William Byrnes' Tax, Wealth, and Risk Intelligence

In this post, I’ll take a look at several more definitions related to non-qualified deferred compensation (NQDC) plans, beginning with the definition of “plan:”

“The term plan includes any agreement, method, program or other arrangement, including an agreement, method, program or other arrangement that applies to one person or individual.”[1]

Here, we see the Treasury using the standard definitional tactic of using several words that, while moderately different, convey the same idea.  However, the commonplace definition of the word “plan” (“a method for achieving an end.”)[2] along with its synonyms[3] would have sufficed.

The plan must be in writing.  While not explicitly stated, it is strongly implied in the regulations.

“…a plan is established on the latest of the date on which it is adopted, the date on which it is effective, and the date on which the material terms of the plan are set forth in writing.  The material terms of the plan may be set forth in writing in one or more documents.”[4]

In addition, because of the sheer complexity of NQDC, it’s best to have a governing document.  (I googled the search term “NQDC sample plan and found several online examples, here, here and here).

There are only six events that allow the plan to distribute assets:

• separation from service as determined by the Secretary (except as provided in subparagraph (B)(i)),
• the date the participant becomes disabled (within the meaning of subparagraph (C)),
• death,
• a specified time (or pursuant to a fixed schedule) specified under the plan at the date of the deferral of such compensation,
• to the extent provided by the Secretary, a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, or
• the occurrence of an unforeseeable emergency.[5]

These terms are not subject to over-lawyering.  Potentially malleable terms (e.g. “disabled” or “separation from service”) are further defined in the statute or require the Secretary’s approval.  The underlying message is clear: don’t get cute.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance Law, Captive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

[1] Treas. Ref. 1.409(A)(c)(1)

[2] https://www.merriam-webster.com/dictionary/plan

[3] Id (“arrangement, blueprint, design, game, game plan, ground plan, master plan, program, project, roadmap, scheme, strategy, system”)

[4] Treas. Reg. §1.409(A)(3)(i):

[5] 26 U.S.C. 409(A)(2)(i)-(vi)