Key Employee Bonus Election in Event of Termination

[Guest DCdeferredcomp]

We all know key employees are subject to a 6 month waiting period before any benefits can be made, but what happens to a key employee's bonus deferral election if he terminates after the bonus is earned but before it is paid?

Example, a key employee elects to defer 50% of his 2011 bonus (payable in 2012). He works for 11 months of 2011 before he terminates in November.

The company decides that they will pay him $20,000 in 2011 Bonus.

Does his elected portion have to be deferred into the plan, and thus, subject to the remainder of his 6 month waiting period?

Any help/thoughts would be great.

Thanks.

[XTitan]

I'd say yes. Haven't found anything in 409A that would permit the cancellation of a deferral election due to separation from service.

[ERISA-Bubs]

I agree with XTitan. There is nothing in 409A that allows the company to terminate the election just because the compensation earned while an employee isn't paid out until after termination.

[SycamoreFan]

I agree. Take a look at Q&A 21 to the 2009 JCEB Meeting with the IRS. It is a more complex fact pattern, but appears to address the same issue.

Specifically, look at the IRS Proposed Answer A: "The Service representative disagrees with the proposed answer. There is no regulatory exception that would allow the service recipient to accelerate payments due to a separation from service where the plan does not provide for such a payment date or, as in this case, where the plan provides for a different type of payment upon separation from service. It generally would be permissible, however, for the plan to provide for a different form of payment. For example, the plan could provide for a lump sum payment during 2009 in the event that the separation from service occurs before a specified date."