July 20, 2016
Authored by: Chris Rylands and Katharine Finley
On the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!” Of course, his news was rarely good. More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect. So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.
The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations. And the news is mostly good. Additionally, taxpayers can rely on the proposed regulations.
The changes are legion, so we are breaking up our coverage into a series of blog posts. This third post is about the death benefit changes. See our first two posts, “Firing Squad” and “Taking (and Giving) Stock.” Check back for future posts on these regulations.
Accelerated Payments for Beneficiaries. 409A generally allows plans to add death, disability, or unforeseeable emergency as potentially earlier alternative payment dates. However, this special rule only applied to the service provider. If the service provider dies, then the payment schedule applicable on the service provider’s death controlled and generally could not be changed.
The proposed rules loosen this. Now, plans can add accelerated payments on the death, disability, or unforeseeable emergency of a beneficiary. This only applies to amounts that are being paid after the service provider’s death, but it creates some welcome flexibility.
Also, Possibly Delayed Payments for Beneficiaries. The proposed regulations say that a payment on a service provider’s death will be timely if it is made any time between the date of death and December 31 of the year after the death occurs. Additionally, a plan is not required to have a specific payment window following death to use this rule and it can allow the beneficiary to choose to be paid any time in this window. If a plan does have a payment period that falls in this window, payment can even be made sooner without amending the plan.
This is helpful for many reasons. Sometimes companies may not know a service provider has died until months after the death and, even once the company is made aware, it can take time to set up an estate. This additional payment flexibility is welcome. (However, we were surprised, with all this talk of death benefits, that the IRS did not incorporate Notice 2007-90. It’s almost as if they didn’t write it or something.)