IN THIS ISSUE Transition Relief Extended Definition of “Plan” Definition of “Employer” Written Plan Documents Payment Election Rules Later Changes in Time or Form of Payment Special Rules for Specified Employees Voluntary Plan Terminations Nonqualified Plans Linked to Qualified Plans Next Steps RELATED DOCUMENT Highlights of Final Rules for Nonqualified Defined Benefit Plans
Transition Relief Extended
The Code section 409A provisions generally apply to compensation deferred under nonqualified plans after December 31, 2004. However, special transition rules apply for 2005, 2006, 2007 and 2008. Until the end of December 31, 2008, plans must be operated with a reasonable good faith interpretation of Section 409A and other applicable guidance. Plan sponsors were permitted to rely on either the proposed rules or final rules as reasonable, good faith compliance through the end of 2007. However, beginning January 1, 2008, plan sponsors may no longer rely on the proposed rules as a reasonable good faith interpretation of the rules. Beginning January 1, 2009, plan sponsors must administer their plans in accordance with the new final rules.
For the period 2005 through 2008, transition relief permits SERPs to allow changes to distribution options without invoking the 12-month notice/five-year deferral restriction. However, changes to distribution options made in 2008 may not be made for any payment due in 2008 and any payment due after December 31, 2008, cannot be paid in 2008. This transition relief ends as of December 31, 2008, and plans must comply with the final rules, as discussed in greater detail below.
Definition of “Plan”
Unlike a qualified plan, which is typically viewed as an agreement between an employer and a group of employees, a nonqualified plan is viewed as a collection of agreements between the employer and each individual employee. As a result, a violation of the terms of a nonqualified plan impacts only those participants affected by the violation, unlike a qualified plan where a violation of the plan’s terms with respect to just one employee can negatively affect all plan participants.
The final rules identify nine different types of nonqualified deferred compensation plans, with a “SERP” being one type. The final rules are applied separately to these nine different types of plans. For example, if an eligible employee is accruing a benefit under a SERP and also deferring income to a defined contribution type of nonqualified plan, the section 409A rules are applied separately to the two arrangements.
However, if a participant accrues benefits under more than one SERP sponsored by an employer, those benefits are treated as being earned under one plan.
These aggregation and disaggregation rules are important to keep in mind as many aspects of the regulations are applied on this basis.
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