Subsequent deferral elections may bring surprises under Sec. 409A.

• Author: Adkins, G. Edgar, Jr.

Now that the transition relief under Sec. 409A has expired and the Sec. 409A final regulations have gone into effect, nonqualified deferred compensation must comply with a vast set of new rules for nonqualified plans. This may 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 a change 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 Sec. 409A allow subsequent deferral elections, but the elections will have to meet rigid requirements under Regs. Sec. 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 Regs. Sec. 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 becomes 59 and the payment date cannot be earlier than age 65.

The five-year delay requirement does not apply if the employer or employee elects to add a payment trigger for death, disability, or an unforeseeable emergency. However, if made part of a subsequent deferral election, these payment dates may not be effective until at least 12 months after the election is made...