule?

[Guest intoERISA]

6 equal monthly installments and 12 equal monthly installments are definately two different forms of distribution. However, in the example you are fine because two different payment events are involved. What you can't do is allow an employee who has been terminated to choose whether to pay the benefit over 6 months or 12 months. But it is fine to pay benefits on a totally different schedule upon disability (as long as a disabled employee can't choose between more than one form of payment.)

Also take a look at 1.409A-3(b),©, and (d) for some wiggle room in this area.

[Guest CABatty]

However, in the example you are fine because two different payment events are involved.

How are two different payment events involved?

I only count one - separation from service. The definition of "disability" is a non-409A compliant definition, so the payment does not qualify as a distribution upon disability. 1.409A-3c only allows different forms upon separation from service if the separation from service is after a change in control, after a specified date, or any other separation from service. The regs don't allow a different form of payment upon separation from service due to disability.

[Guest intoERISA]

However, in the example you are fine because two different payment events are involved.

How are two different payment events involved?

I only count one - separation from service. The definition of "disability" is a non-409A compliant definition, so the payment does not qualify as a distribution upon disability. 1.409A-3c only allows different forms upon separation from service if the separation from service is after a change in control, after a specified date, or any other separation from service. The regs don't allow a different form of payment upon separation from service due to disability.

You are right--there is only one payment event. I missed that the def. of disability is non-409A compliant.

But see 1.409A-3©(2). In some circumstances distributions on account of sep from service can have multiple forms of payment. For example, a seperation from service after a "specified date." You might argue that the date a person becomes disabled under your plan's definition is a specified date. However, that is pretty aggressive, I think, because specified date probably means a date that is determinable at the time of the deferral- or maybe not?

1.409A-3(d) could also help you because it says a payment is treated as made on a payment date if it is made in the taxable year of the payment date. You could structure the plan so that whether or not payments are made over six months or twelve months they are all paid within the taxable year of the payment date. For example, I think you would be fine if the plan said "all distributions because of a separation from service will become distributable on January 1 following the separation from service. If it's because of disability, the benefit will be paid in 6 equal monthly installments, otherwise there will be 12 equal monthly installments." Then your plan will essentially provide one lump sum payment in the year following termination--which is allowed under 1.409A-3(a)(4). That the lump sum payment is paid over different periods of time is fine as long as it is all paid within the taxable year of the employee.

But it might just be easier to remove the 6-month payout in the event of disability.

[Randy Watson]

Here's a twist. What if termination without cause triggers 24 equal monthly payments, but a termination due to a disability (meaning the employer can terminate the individual if he becomes disabled) is paid in a lump sum within 30 days. We clearly have two different forms of payment, but the latter would meet the short term deferral rule. If it meets the short term deferral rule it's not subject to 409A and it's at least arguable that these two different forms of payment are acceptable as only one is subject to 409A. What do you think about that?

It's late, maybe I'm losing my mind.

[Steelerfan]

1.409A-3(d) could also help you because it says a payment is treated as made on a payment date if it is made in the taxable year of the payment date. You could structure the plan so that whether or not payments are made over six months or twelve months they are all paid within the taxable year of the payment date. For example, I think you would be fine if the plan said "all distributions because of a separation from service will become distributable on January 1 following the separation from service.

That rule is for set payment dates and only applies when payment is made after the scheduled date (but within the same calendar year), or not more than 30 days before (as explained in the preamble you can't pay at any time earlier in the year, such as Jan 1 because of the timing of subsequent elections). You can get the whole year to pay if you designate a calendar year as a payment date. In OP, payment is upon an event--separation from service, so those rules don't apply.

Your idea would appear not to meet the time and form requirements. You'd have to pay within 90 days of separation. In your example, Jan 1 could be more than 90 days from separation.

[Steelerfan]

Here's a twist. What if termination without cause triggers 24 equal monthly payments, but a termination due to a disability (meaning the employer can terminate the individual if he becomes disabled) is paid in a lump sum within 30 days. We clearly have two different forms of payment, but the latter would meet the short term deferral rule. If it meets the short term deferral rule it's not subject to 409A and it's at least arguable that these two different forms of payment are acceptable as only one is subject to 409A. What do you think about that?

It's late, maybe I'm losing my mind.

If the plan already provides for deferred compensation, you can't meet the STD rule on an ad hoc basis by paying in a lump sum immediately after termination. If we were talking about a separation pay plan that imposes an SRF on all payments, then it could work that way.