NQDC - distributions taken against plan doc provisons

[Guest tom w]

I think I've stumbled into a problem here. I've done quite a bit of research, but am not finding guidance exactly on point. So, let me post here. I appreciate any help anyone out there can give.

Here are the facts as I understand them:

1) NQDC Plan set up in '03 (prior to 409A). It has not yet been amended to comply with 409A, although I don't see many provisons that will be problematic.

2) Contributions were made during 2005 (post-409A). On these contribution elections, payment ("entitlement date") was set at "normal retirement" defined in the document to be age 65.

3) Distributions were taken during 2007 by 2 of the 5 participants (none were yet 65, and none are retired). One of the participants completely liquidated their account. The other set up payments over 4 years. Neither of these payment dates or amounts were set at the time the contributions were made, and are not otherwise available under the terms of the Plan Document.

My questions are:

A) First, regarding the distributions:

1) What are the taxes / penalties due on these distributions?

2) are there wider consequences?

3) what is the best course of action?

B) Regarding the Contributions:

1) for the three participants who have not taken distributions, but who made contribtuions post-1/1/05, what is the best course of action?

2) for the two participants who have taken distributions, are there further ramifications?

Again, I appreciate any input. Thank you.

[Steelerfan]

In order for the participants who took distributions in 2007 to have avoided 409A violations, they should have executed election changes in 2006 for different timing/form of payment in accordance with transition rules. Absent that, I don't see how there isn't a 409A violation. For the participants who have not taken distributions, they should be given a chance prior to the end of 2007 to make any changes within the confines of current transition rules, otherwise they will have to live with the terms of the plan as written.

One has to wonder what the point of the plan documensts was if noone was going to bother following the terms?

[Guest tom w]

Agreed about the client's apparent disregard for the plan document. Thank you for your help.