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January 2008

year to year. The employer may change the identification date prospectively, but that change can not be effective for at least 12 months. If no date is chosen, the default identification date is December 31. An employee is considered a key employee for the 12-month period beginning no later than the first day of the fourth month following the identification date.

The employer may choose whether to simply begin making payments for specified employees at the end of the six-month period or to aggregate the six months of delayed payments and pay the total amount at the end of that period. It appears that an employer may treat individual specified employees differently in this regard, i.e., either aggregate payments for one but delay payments for another, and need not be consistent in his treatment of all affected employees. It is clear that employees do not have a choice in this regard.

Voluntary Plan Terminations

The final rules identify three circumstances under which a plan may be terminated at the employer’s discretion, resulting in accelerated payments to employees. These circumstances do not have to be spelled out in the written plan document and may include:

  • Termination within 30 days preceding or 12 months following a change in control;

  • Termination within 12 months of a corporate dissolution, or with the approval of a bankruptcy court; and

  • Voluntary termination of the plan for reasons other than the financial health of the company. In this situation, the employer and all members of its controlled group must terminate all of their nonqualified defined benefit plans and cannot adopt any new nonqualified defined benefit plan for three years. No payments other than those due under the plan may be made within 12 months of the termination date, and all other assets must be paid out within 24 months of the termination date.

Nonqualified Plans Linked to Qualified Plans

The ability to link the time and form of payment under a nonqualified defined benefit plan to an employee’s payment election under a related qualified defined benefit plan is extended to December 31, 2008. However, it is acceptable, even after 2008, for a participant’s qualified plan election or non–election to result in a decrease in benefits payable under the related nonqualified plan.

Next Steps

Prudential has administered nonqualified plans in accordance with section 409A requirements and all related IRS guidance since the rules first took effect in 2005. Sponsors of nonqualified plans must ensure that distribution elections are timely captured. Also, consideration should be given to permit participants to change distribution options prior to December 31, 2008. If you would like to discuss the application of these rules to your deferred compensation program, please contact your Prudential Retirement representative.

Pension Analyst by Prudential Retirement The Pension Analyst is published by Prudential Retirement, a Prudential Financial business, to provide clients with information on current legislation and regulatory developments affecting qualified retirement plans. This publication is distributed with the understanding that Prudential Retirement is not rendering legal advice. Plan sponsors should consult their attorneys about the application of any law to their retirement plans. Prudential Financial is a service mark of The Prudential Insurance Company of America, Newark, NJ and its affiliates.

Editor: Mitzi Romano

(860) 534-2768

©2008, The Prudential Insurance Company of America, all rights reserved.

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