Payment Election Rules
In general, section 409A permits nonqualified deferred compensation plans to make distributions only:
Upon the employee’s separation from service;
Upon the employee’s death;
Upon the employee’s disability;
Upon occurrence of an unforeseeable emergency for the employee;
At a specified time (or according to a fixed schedule); or
Upon change in control of the employer.
If a nonqualified defined benefit plan allows a participant to elect the time and form of payment he will receive upon the occurrence of one of these events, the participant must make that election earlier than he would be able to make a similar election under a qualified defined benefit plan. The participant must elect the payment option at the time he first accrues a benefit under the plan.
In most situations, an employee may not realize that he has accrued a benefit under the nonqualified plan until the qualified plan’s actuarial valuation has been completed. As a result, the final rules allow the participant to make the payment election as late as 30 days after the beginning of the next calendar year following the plan year in which he accrues his initial benefit in the nonqualified plan. This exception can only be used once per employee.
For example, the XYZ SERP has a calendar plan year and allows employees to elect a lump sum or annuity for their accrued benefit under the plan. In 2008, Mary’s compensation exceeds the qualified plan compensation limit and she accrues her first benefit under the SERP in 2008. Mary must elect whether she will receive her payment upon retirement in a lump sum or in an annuity as soon as she is informed that she has accrued that benefit, but no later than January 30, 2009.
Under certain circumstances, an employer may delay a participant’s elected payment date. For example, an employer may delay a payment if it cannot take a tax deduction for the payment because it represents excessive employee remuneration. The date the payment must be made depends on the situation but generally must be made as soon as the employer anticipates that the payment can be deducted. The final rules list other situations that may result in a deferral of the payment
Later Changes in Time or Form of Payment
The final rules allow an employee (or beneficiary) to change a previously-elected time or form of a payment, subject to certain limitations. A change in either the time or form of payment may not take effect for 12 months and must provide for a new payment beginning date that is at least five years after the original beginning date. In addition, if the payment is made as an annuity or as installment payments, the election must be made 12 months before the date the first amount was scheduled to be paid.
There are some exceptions to this general rule. A payment starting date does not have to be delayed five years when the employee changes the form of payment to be made in the event of death, disability or unforeseeable emergency. However, the change in the form of payment cannot take effect for 12 months from the date the new election is made.
If a payment is made in installments, the plan must specify whether the payment is viewed as a single payment or a series of separate payments. If viewed as a single payment, the 5 year deferral rule starts from
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