Permissible payment event

[mariemonroe]

Client just unearthed 24 year old salary continuation plan that states employee is entitled to 10 years of monthly payments upon earliest of:

1. death

2. disability (with a 409A acceptable definition)

3. "retirement" after age 65 but before age 70.

Is there any way #3 could be construed as "separation from service" within 409A?

Or is #3 akin to a payment election that must comply with 409A rules?

If so, did employee make an election by giving notice of his retirement?

Any thoughts are appreciated.

Marie

[EBECatty]

A few thoughts:

1. I think retirement is fine for a separation from service, as long as the employee meets 409A's definition for a separation from service. No problem with paying an employee when they "elect" to retire as long as they have a valid separation from service.

2. If this plan is 24 years old, and the employee was fully vested in the benefit before 2004/2005, wouldn't the plan be exempt from 409A altogether? I'm assuming it hasn't been modified since 2004 if it was just re-discovered.

[QDROphile]

Benefits accrued after 2004 are subject to the 409A requirements. Any noncompliant terms would have had to be modified by 2009 with respect to the post-2004 benefits (which would include "earnings" accruals). How are you interpreting #3? If the individual does not retire by age 70 is the benefit forfeited or simply not paid until death? The age 65-70 window is problematic because it does not fit the separation from service event.

[EBECatty]

It doesn't seem clear to me that the employee is "accruing" any new benefits after 2004. If I recall, earnings on grandfathered amounts (even if earned after 2004) remain exempt, no?

Agree it's unclear what would happen (without more facts) if the employee continued working past age 70, but is a window really a problem under 409A if you had an otherwise-permissible separation from service? You can always pay on a separation from service, even if the employee chooses when to separate.

[QDROphile]

The event described is not separation from service, it is separation from service after 65 and before seventy. Not the same thing. If separation form service is a payment event, it has to be separation from service -- not separation from service plus some other condition.

[EBECatty]

Why isn't a separation from service between age 65 and 70 still a separation from service?

1.409A-3(a)(1) says a permissible payment event is "(1) The service provider’s separation from service (as defined in §1.409A-1(h) and in accordance with paragraph (i)(2) of this section)"

1.409A-1(h) says a separation from service is when the employee retires, dies, or otherwise has a termination of employment. Paragraph (i)(2) is the six-month delay for specified employees.

I'm not aware of any other rule that says plans must pay out ONLY on ANY separation from service. For example, you can pay out only on involuntary separation from service, good reason separation, elect different forms of payment for separation occurring before/after a specified age, etc.

[401 Chaos]

Curious if you reached some resolution on how best to handle?

I guess my quick thought is that the grandfathering rule would not work here because the salary continuation would presumably be based on salary at time of trigger thus "benefits" have arguably continued to accrue each time there is a salary increase and so no fully vested right as of enactment of 409A? Not sure though about whether the retirement provision here might fit within the "separation from service" trigger--seems you might possibly make that argument but as QDROphile suggests, I think you would have to apply a somewhat strained reading and would run into issues if you provided any payout upon retirement outside the 5-year window.