Late Distributions

[Guest Mr. Kite]

Here's another question that has me stumped (this is getting to be a bad habit) about 409A errors. In this case (with facts modified for clarity), a NQDC plan participant had elected to have his compensation deferred until April 30, 2008, but due to administrative error the plan did not make a distribution until November 2008.

Section 1.409A-3(d) provides that a delayed distribution is treated as paid on the designated distribution date if paid within the same taxable year or by March 15th of the following year. Under the scenario above, because the distribution falls within the specified period, it appears there is a not a 409A failure under the regulations.

The problem arises in determining the amount of the distribution. The plan provides for earnings/losses of accounts by indexing the bookkeeping entries to investments selected by the participants. As you may imagine, the account value in March was much higher than the value in November. As I noted above, section 1.409A-3(d) indicates that the distribution is deemed to be made on the designated date (April 30, 2008). Does it follow that the amount of the distribution should be based on the April 30 account value? And no, the plan does not include language that clearly addresses this situation.

For further thought: If the distribution had been made after 2008, but on or before 3/15/2009, would the distribution be taxable in 2008 or 2009? Although the regulations deem the payment as having occured on April 30, 2008, this is a 409A rule rather than an income inclusion rule (IRC 61 and 451) -- but then, wouldn't the payment be includable in 2008 under the constructive receipt (or economic benefit) doctrine? See, for example, PLR 9337016.

Yet further: If the distribution had been made after 3/15/2009, and it is appropriate to treat the payment as "received" (and taxable) in 2008 (again, because of constructive receipt), should the arrangement therefore be treated as failing 409A? The regulations suggest that this would be the case.

Thanks for any thoughts on this.