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Creative Alternative to Non-Assignment in a 409A Plan


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A participant in a nonqualified (409A) plan is going through a divorce. Plan doc clearly states that benefits are not transferable, cannot be assigned, etc. Participant is wondering if he can draft a separate agreement with his soon-to-be ex-wife where his Deferred Comp Account would be divided into two, both still in his name, but essentially one for him and one for his wife. (1) I'm pretty sure that doing so would be a violation of the Plan and (2) he will be taxed for all of it upon distribution. So, has anyone seen this done before or do you have any other creative alternatives for the divorce settlement in this scenario?

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Is this account payable in cash?

If so, why not just take it himself and make sure whatever portion he pays to ex-wife is categorized as alimony? That transfers the taxation (OK, the income tax but not the FICA tax) to her. It also helps him keep it if he outlives her. (ie, don't try to overcomplicate it)

But hey, I'm no expert on divorce matters.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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The plan provision should be reconsidered. I advise clients that it creates hardship on the executives not to have the deferred comp benefit in play in a divorce. Perhaps the decision about assignement provision was not given enough thought. It sounds good just to say no without full consideration and understanding. Also, before the revenue rulings in 2002 and 2004, there was a lot of uncertainty about allowing a split in a divorce, so the habit was to forbid. Some minds never opened up.

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Many older plan documents include the anti-alientation language from Revenue Procedure 92-65 which was the argument that NQ plans were not subject to divorce procedings (i.e. DROs).

On the other hand, from the 409A final regs:

1.409A-3(j)(4)(ii) Domestic relations order. A plan may provide for acceleration of the time or schedule of a payment under the plan to an individual other than the service provider, or a payment under such plan may be made to an individual other than the service provider, to the extent necessary to fulfill a domestic relations order (as defined in section 414(p)(1)(B)).

Counsel should opine on whether payments can be made pursuant to a DRO without a plan amendment or if one is needed.

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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dv13, for the deferred compensation and the employer might become willing to divide, how much of it is no longer subject to a forfeiture risk (beyond the employer's inability or unwillingness to pay what becomes due)?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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