Revoke Election While in Original Election Period

[Guest mbw]

A new participant has 30 days to elect to participate in a nonqualified deferred comp plan. A participant elects a deferral and the deferral is withheld from his first paycheck. The participant then decides he does not want to participate (buyer's remorse??).

The plan is not too clear on when the election actually becomes effective...when made (think possibly no revocation) or the last day of the election period (think 30th day). Under the regs, the participant may change his initial election any time before the election becomes effective. May the participant revoke his prior election? I think the answer is clearly yes unless the plan provides otherwise (and we can clean up the language to specify the effective date of the election as we finalize for the regs).

Now, here is the real question, what happens if the company has already withheld deferrals from the participant's pay. By withholding, isn't the employer treating the election as effective sooner than the 30th day, in which case a revocation does not seem possible any longer. If the employer could still allow the revocation because the 30th day has not arrived (can it even do this?), what happens to the deferrals...stay or distributed? Seems as though they would have to be returned.

[Steelerfan]

If the regs allow an election to be revoked any time until it becomes irrevocable, why is there an issue? You can easily amend the plan. Plus, wouldn't this be a error that you could correct under the new guidance?

[Guest mbw]

If the regs allow an election to be revoked any time until it becomes irrevocable, why is there an issue? You can easily amend the plan. Plus, wouldn't this be a error that you could correct under the new guidance?

Thanks for the input.

But does it become irrevocable when the employer withholds deferrals? The election is irrevocable until it is effective and I would think that withholding treats it as effective.

As for the correction, I don't think this is an operational failure, which is a failure to follow the terms of the plan. Seems to me the correction program applies only to operational errors. This is just a guy who changed his mind and now wants to revoke his election.

Even if we conclude he cannot revoke the election, it seems a good solution is to have him do an election change (during the transition period) for distribution on January 1, 2009.

Do you agree?

[Steelerfan]

I thought that an election could be changed any time prior to it becoming irrevocable, meaning that if your within the 30 days you could revoke and get your money back, but I could be wrong I haven't read the rule in a while.

Your approach of using the transition election rule would work fine, but maybe your using as Uzi to kill a fly.

[Steelerfan]

1.409A-2(a)(1) states that "a plan my provide that an election to defer may be changed at any time before the last permissible date for making such election." I think you could safely say that you have until the 30th day to make or change your election so you just need to clarify that in the plan. Since we are in the plan drafting stage, it doesn't seem that you have any thing to worry about as long as your plan is clarified to say that the election is not effective until the 30th day. Shouldn't matter that money was already withheld if the election is still revocable.