As examined in the article "Take 409A's Advice . . . Please: Timing Is Everything for Nonqualified Plans," Internal Revenue Code Section 409A contains strict rules limiting the ability of nonqualified deferred compensation plan (NDCP) participants to change their benefit commencement date (BCD) under the plan. These rules provide that, subject to certain exceptions, a change in the BCD will usually constitute an impermissible acceleration or deferral of payments under the NDCP. However, even when the BCD is not changed, a participant's election to change the form of payment in which benefits under the plan are paid will also, subject to certain exceptions, usually constitute an impermissible acceleration or deferral of payment under Code Section 409A. For example, changing the form of payment from installment payments payable over five years to a lump sum payment, while maintaining the same BCD, will usually constitute an impermissible acceleration of payments. Accordingly, the rules with respect to changing BCD and changing the form of payment are connected because they share a common purpose: preventing a participant from having the type of excessive control over the timing of payment that Code Section 409A was enacted to eliminate while, at the same time, containing certain exceptions that provide participants with some degree of flexibility in certain circumstances. This column examines how NDCP sponsors can navigate these rules to ensure that their NDCP comply with Code Section 409A with respect to changes in form of payment elections.
Copyright © 2020 CCH Incorporated. All Rights Reserved. Reprinted from Benefits Law Journal, Spring 2020, Volume 33, Number 1, pages 70–79, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437, www.WoltersKluwerLR.com
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