After 2005:

1. Can a deferral agreement/election that is made, be rescinded? And,

2. Under what circumstances can a nq plan be terminated.

Huge thank you

Prospectively, yes. Not a 409A problem.



At a minimum, it has to be beyond the control of the participant. Ultimately, it is a contract that can be terminated, but the particpant can't control her distribution timing under 409A.

On the termination question, some have opined that the plan can be frozen (depending on the plan terms) but that no distributions may be made of pre-plan termination balances until all of the participants would have otherwise been entitled to distributions (since plan termination is not one of the special distribution events). Therefore, if a participant who is 30 has elected to defer compensation until age 65, the plan would be forced to stay open for another 35 years.

While a participant can elect to cancel a deferral election for this year (or even his entire plan participation if the employer allows that option), I think that, after the transition rule, under 409A an election to defer is irrevocable when made. So if the participant elects before 12/31/2005 to defer 50% of base pay for 2006, that election cannot be revoked but the participant can always choose to defer a different percentage (including 0%) for future years' base pay.

Hope this helps.

JDuns, you're correct regarding 409A plans; termination and distribution would be considered an acceleration and subject the benefits to penalties. Moreover, in a teleconference after 2005-1, one of the Treasury reps (Hogans, I believe) said that after 12/31/05, termination and distribution of assets of even a grandfathered plan would result in penalties. Although this sounds unreasonable (if the plan document allows it), he said that the exercise of discretion to distribute would be considered a "material modification".

Did others hear this? Any clarification?

I've not researched that issue myself, but others that have, have told me that they don't think that plan can be terminated.

Hopefully, somebody will make a compelling case to the IRS to allow plans to be terminated at least in some situations.

The 2005-1 guidance and opinions of Treasury to date seem resolute that post-2005 terminations are accelerations. Considering the practical problems these rules foster & the comments I suspect Treasury's received, I guess we can speculate there will be some sort of exceptional relief offered in the further guidance expected this year.