Plan Amendment to Add Aggregate Cap to Benefits Paid to Multiple Recipients

[Guest Tudor Fever]

An employer has an existing deferred compensation plan with no provisions for employee elective deferrals. The plan has payouts that start upon separation from service, and the payment schedule complies with 409A. The employer now wishes to add an aggregate cap to the amounts paid out under the plan that would limit the amount of the payout to any individual if there are multiple payees. The cap would comply with the 409A regulations if this were a de novo plan.

Would the addition of the cap constitute a service recipient election that would trigger the 1/5 rule? And would the application of this rule require that payouts could now start no earlier than 5 years after the date when they would have started under the original plan?

This would be a deal-breaker here because it would require the employer to delay payouts for at least 5 years after separation from service. This seems like a harsh and unintended result for adding a provision that would have been clearly permissible in a de novo plan. I am cautiously pessimistic, however, that the answer might be yes.

Any thoughts would be greatly appreciated.

[QDROphile]

You have not given enough information about the payment terms for analysis and the assurance that the cap would comply in a new plan does not cover the omission.

[Guest Tudor Fever]

The amount of the payment is derived form a somewhat complex calculation based on financial results through the year of separation from service. For purposes of the question, please simply assume that provisions of the aggregate cap meet the requirements of Regulations Section 1.409A-3 (i)(1)(ii)(B) and therefore would not cause the series of payments to fail to qualify as a fixed schedule of payments. The question is whether the fact that the cap is imposed through an amendment to an existing plan, as opposed to through the original version of a plan, gives rise to a service recipient election that would trigger the 1/5 rule.