I am trying to figure out how far you can go with operational delays and other similar operational defects for a grandfathered plan before you risk the plan being treated as having had a material modification. i.e., if the plan is unable to locate a participant for whatever reason and the money has to stay in the plan for a period of time. In that case would it make a differeence if you make up the lost payments. Also, would these operational errors adversely affect only the participant whose paymetns were late, or possibly causes all of the other participants to lose their grandfathered status.

Any suggestions/thoughts on this matter are welcomed. Also, please advise if you know of any articles discussing this issue.

I think the IRS would be looking at an intentional change to the plan that caused enhanced or new benefits. So the question I'd ask would be what the plan/employer would have done in this circumstance before we ever hear of 409A? Does the plan speak about participants that can't be located (probably not, or you wouldn't be asking). I'm not convinced that this rises to the level of a material "modification" to the plan. In the event the IRS said it did, then it should only affect the missing participant, not the other participants.

Your question about operational errors, generally, is a fair question, but as to the specific fact pattern described, come on now, let's be real. If this is truly legit and there is good evidence of the inability to locate the participant after reasonable attempts to find him, do you think the decision makers at IRS would be willing to stand in front of a Tax Court judge or a Federal Court judge and defend an assessment of 409A penalties because (a) this resulted in a "material modification," and (b) the resulting 409A-governed plan was out of compliance?