Terminating Loan Regime Split Dollar and 409A

[CaliBen]

What 409A issues, if any, may arise if a loan regime split dollar plan is terminated?

- policies will be surrendered with proceeds paid to particpants

- loans will be forgiven giving rise to tax on forgiveness of debt for each participant?

- does waiving loan and interest trigger the exception that pulls loan regime into 409A? If so do the penalties and interest provisions apply?

- plan sponsor will then establish a 457f plan with initial contributions equal to the difference between the loan balance and cash surrender value to "make participants whole". and will also make ongoing annual contributions to the new 457 plan

Thanks

[Guest George Chimento]

<What 409A issues, if any, may arise if a loan regime split dollar plan is terminated? >

I'll stick my neck out.

The starting point is that loan regime split dollar is exempt from 409A.

Assuming there was not a prearranged plan to forgive the loans, there was no legal right to that money (and no deferral) until the decision was made to forgive the loans, so the payment of that money is within the short term deferral exception.

If you wanted to be very conservative (because maybe, wink wink, forgiving the loans was your plan all along), you might decide to pay the money in the termination window of 13-24 months. Provided you have no other split dollar plans, and do not adopt another one for 3 years following the distribution, you have not violated 409A. However, that is more conservative than you need to be, in my view.

This is not legal advice, of course, etc., etc. Just internet chat. I would be interested in hearing other views.