Definition of “Employer”
In general, the final rules provide that the new 409A rules must be applied to all nonqualified plans maintained by an “employer.” If an employer is a member of a controlled group of corporations or businesses under control (a “controlled group”), all nonqualified plans maintained by all members of the controlled group are subject to the plan aggregation rules mentioned above.
Under the standard controlled group rules, an 80% common ownership threshold applies for identifying controlled group members. However, for purposes of applying the 409A final rules, the 80% ownership level is reduced to 50%, unless the employer specifically indicates a different level in the plan. A plan may designate any percentage that is between 50% and 80%.
In addition, for purposes of determining whether an individual has terminated employment with the controlled group, the common ownership percentage can be lowered to no less than 20%. This might prove helpful to delay distributions to executives.
If an employer wants to apply any ownership requirement other than the standard 50% requirement, for any purpose (e.g., plan aggregation or a participant’s termination of employment), that non-standard percentage must be specified in the plan document. It must be added to the plan document no later than the time the employee must elect a payment option.
Written Plan Documents
All nonqualified plans must have written plan documents. Originally, the final rules required these plans to have written documents no later than December 31, 2007. However, Notice 2007-86 extended this plan adoption deadline to December 31, 2008. New plans must have written documents no later than the last day of the plan year in which the first contribution is made or, if later, December 31, 2008.
In a notable exception to the delayed documentation deadline, a participant must document his distribution election designating the time and form of payment to be made when he first accrues a benefit under the plan (even if the benefit relates to services before the election).
The basic provisions that must be addressed in plan documents are:
The formula for determining how benefits will be earned;
The time and form of payment rules, including payment options and later changes; and
Any rules that would restrict the payment of benefits to specified “key employees.”
Since a nonqualified plan is viewed as a collection of agreements between the sponsoring employer and each individual employee, the written plan document requirement may be met by creating individual documents for each employee. The final rules do not require employers to use any specific form or format or specimen plan language to satisfy the written document requirement. In fact, a collection of documents that describe different aspects of the plan’s operation would meet this requirement. For example, an election form that adequately satisfies the three conditions above could constitute a “plan document.”
It is important to note that an existing plan that needs to be updated to comply with the new rules cannot simply be amended to state that the plan will be interpreted to be consistent with these rules and that any provision of the plan that does not comply will be of no force or effect. The plan must be amended to specifically reflect the new rules.
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