Salary deferral NQDCP

[Guest intoERISA]

I'm designing a 409A plan with elective salary deferrals. The employer wants a dollar limit on the total amount an employee can defer under the plan. I'm concerned that when an employee has elected to defer and is terminated mid-year there might be a prohibited acceleration. For example, what if an employee has elected $1000 in deferals each pay period and is terminated in June? The total amount deferred is about half of what it was expected to be when he made the election in the previous year. Could this be treated as an acceleration? What about an employee who elects to defer 10% of comp, gets a raise mid-year and, consequently, reaches the max deferral mid-year and deferrals are canceled--so 10% of comp in total is not deferred. It seems to me in both examples there will be a prohibited accelerations. -- How do you structure a plan to avoid this type of acceleration for terminated employees?

Thanks in advance for your thoughts.

[Steelerfan]

I'm designing a 409A plan with elective salary deferrals. The employer wants a dollar limit on the total amount an employee can defer under the plan. I'm concerned that when an employee has elected to defer and is terminated mid-year there might be a prohibited acceleration. For example, what if an employee has elected $1000 in deferals each pay period and is terminated in June? The total amount deferred is about half of what it was expected to be when he made the election in the previous year. Could this be treated as an acceleration? What about an employee who elects to defer 10% of comp, gets a raise mid-year and, consequently, reaches the max deferral mid-year and deferrals are canceled--so 10% of comp in total is not deferred. It seems to me in both examples there will be a prohibited accelerations. -- How do you structure a plan to avoid this type of acceleration for terminated employees?

Thanks in advance for your thoughts.

Take a look at the regs pp. 19256-57 for ideas on objective formula limitations that are fixed or non-discretionary. If an employee has a bona fide separation and has no more compensation to defer, I don't see how that creates an acceleration, unless there are additional amounts paid immediately upon termination that would have been subject to the deferral election. Otherwise it looks like your methods are objective--you would have to build into the formula that up to 10% of compensation subject to the overall plan limitation of x amount may be deferred. There can't be any subsequent discretion or manipulation.