Use of 402(g) Cashout

[Guest gaham]

I have a plan where the participant executives are not yet vested - i.e., the benefit is subject to a substantial risk of forfeiture. Their benefit payments are triggered on a change in control. The employer is going through a reorganization that would not constitute a CIC under the terms of the plan. Since the structure of the plan doesn't fit the post-reorg employer, the employer would like to terminate the plan and ultimately do a new plan for this executive group. Even though the executives have no right to any current benefit under the terms of the existing plan, we would like to use the 402(g) cashout provisions (1.409A-3(j)(4)(v)) to basically offer the executives a lump sum payment of an amount less than $17,500 to cash them out of this plan such that they relinquish all potential benefits under this plan. Then we would establish a new plan with potentially different times and forms of payment than the original plan. The cashout appears to me to remove any substitution issue such that we would need to worry about complying with the subsequent changes in time and form of payment rule. All of this appears to work to me, but I would appreciate any thoughts on whether anyone sees any problems with this scenario. Thanks.

[elmobob14]

This is exactly how I read Treas. Reg. 1.409A-3(j)(4)(v) is supposed to work. As you know, it's listed as an exception to the accelerated payments section of 409A. So, I think you're green lit for take off.

[SycamoreFan]

I wouldn't be so comfortable that the offer of an amount under the 402(g) limit to cash out an unvested balance works under this provision. I'd look at that closer. If you are comfortable, be careful not to permit discretion on the part of the executive. It must be mandatorily imposed by the employer.