How Far Does a 409A Taint Go?

[Guest Grumpy456]

I am finding a lot of the 409A rules are worded very confusingly and that summarizes of the rules put out by law firms and consulting firms are anything but clear. Here's an example:

"Plans within each category are aggregated for each individual, which means that a compliance failure in any plan in that category for that individual will make all of his or her other plans in that category fail compliance as well."

What the does that statement mean in light of the following example:

Jim is a participant in Account Balance Plan 1 and Account Balance Plan 2 (both sponsored by PrivateCo, Inc.--a privately-held entity). Jim and Donna are the only participants in Account Balance Plan 1. Jim, Larry, Donna and Jerry are the only participants in Account Balance Plan 2.

Assume Account Balance Plan 1 violates 409A because it allows Jim (but nobody else) to do something that it shouldn't. Does the rule stated above mean:

1. with respect to JIM ONLY, Account Balance Plan 1 and Account Balance Plan 2 are subject to 409A's penalties, etc. (and benefits provided to the other participants are not subject to 409A's penalties as a result of Jim's problem);

2. ALL participants in both Account Balance Plan 1 and Account Balance Plan 2 are subject to 409A's penalties, etc. (e.g., Larry's benefit from Account Balance Plan 2 is subject to 409A's penalties, etc.); or

3. Something else.

Thanks, in advance for your help/comments.

[Steelerfan]

Assuming they are the only AC plans Jim is in, number 1 is correct. It's the participant not the plan that bears the penalty of a violation. The 409A failure rules sort of force you to look at a "plan" as an individual arrangement between the employer and an employee and less like a plan in the qualified plan sense.

[Guest Grumpy456]

Thanks for your response. Let me change the scenario a little bit to make sure I understand things. What if the plan sponsor terminates Account Balance Plan 1:

1. since Account Balance 2 is also an "account balance" plan, can it terminate Account Balance Plan 2 only with respect to Jim and Donna (i.e., with respect to those participants in common between Account Balance Plan 1--the plan being terminated--and Account Balance Plan--the only other account balance plan sponsored by PrivateCo, Inc.);

2. does it have to also terminate Account Balance Plan 2 with respect to all of its participants, even those who are not also participants in Account Balance Plan 1; or

3. is there some other possibility I've overlooked.

Finally, what if neither Jim nor Donna were participants in Account Balance Plan 2. If PrivateCo, Inc. terminates Account Balance Plan 1, does it also have to terminate Account Balance Plan 2?

I find the wording in the final regs very confusing on these basic issues. Thanks, in advance, for any help figuring out what the final regs mean.

[Steelerfan]

If you terminate account balance plan 1 you have to terminate the entire account balance plan 2. the termination rules are different from the failure rules. The idea with these rules is to prevent executives from accelerating the money out of one plan but continuing to get tax benefits from another plan.