Adding Distribution Options

[Mike31]

Hello all, 

I have a quick and hopefully easy questions for you. 

Current 409A plan does not allow participant elections of time or form of payment.  The plan specifies that payment will be made at the earlier of:

Separation from service, Disability, Death, Change in control

 

The employer now wants to add a Retirement Age of 65 (currently no Retirement Age is specified in the plan) and add Retirement Age as a payment event so that the new time of payment will be the earlier of:

separation from service, disability, death, change in control, Retirement Age

 

It is my understanding that this could be considered an acceleration of payments and is therefore not permitted for existing amounts already deferred.

Can the plan be amended to add Retirement Age for future deferrals of compensation without violating 409A?

Thank you in advance for your responses! 

Mike 

[XTitan]

Yes

[Mike31]

XTitan,

Thank you for you response! I was looking through the regs, but could not find this answer. I guess this is one of those things that are not in the regs but assumed by the industry.

Or maybe my sleuthing abilities are not as sharp as they once were!

Thanks again,

Mike  

[Mike31]

I apologize, but  I do  have a follow up question.

Is there any way the employer could add the Retirement Age payment provision for existing accounts?

 

Mike

 

[XTitan]

To the second question, you have multiple payment events.  The addition of a new payment event (retirement age) must conform with §1.409A-2(b)(6) (subsequent changes in time and form of payment to multiple payment events) and §1.409A-3(j)(2) (Prohibition on acceleration of payments applied to multiple payment events).  In your example, if the retirement age is not added, then if someone separates at 62, they get their existing balances at 62.  If someone separates at 69, they get paid at 69.  if you add retirement age at 65, then if someone separates at 62 (assuming this has been in place for a year), then the payment can't be made before 67.  If someone separates at 69 and you paid them at 65, you've accelerated their payment. 

To the first question, the reason you won't find anything explicit is that you are establishing the time and form of payment prior to when amounts have been earned; there is nothing prohibiting changing the distribution events prospectively as long as the rules under §1.409A-2(a) are met, you should be fine.

[Linda Wilkins]

I agree with XTitan that the addition of a new payment event for existing accounts would have to satisfy the 1 year/5 year rule on subsequent changes to the time of payment.  This means that the new payment event cannot apply for 12 months.  It also means that you new payment date must defer the payment for a period of at least 5 years from the date it would otherwise have been paid.  My question is, how can you satisfy that rule for a payment that is only made upon Separation from service, Disability, Death, Change in control ?

[XTitan]

18 hours ago, Linda Wilkins said:

My question is, how can you satisfy that rule for a payment that is only made upon Separation from service, Disability, Death, Change in control ?

You can't.  If you try adding an "earlier of" retirement age to the existing balances, which would make both separation and change of control distributions be delayed 5 years, either one of these triggering event occurs before 65 (so retirement age is irrelevant) or they occur after 65 (so payment at 65 is an acceleration).