Does modification in NQDC impact Separation of Service date

[jpstl]

I'm participating in a NQDC that specifies that the distribution starts the January following an Elected Age + Separation of Service.

I'm allowed a one time change and I changed my plan by five years (original elected age + 5 years).  The change was made 13 months prior to the earliest payment date (the January following the original specified age) - Change became final in Nov the year prior to the original elected age.

Nine months after the change my employer statement was showing the new age + separation from service (status pending - I assume because it can't take effect for 12 months).  Several months later the plan got transferred to a major investment firm and their statement was showing new age + "separation+5 years".  I filed a claim stating that it should be new age + separation of service but they declined the claim and pointed to 409A.

Note that my plan states that if I attempt to change the payment election the same year as the elected age (that would be less than 12 months from earliest payment date) they will change the separation of service to separation+5 years.  In this case I made my change the prior year (Nov).

I have read countless web site that discuss "Changes in Time and Form of Distribution" but I can't find anything that talks about adding five years to my separation date.  This seems like a slam dunk but then we're dealing with the IRS tax code.  Does anyone have any insight on when separation would/should be changed to "separation + 5 years" so I can determine if I should appeal the claim?

[CuseFan]

As I understand it, IRC Section 409A requires that any change to the time and form of distribution must defer the commencement of payment(s) at least five years beyond when it would otherwise be required to commence. If your payments were originally required to commence at the earlier (or later) of age X or separation then 5 years must be added to such timing. Adding 5 years to only the age component does not satisfy that requirement.

[jpstl]

Thanks for the quick response.  I wasn't clear on the wording in my post and I apologize.  The plan states payment begins January following the Elected Age AND Separation so I would think that adding five years to the Elected age would assure 409A compliance since both must be met before I'm eligible for payment. 

I just noticed that the Plan Description documents when payment will begin following a change (assuming the change is a year prior to payout).  Do these clarifications make a difference in your response or is the plan description incorrect?

If you make the distribution election change a year before you will reach the age at which you
elected to receive payment, then you must add at least five years to the age you originally elected to
start receiving payment. Payments based on your new elections will begin the later of:
1. the January following the year in which you reach the newly elected age you chose to start
receiving payments, and
2. the January following the year you Separate From Service.

[Luke Bailey]

On 8/8/2022 at 3:40 PM, jpstl said:

Elected Age + Separation of Service

I assume this means the later of the two events.

Because the later event could have been separation from service, the later of age + 5 years or separation from service + 5 years would typically be the only permitted further deferral.

Of course I have not reviewed the documents or specific facts so am just addressing a hypothetical. Please consult your own tax adviser based on your specific facts.

[CuseFan]

I agree with Luke and I think your summary document may not be correct.

Say your original election was later of age 62 or separation. If you left at age 64, payments would begin at age 64, correct?

But, a year before your turn 62, you elect to change the age to 67. You separate at 64. If payments begin at 67 they have only been deferred 3 years from the time they would have otherwise been payable (later of age 62 or separation, 64 in this example), not the required 5, and that would be a 409A violation. 

You should also note that 409A penalties (excise taxes, in addition to income taxes) are assessed to the employee, not the employer, so it is in your best interest that this is administered properly.

It could be that the major firm taking over admin of your plan noticed this as a compliance mistake/issue and fixed it.

[jpstl]

It seems to me that adding five years to the separation guarantees that 5 years elapses from the time of the change and the separation date is immaterial because it can't accelerate the payment date, but, what do I know about IRS compliance.  Interestingly the plan states that if you attempt to change the plan less than 12 months from initial payment then they tack 5 years onto the separation date to assure compliance but in my case that's not when I changed it. 

I really appreciate the you guys taking the time to respond.  I'll bounce it off a 409A tax specialist before I take any further steps and I'll update the post with what I find so it can help others.