Payment within a Given Year or a Given 90-Day Period

[Yesrod5]

Reg. Section 1.409A-3(b) says generally that a plan provides for payment upon a permissible event (e.g., retirement, death, disability, separation from service, etc.) "if the plan provides the date of the event is the payment date, or specifies another payment date that is objectively determinable and nondiscretionary at the time the event occurs." [emphasis added]

The regulation also provides that "a plan may also provide that a payment . . . is to be made during a designated period objectively determinable and nondiscretionary at the time the payment event occurs, but only if the designated period both begins and ends within one taxable year of the service provider or the designated period in not more than 90 days and the service provider does not have a right to designate the taxable year of payment . . . ." [emphasis added]

Must this be read so literally as to require that the plan cannot say, for example, that "the service recipient may, in its discretion and without input from the service provider, make payment either: (i) within the taxable year following the year of the event, or (ii) within 90 days of the event."? In other words, if the service recipient wishes to take advantage of the flexibility afforded by permitted delay in payment, must the plan specifiy either (i) or (ii) - but not both (because permitting both would insert some discretion into the mix)?

Thanks.

[SycamoreFan]

I think there are differing interpretations on this point. I understand the IRS' opinion to be that the 90 day rule must be written into a plan and the other "rule of administrative convenience" is for administrative purposes. That being said many practitioners think that this position is not supported by the text of the regs. I see more and more companies taking the position that plans can combine the two approaches, and include language to that effect in the plan. If you are drafting a new plan (and can administer it), I'd feel comfortable drafting the payment timing to be a specified date with payment being timely anytime within the "rule of administrative convenience" period. If you do that, make sure that you are clear that there is no right to interest due to such delay.