Separation Pay and 401(a)(17) limits

[Guest Mr. Kite]

I have a separation pay plan that currently meets the requirements for exclusion under 409A -- upon involuntary termination, the employee will continue to receive base salary for 2 years. Currently one employee's salary is lower than the 401(a)(17) limitation (but is rising), and another employee's income is above the 401(a)(17) amount. The separation pay plan does not specify that the installments will be treated as a series of separate payments.

Is it too late to amend the plan to cap the payment at twice the applicable 401(a)(17) amount (assuming the employees are agreeable)? Or would it be okay for the first employee, but not for the second (and may be capped at his current salary)?

I believe it would be okay to implement the 401(a)(17) cap because, until involuntary separation occurs, the right to the payment continues to be subject to a substantial risk of forfeiture.

Second question -- if the cap is not imposed, and a terminating employee has a base salary greater than the 401(a)(17) amount (and thus the benefits will be partially be "deferred compensation"), will the payments not be treated as "deferred comp" until such time as the payments reach the limit, or will each installment be allocated between deferred comp and excluded separation pay? I believe the first alternative is correct.

Thanks for looking!

[QDROphile]

So what is the compliance issue?