Can you amend plan to add a form of payment

[mariemonroe]

Plan has lump sum distribution only. Can employer amend plan to add installment option? If so, would installment option only be available for amounts deferred after effective date of amendment?

[QDROphile]

Treas. Reg. section 1.409A-2(b) is one piece of your puzzle.

[mariemonroe]

Yes, I am aware of that.

However, the plan in question currently doesn't allow payment change elections. All distributions are simply lump sum.

I am just wondering about the limits of amending plans subject to 409A.

For instance, if I amend the plan to allow for participants to (1) make payment elections and (2) add installment payments as an option, then can a participant elect installment payments for all of his vested account balance? or can he only elect installment payments prospectively? Will the election only be effective if made 12 months before he would otherwse be entitled to payment and only if deferred at east 5 years beyond when he would otherwise receive payment?

[XTitan]

In general, if the participant were make an installment election on existing balances, that would be a subsequent deferral election (1 year/5 year rule applies). Prospectively, it would be generally be treated as an initial deferral election, provided all the usually timing rules are followed, and plan amendments are in place.

[mariemonroe]

Let's say a participant makes an installment election on existing balances if he separates from service.

The 1 year/5 year rule applies.

Plan's distribution events are first to occur of death, disability or separation from service.

Participant can't know for sure whether he will comply with 1 year rule because he might get fired within a year of making the installment election.

So if he gets fired before the 1 year is up, then his installment election is not effective and he gets a lump sum payment.

However, what if he passes the 1 year mark and the election becomes effective. Then he separates from service, he must then wait 5 years after his separation from service to get the first installment payment.

Am I thinking this through correctly?

[XTitan]

Yup