Subsequent Deferral and "Later of" Language

[Christine Roberts]

The final 409A regulations contain 24 examples under 1.409A-2(b)(1)(9) on subsequent deferral elections but this scenario is not addressed:

Plan defines "payment date" as the later of participant reaching age 65, or his termination of employment.

On which event/date does the 5 year minimum subseqent deferral rule depend?

Participant is less than 1 year from his 65th birthday but plans on working another 5 to 10 years. He has over 40 years of service with the employer.

First, is there a substantial risk of forfeiture just due to the "later of" language and the participant's good faith intention to continue working? Does the fact that the participant is a substantial but not majority owner of the entity make any difference?

In other words does the plan on its face have to have a more material risk of forfeiture?

If so can the participant now change the definition of "Payment Date" to the later of age, say, 70, and completion of, say, 50 years of employment? Or just leave 65 as is, and make later trigger his "separation from service on or after completing 50 years of service"?

Any comments appreciated.

[XTitan]

By deleting the separation portion of the election, there would be a violation of the anti-acceleration provisions as applied to multiple payment events as described in 1.409A-3(j)(2):

(2) Application to multiple payment events. Generally, the addition of a permissible payment event, the deletion of a permissible payment event, or the substitution of one permissible payment event for another permissible payment event, results in an acceleration of a payment if the addition, deletion, or substitution could result in the payment being made at an earlier date than such payment would have been made absent such addition, deletion, or substitution.

[Christine Roberts]

By deleting the separation portion of the election, there would be a violation of the anti-acceleration provisions as applied to multiple payment events as described in 1.409A-3(j)(2):

(2) Application to multiple payment events. Generally, the addition of a permissible payment event, the deletion of a permissible payment event, or the substitution of one permissible payment event for another permissible payment event, results in an acceleration of a payment if the addition, deletion, or substitution could result in the payment being made at an earlier date than such payment would have been made absent such addition, deletion, or substitution.

Thanks for your reply. What about not deleting the separation from service but requiring that separation from service occur on or after the employee's 50th anniversary of hire, to be a distribution event? This would not be an additional payment event but a subsequent deferral (it seems to me), made more than one year before he intends to retire, and pushing the payment event out by more than 5 years.

[XTitan]

If the participant wasn't yet 64, there would have been no problem. The later of 65 and separation could have been changed to later of 70 (or later) and separation while complying with the subsequent deferral rules.

Being within 1 year of 65, there is no ability to delay that portion of the later of election. You are left with effectively a separation only election. Then §1.409A-2(b)(9), Example 23 seems to apply:

Subsequent deferral election rule – change in time of payment from payment at separation from service to payment at later of separation from service or specified age.

Employee W participates in a nonqualified deferred compensation plan that provides for a lump sum payment at separation from service. Employee W wishes to make the payment payable upon the later of separation from service or a predetermined age. Provided that Employee W makes such election on or before the date 1 year before a separation from service, Employee W may elect to receive a lump sum payment upon the later of the date 5 years following a separation from service or at a specified age.