ISSUE: What flexibility does Proposed Treasury Regulation §1.409A provide for structuring the payment of death benefits from an account balance NQ plan?

BACKGROUND:
Preamble page 71: "Where the time of payment is based upon the occurrence of a specified event (such as death), the plan must designate an objectively determinable date or year following the event upon which the payment is to be made."

Preamble page 72: "Once an event upon which a payment is to be made has occurred (i.e. death), the designated date generally is treated as the fixed date on which, or the fixed schedule under which, the payment is to be made. Accordingly, the recipient may change the time and form of payment after the event has occurred, provided that the change would otherwise be timely and permissible under these regulations."

Prop. Treas. Reg. §1.409A-2(b)(1)(ii) on page 189: "(ii) In the case of an election related to a payment not . . . . on account of death . . . , the plan requires that the payment with respect to which such election is made be deferred for a period of not less than 5 years from the date such payment would otherwise have been paid . . . .

MY THOUGHTS: This seems to say the 5 year delay requirement does NOT apply to death-benes. Thus, for example, if the plan said that the death-beneficiary's first payment was to be 14 months after the participant's death, then the death-bene could (within 2 months after the participant's death) elect to delay the start of payments, but not accelerate them (but also not need to delay payment for 5 years as the participant would have to if he were making the change). Does any one disagree with this?

Further, it seems that the plan sponsor could continually amend that part of the NQ plan that deals with the time and form of payments to a death-bene as long as the effective date of each amendment was at least 12 months in the future. Does any one disagree with this?

Alternatively, the NQ plan document could merely enable the Participant to specify the time and form of payment to his death-bene; provided that any change to it would not be effective for at least 12 months. Does any one disagree with this?

Jed - Did you ever resolve your issue? I am now looking at the same issue and am curious to see where you came down? Also, by chance did you look at a distribution that included employer securities?

Since no one responded, perhaps I should have worded my question to ask if any one agreed instead of "disagree"?

Our first choice would be to allow the death beneficiary of a nq plan to have the same flexibility as a qualified plan, but that clearly isn't permissible. Our second choice would be to allow the Plan Administrator or the plan sponsor's Board to decide when and how the death beneficiary would be paid; this is what we believed we could do before §409A was passed. But now we must have an "objectively determinable" structure.

So some of my clients have tried to maintain some flexibility after a pre-retirement death by:
1 - Setting the default pay out to be 5 annual installments starting 14 months after death
2 - Allowing the participant to elect any thing else if he does so before he becomes a participant
3 - After a pre-retirement death, allowing the beneficiary to spread the annual installments over more than 5 years if she delays the first installment and does so 12 months in advance of the first installment.

My question to you is: if the death beneficiary does not have to delay her first installment for 5 or more years, how long must she? Is one month enough?

Sorry, but I did not look at a distribution of employer securities.