Plan Amendment to Change Time and Form of Payment

[Guest rjohnson]

I understand from the 409A regulations that a plan providing the employer and/or employee discretion to make subsequent deferral elections in the time/form of payment are subject to 1/5 year rules, etc. However, what happens if the employer unilaterally (but with the acquiescence of the participant) amends the plan to change the time and form of payment?

For example, a plan currently provides a life annuity at age 62 (with no subsequent election/discretion). The employer--which has reserved the authority to amend the plan unilaterally--amends the plan to state that the participant now is entitled to a 15-year term certain starting at age 67. Assume employee is fully vested and will not sue in the event this equates to a reduction in vested benefits.

From my reading of the 409A regulations, this does not violate the subsequent deferral elections because the plan does not give anyone the discretion or election to change the time/form of payments--it is simply accomplished by plan amendment. Does the employer's reservation of rights to amend the plan count as discretion to make a subsequent deferral election? If so, the plan (and lots of others) would have already violated 409A because it does not include the 1/5 year delay rules, which are required in the plan itself per the subsequent deferral election rules.

Despite this, it doesn't quite sit right with me. I assume the counterpoint is that this method of subsequent elections leaves the decision up to the employer, which could refuse to amend the plan to change the time/form per the employee's wishes.

Any thoughts?

[Guest George Chimento]

Unfortunately, the employer is not allowed this type of discretion.

See 1.409A-2(a)(2) for "service recipient" elections.

In your example, the employee already has a legally binding right.

And, if the plan allowed for elective deferrals, it is too late for the employee to defer.

Accordingly, the employer cannot change the time or form without causing a 409A failure.

[Guest rjohnson]

Unfortunately, the employer is not allowed this type of discretion.

See 1.409A-2(a)(2) for "service recipient" elections.

In your example, the employee already has a legally binding right.

And, if the plan allowed for elective deferrals, it is too late for the employee to defer.

Accordingly, the employer cannot change the time or form without causing a 409A failure.

I follow you there--thanks. These are all nonelective deferrals that are fully vested. What if the hypo changed to amend the plan to allow the participant to choose between the existing form of benefits and a new form of benefits? I would think the later of the two events in 1.409A-2(a)(2) would apply to the newly added election (as opposed to the legally binding right date). This would require the 1/5 year delay, but would nonetheless be 409A compliant, no? E.g., if the participant were provided the election (per 1.409A-2(a)(2)) it would have to be exercised later than the vesting date since that's past, but would have to be exercised one year before benefits begin and subject to the five-year delay. However, the plan now does provide for a participant election, so would 1.409A-2(a)(2) even apply at all (since it requires no participant election and deals solely with employer discretion)?

[Guest pech]

Thank you for sharing it. :lol: