3547 / When do prohibited (and permissible) acceleration of payment requirements apply to private nonqualified deferred compensation plans under IRC Section 409A?

Accelerations of plan distributions outside the six primary permissible listed distributions are prohibited. Final regulations, however, define specified circumstances under which a plan may permit the acceleration of plan payments and, in effect, widen permissible plan distributions, as follows:

(1)   To comply with a domestic relations order (a DRO, not a QDRO since there are no “plan assets” in a promise-to-pay nonqualified deferred compensation plan to levy against).

(2)   To comply with a conflict-of-interest divestiture requirement, including foreign conflict of interest per 2016 409A clarifications.¹

(3)   To pay income taxes due on a vesting event under a plan subject to IRC Section 457(f).

(4)   To pay FICA or other employment taxes imposed on compensation deferred under the plan.

(5)   To pay any amount included in income under IRC Section 409A.

(6)   To pay only the proper amount due, based on a valid unforeseeable emergency request.

(7)   To terminate a participant’s entire interest in a plan:

a. after a separation from service where the payment is not greater than the IRC Section 402(g)(1)(B) so-called “small amounts” ($23,500 in 2025, $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020 and 2021, and $19,000 in 2019); or

b. in the calendar month prior to, or 12 months following, a Section 409A change in control event date.

(8)   To terminate the plan entirely at the employer’s discretion (and distribute) so long as:

a. all the plans of the same Section 409A type are terminated;

b. all plan termination distributions will be made no earlier than 12 months, but not later than 24 months, following the date of termination; and

c. no new plan of the same Section 409A type is established for at least three years following the termination (or a retroactive violation occurs).

(9)   To terminate a plan pursuant to an IRC Section 331 corporate dissolution with the approval of a bankruptcy court judge.²

The IRS has informally advised³ that a “salary advance” plan that allows an employer to offset any unpaid compensation advances against an employee’s balance under a Section 409A nonqualified deferred compensation plan violates the Section 409A prohibition against acceleration of payments, and requires the amendment of the salary advance plan to prevent a violation of Section 409A for the deferred compensation plan (the terms of the two plans would be combined to determine a Section 409A violation).

Offsets and substitutions of plans to achieve an earlier distribution of compensation deferred under Section 409A generally are prohibited, except for a narrow exception that allows “debt incurred in the normal course of the service relationship” to be offset in the year debt is due up to $5,000.”⁴