Subsequent Deferrals Under Section 409A

Nonqualified deferred compensation plans must now comply with a vast set of new rules. The transition relief expired on Jan. 1, and the final regulations under IRC § 409A are now in effect. These rules include the subsequent deferral election rules, which could bring unpleasant surprises for employers and employees. When the transition relief was in effect, employers and employees could change the time and form of payment under deferred compensation plans without complying with very restrictive rules. Now changes to the time and form of payment may be made only if the agreement allows for the change and the subsequent deferral election rules are followed.

SUBSEQUENT DEFERRAL ELECTION RULES IN GENERAL
Subsequent deferral elections are changes made to the time and form of payment under a deferred compensation plan after the initial election. Employers often want to allow such changes to provide flexible payment alternatives. The new rules for nonqualified deferred compensation under section 409A allow subsequent deferral elections, but the elections will have to meet rigid requirements under Treas. Reg. § 1.409A-2(b).

A change in the time and form of payment would include, for example:

• A change from a lump-sum payment to an annuity payment;
• A change from a life annuity to a lump-sum payment;
• A change in the length or commencement date of an installment payment;
• The addition of a new payment trigger; and
• A change in the payment date of a lump-sum payment.

The general rule under Treas. Reg. § 1.409A-2(b)(1) provides that:

• The subsequent deferral election must be made at least 12 months before the originally scheduled payment date;
• The subsequent deferral election may not go into effect until at least 12 months after the election is made; and
• The new payment date must be at least five years after the originally scheduled payment date.

The payment date cannot be accelerated under these rules. For example, if the original payment terms provided for a lump-sum payment at age 60, the subsequent deferral election must be made before the employee turns 59, and the payment date cannot be earlier than age 65.

CONCLUSION
The subsequent deferral election rules under section 409A can result in unexpected consequences if employers and employees are not prepared. For example, adding a new payment trigger to a plan after the initial election may result in an unanticipated delay in payment. To avoid this, employers and employees may wish to consider including all the permissible payment triggers (such as death, disability, separation from service, change in control, specified date, and unforeseeable emergency) in the initial deferral election.

For a detailed discussion of the issues in this area, see “Subsequent Deferral Elections May Bring Surprises Under Sec. 409A,” by G. Edgar Adkins Jr., CPA, and Jeffrey A. Martin, CPA, in the February 2009 issue of The Tax Adviser.

—Alistair M. Nevius, editor-in-chief
The Tax Adviser

Also look for articles on the following subjects in the February 2009 issue of The Tax Adviser:

• A discussion of the dependency status of children of divorced or separated parents.
• Current developments in partners and partnerships.
• Tips for preparing Form 5471.