Specified Employee Delay and Subsequent Changes to Distribution Election

[ERISA-Bubs]

We have an specified employee who made a subsequent change to his election. He changed his election to receive payment upon separation from service to receive payment 5 years following separation from service.

Should we pay:

1) exactly 5 years following separation, since the 6 month delay will automatically be satisfied, or

2) 5 years + 6 months following separation, since the payment would have originally been paid 6 months after separation due to the specified employee delay?

I'm inclined to go with 2, because the regulations state a subsequent change should "be deferred for a period of not less than five years from the date such payment would otherwise have been paid," and that date would have been 6 months following separation. Anyone agree/disagree?

[XTitan]

Depends on the plan document and the form of the election. If the initial election was to pay upon separation, and due to specified employee status the 6 month delay is imposed, then a subsequent distribution should be separation + 5 years. The 6 month delay is satisfied since 5 years is longer than 6 months. I know I've seen this commented on somewhere but I can't find it offhand.

If the form of the initial election is 6 months after separation, then the subsequent distribution election could not commence earlier than 5.5 years after separation.

[Louis Richey]

Having had an opportunity to explore this issue in some depth, I agree with XTitan's summary answer. Only if the sponsor has selected the alternative of making fixed date elections upon Separation from Service to satisfy the "specified employee rule" do I think the Regulations would require a 5.5 year setback. Otherwise I believe you can reasonably argue the 5 year set back satisfies the 6-month delay requirement, especially when you consider the objective for the delay in the first place.