Installment Payments under 409A

[Guest PBJ]

The last sentence of Treasury regulation section 1.409A-2(b)(2)(iii) states: "[A] schedule of payments does not fail to be an installment payment solely because such plan provides for an immediate payment of all remaining installments if the present value of the deferred amount to be paid in the remaining installments falls below a predetermined amount, and the immediate payment of such amount does not constitute an accelerated payment for purposes of section 1.409A-3(j)..."

The question is:

Can the "predetermined amount" be any amount or are we limited to the amount described under Treasury regulation section 1.409A-3(j)(4)(v)(B)? This regulation limits "cashouts" to an indexed about under Code section 402(g) (e.g., $15,500 in 2007).

Some commentary is suggesting it can be any amount. However, other commentary indicates that the limit may apply.

Any insight would be appreciated.

Thanks.

[Everett Moreland]

The following from the preamble (72 Federal Register 19268 (April 17, 2007)) indicates to me that it can be any amount:

H. Cashout Rules

Commentators requested various modifications to the cashout rules generally expanding the conditions under which a service recipient may exercise discretion to cash out a service provider's entire amount deferred under a plan. The final regulations generally provide that a service recipient may exercise such discretion at any time that a service provider's amount deferred under the plan is less than the applicable dollar amount under section 402(g)(1)(B) for that calendar year. For this purpose, the plan aggregation rules apply, so a service recipient may not use this rule to cash out an amount under one arrangement but not another arrangement where the two arrangements would be treated as one plan. The final regulations, unlike the proposed regulations, do not require that a service provider have separated from service for the service recipient to cash out the amount deferred. In addition, the plan does not need to be amended to provide this discretion to the service recipient. Finally, the amount has been changed from $10,000 to the limit on elective deferrals under section 402(g) to permit the amount to be adjusted for changes in the cost of living.

The final regulations also provide that a plan under which amounts are to be paid in installments may provide for immediate payment of all remaining installments if the present value of the deferred amount to be paid in the remaining installments falls below a predetermined amount, and such immediate payment will not constitute an accelerated payment for purposes of § 1.409A-3(j)(1), provided that such feature (including the predetermined amount) is established no later than the latest time at which the time and form of payment is otherwise required to be established, and provided further that any change in such feature including the predetermined amount must comply with the requirements for a change in the time and form of payment.

[gc@chimentowebb.com]

The question is: Can the "predetermined amount" be any amount or are we limited to the amount described under Treasury regulation section 1.409A-3(j)(4)(v)(B)? This regulation limits "cashouts" to an indexed about under Code section 402(g) (e.g., $15,500 in 2007). Any insight would be appreciated.

Thanks.

I believe it can be any amount. The 402(g) limit cashout provision is meant to give an employer discretion to overide an election. If the plan provides that a cashout must occur, there is no limit from what I can see.

Let me take it another step further. Some of my pre-409A plans provided that installments, regardless of election, must always equal at least 1/2 of the 415 DB limit as in effect on January 1. It was a way to assure participants (and plan sponsors) that the distributions would not be painfully small, and that they would also provide a reasonable income supplement. This is certainly a definite and pre-determined schedule. Whether it works under the regulations is a bit unclear to me. Getting an answer before this ridiculous semi-compliance date of 12/31/07 is problematic.

George