Hopeless?

[Randy Watson]

We have a plan that contains a timing distribution provision which according to the sponsor was never intended. In a nutshell, the plan delays actual distribution for 1 year after a distribution event. An executive is now thinking about terminating and was shocked to see that they would have to wait a full year for their money.

I don't believe there is anything that can be done to correct this problem. This doesn't appear to qualify for the IRS correction "programs".

Is there anything we can do to fix this? I assume the IRS wouldn't be very receptive to a self correction through a retroactive amendment. Another problem is that there is little to no evidence that would support the sponsor's position that they never wanted a 1 year delay.

We will be amending the plan to remove the 1 year delay on the distribution of future contributions (2011 and beyond).

[XTitan]

Hopeless indeed.

[Just Me]

You're in a pickle on this one. You can amend to eliminate the one year delay, provided that you do this at least one year in advance, but then you'd need to add a five year delay due to the change in timing of the distribution for the existing deferred compensation amounts.

[401 Chaos]

Not a direct help to the question at hand but this sort of provision can very often be useful from an income tax perspective. I've often seen plans provide for immediate distribution upon separation such that indivdiuals get an immediate distribution in the year they retire (often with a bonus and with a high income) or are terminated (often with significant severance benefits) and so have the distribution taxed at very high rates. In many cases, the individuals would be better (from a tax perspective) anyway if they had the distribution held until the next tax year when they had much less income. Cold comfort for change I know if the participant was not planning on the delay but the best that I can offer on this particular issue.

[jpod]

Randy: This doesn't sound like a possibility in this case, but if the future payment is still subject to a substantial risk of forfeiture within the meaning of the 409A regs, that can be waived and payment can be accelerated.