Plan Terminations

[jpod]

Please let me know if you agree with my conclusion, or if you don't agree tell me why I am wrong. (Actually, I hope I am wrong, but I'm afraid I am not wrong.)

414(b) controlled group of corporations. One employer within the controlled group wishes to terminate its account balance deferred compensation plan for its employees under the "elective" termination rule in the regulations. Among other things, this rules requires that the service recipient terminate all plans that would be required to be aggregated under the 409A regs if the same service provider participated in those plans. Because of the definition of "service recipient" in the 409A regs (i.e., it includes all entities aggregated under 414(b) and ©), I believe that all plans of the entire controlled group that would be required to be aggregated must be terminated in order to use the elective termination rule.

[J Simmons]

Please let me know if you agree with my conclusion, or if you don't agree tell me why I am wrong. (Actually, I hope I am wrong, but I'm afraid I am not wrong.)

414(b) controlled group of corporations. One employer within the controlled group wishes to terminate its account balance deferred compensation plan for its employees under the "elective" termination rule in the regulations. Among other things, this rules requires that the service recipient terminate all plans that would be required to be aggregated under the 409A regs if the same service provider participated in those plans. Because of the definition of "service recipient" in the 409A regs (i.e., it includes all entities aggregated under 414(b) and ©), I believe that all plans of the entire controlled group that would be required to be aggregated must be terminated in order to use the elective termination rule.

Unfortunately, I think you are correct.

[Guest George Chimento]

[[i believe that all plans of the entire controlled group that would be required to be aggregated must be terminated in order to use the elective termination rule.]]

That's correct, but isn't that just to prevent an "abuse" where a participant might have deferred compensation in plans of various controlled group members?

I don't think it means that a controlled group which wants to terminate the plan of a West Coast subsidiary has to terminate the plans of its East Coast subsidiary, unless there is overlapping membership.

[jpod]

George, what you say sounds reasonable. However, how do you get by the language of the regulation? Specifically (I'm paraphrasing): the service recipient must terminate all plans that would be aggregated under 1.409A-1© IF THE SAME SERVICE PROVIDER had deferrals of compensation under al of the plans.

[XTitan]

I don't see a way around aggregation rules either.

[Guest George Chimento]

[George, what you say sounds reasonable. However, how do you get by the language of the regulation? Specifically (I'm paraphrasing): the service recipient must terminate all plans that would be aggregated under 1.409A-1© IF THE SAME SERVICE PROVIDER had deferrals of compensation under al of the plans.]

I agree that the language is really ambiguous for terminations of plans in a non-change in control context. Being able to terminate plans after a change in control of a sub has been my main concern in law practice, and the language is clear for that situation that termination is necessary only for the "participants affected thereby."

It's not as clear for terminations in a non-change in control situation, because the language is a little different. All plans of the same type must be terminated "if the same service provider had deferrals of compensation under all of the agreements... that are terminated or liquidated."

It doesn't say "as if." It says "if." Accordingly, I think it's a reasonable interpretation that it is not necessary to terminate plans of the same type unless there is overlapping participation. Admittedly, the language is not as clear as the change in control portion of the anti-acceleration regulations. Still, if Treasury wanted a company to terminate all plans of the same type, why wouldn't it have said so? There has to be a reason for the phrase "if the same service provider had deferrals of compensation under all of the agreements... that are terminated or liquidated."

I'm thinking that in a change in control situation, it would only be necessary to terminate a portion of a plan with respect to "participants affected thereby," whereas in a non-change situation, all plans with overlappng participation would have to be terminated. But that's just an effort to make sense of this.

Steve Tackney at Treasury is very helpful and would be the right person to ask if this is a real-life concern.

Regards,

George

[jpod]

George: My initial post was directed at the issue of whether you really had to aggregate plans of different members of a controlled group. I never thought that the issue you are raising had any legs.

Your analysis seems to ignore the phrase "would be aggregated." To me, "would be" means that you aggregate plans that would be required to be aggregated if the same service provider had participated in them, whether or not he actually participated in them. The reason for the word "aggregated" is to reflect the rule that you only aggregate two elective account balance plans, or two non-elective account balance plans, or two DB plans, etc., but not an elective account balance plan with a DB plan, etc. Your analysis would work, I think, if the "would be aggregated" language was not there, but it is there. The fact that the other interpretation would have been obvious if the reg. had said, simply, that you must terminate all plans required to be aggregated, rather than the much lengthier and clumsy language that is there, suggests to me that the meaning is that you must terminate all plans of the same type.

If you didn't have to terminate similar plans covering different participants, think of the abuse potential. Rather than set up one plan for all participants, the employer could set up separate clone plans for each participant. Then, when Executive #1 decides that he wants his money earlier than elected, and is willing to give up further deferral potential for 3 years, presto, his plan is terminated, but not the other participants' plans. Surely, Steve T. would never agree that this is how the reg works.

[Guest George Chimento]

I just don't think that all plans of the same type within a controlled group have to be terminated when there is no overlapping participation. You only need to do that "if" (not "as if") the employee participates in them. So if you have a d.c. deferred comp plan for west coast employees, and a similar plan for east coast employees, you can terminate one without terminating both, even though they are agggregated as plans of the same type. However, if an executive participates in both, you have to terminate both.

As a practical matter, this is academic. When plans terminate, it will usually be in the context of a change in control and the language is very clear that aggregated plans only need to be terminated for "participants affected thereby."

This is one of those cases where only the reg. writer knows what he meant.

[jpod]

George, it is not academic in my case. One member of a controlled group is inquiring about whether it can do a © termination of its plan; there will be no CC, so a (B) termination is not in the cards.

I still don't understand how you explain away the words "would be."

[Guest George Chimento]

George, it is not academic in my case. One member of a controlled group is inquiring about whether it can do a © termination of its plan; there will be no CC, so a (B) termination is not in the cards. I still don't understand how you explain away the words "would be."

IPOD,

If the question is, can you terminate just one of the plans while the same executive stays deferred in a separate plan of the same type in the controlled group, the answer is a clear NO. You have to terminate both. I thought you were dealing with a case where the Executive does not participate in both, and where you only wanted to terminate one of the plans.

Best,

George