As employers consider changes to their key employee benefit packages, many ask whether they can change their current nonqualified deferral plans, and if not, whether they can terminate their plans and start over.  Options are available, but careful attention must be paid to 409A to avoid penalties.  The general principles are:

• For prior accruals, payment of benefits cannot be accelerated.  Payment can be postponed if the change is made at least 12 months in advance, and if the payment is postponed at least five years.
• For future accruals, changes must be made by December 31 preceding the first day of the plan year in which the changes are to take effect.
• Benefit accruals can be frozen at the end of any year, and then held until payable under the normal terms of the plan.
• Plans can be terminated and benefits distributed early if:
  • All plans in the same category (e.g., account balance) are terminated
  • No benefits are paid for 12 months
  • All benefits are paid in months 13 to 24 after the termination
  • The employer does not adopt a plan in the same category for at least three years after the termination (the employer can adopt a plan in a different category or an exempt plan (e.g., short-term deferral plan))
• Interests of individual participants in a plan can be terminated and distributed early if the participant’s total benefits from all plans in the same category are paid out, and if the total amount distributed is less than the annual deferral limit (i.e., $16,500 in 2010).