Differnt Distribution Schedule for Voluntary vs. Involuntary Terminations?

[401 Chaos]

Can you have different distribution schedules (e.g., 6 month vs. 12 month) for deferred compensation amounts that are distributed upon a separation from service but vary depending upon whether it is an involuntary termination by employer versus a voluntary termination by the individual.

Treas. Reg. 1.409A-3© would seem to prohibit such distinctions to the one time and form of payment rule but I am trying to determine exactly what 1.409A-3©(3) means in this regard. It seems to open the door very broadly to permit distinctions based on any sort of separation from service. Would appreciate any thoughts on how to parse that language.

[jpod]

Gosh, I always thought it was clear, but maybe it's not. My reading of ©(1), (2) and (3) is that you can have one structure for a SFS that is described in (1), another for a SFS that is described in (2), and another for any other type of SFS that is not described in (1) or (2). Hwever, you can't have multiple structures for different scenarios that all fall under (3).

[401 Chaos]

Jpod,

Thanks, that interpretation makes sense to me and would seem cosistent with the rest of the rule. So, under that interpretation you could not have a payout over 6 months in the event of an involuntary termination and 12 months in the case of voluntary termination because that would be two different schedules related to category (3) SFS? Thanks

[XTitan]

This is from the Q&A from the May 2009 ABA JCEB meeting which, while on another topic, seems to indicate you can differentiate between voluntary and involuntary:

A nonqualified deferred compensation plan subject to Section 409A provides for a distribution at age 65 or, if earlier, upon an involuntary separation from service. If the separation is voluntary, payment is made at age 65 (i.e., on the original fixed payment date). Does such a provision (accelerating payment upon only a subset of an otherwise permissible payment event) comply with Section 409A?

Proposed Response: Yes. Section 409A permits distributions to be made upon the earlier of one or more permissible payment events, such as the first to occur of a date certain (e.g., age 65) or a separation from service. When a separation from service is a payment event, there is no requirement that every possible separation from service is a payment event. Because payment could be made before age 65 upon any separation from service (whether voluntary or involuntary), it likewise should be permissible to permit an earlier distribution upon a subset of the permissible payment event (e.g., upon an involuntary but not voluntary separation from service).

IRS Response: The Service representative agrees with the proposed answer as long as whether there has been an involuntary separation from service is objectively determinable and nondiscretionary.

[jpod]

401Chaos: I agree with your conclusion.

XTitan: Don't know what your intentions were in citing the Q&A, but I think it is addressing a different issue, as it deals with two different payment triggers: a SFS and a fixed date. 401Chaos was addressing two different types of SFS.

[KJohnson]

I agree as well, you could not have different pay out schedules. Only one form of payment per payment trigger. And it is also clear that installments over different periods of time are different forms of payment.

For this purpose, a series of installment payments over a predetermined period and a series of installment payments over a shorter or longer period, or a series of installment payments over the same predetermined period but with a different commencement date, are different times and forms of

payment.

The one I have always strugged with, is, for example a five year employment contract which states that if an employee was terminated without cause he woudl be paid his/her base salary on a monthly basis for the remaining term of the contract. You arguably then have different "lengths" for the installments based on when the employee is terminated and therefore different "forms" based on the same event--separation from service.

[XTitan]

I read the conclusion from the ABA Q&A that it is possible to have different forms of payment depending on whether the termination was voluntary or involuntary. The question may not apply, the reasoning sure sounds like it.

[jpod]

XTitan: At first glance the IRS' conclusion might suggest that it is permitting separate distribution structures based on voluntary vs. involuntary, because of its "objectively determinable and nondiscretionary" caveat. However, I think the reason for the caveat is something else; namely, to remind readers that the employer can't get around the "anti-acceleration" rule by mischaracterizing a termination as involuntary when it is really voluntary. This was a very silly caveat and had no place in the discussion.

[KJohnson]

The reason that the JCEB one works is that you only have one payment form for the termination payment trigger (and you have limited to involutary terminations). If someone voluntarily terminates they are not entitled to the termination payment trigger. What they are entitled to is the "stated age" payment trigger that applies to all curently employed as well as those that voluntarily terminated from employment prior to age 65.

[Just Me]

My two cents: No, you can't have different payment forms for voluntary vs. involuntary. The regs allow you to have different payment provisions for (1) specified age/service separation triggers, (2) separation within 2 years after a "good" CIC, and (3) all other separations. If there is not age/service/CIC component to the question, then both the involutary and voluntary SFS fall into the "all other" bucket and must have the same form and time of payment.