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My understanding, which is shaky at this point, is that an advance selection of early withdrawl eliminiates the early withdrawl penalty.

"Advance" being at the point of decision to contribute. From http://www.fa-mag.com/past_issues.php?idArticle=1091&idPastIssue=103

- How does a nonqualified deferred compensation plan work? An executive must elect to defer compensation before the year in which the compensation will be earned. (For bonus compensation only, the executive can currently make a deferral election as late as six months into the performance year.) For example, Sally elected to defer her first $30,000 for ten years, until she attains the age of 55. She elected to defer her second $30,000 bonus for nine years, and so forth.
- Can a NQDC plan participant change his or her election? Yes, but only to extend the time period. Specifically, an election to delay or change the form of payment needs to be made at least a year in advance of when the new election is supposed to take effect. And the new distribution date must be at least five years after the old one.
- Can a participating executive have any access to, or secure an indirect benefit from, his or her deferrals prior to the election date? With a few exceptions listed below, no. Until the elected or specified distribution date, the plan funds must remain the company’s property. Thus, the plan is only “informally funded.” The executive cannot derive any benefits from the deferrals until the election date(s) come due.
- How does the employer fund the plan? The employer either pays the plan amounts out of current revenue, or more commonly, prefunds the plan out of periodic investments or corporate-owned life insurance. Obviously, an executive should only agree to participate in a plan if he or she is confident the money will be there when payments are due.
- Do the Section 409A rules permit early plan distributions for any reasons? Yes, the exceptions are:
• Separation from service
• Disability
• Death
• Change in ownership or control
• Unforeseeable emergency (as defined earlier)
• Miscellaneous (domestic relations order, conflict of interest divestiture requirements, de minimis cash-out payments)


In another part of the article, it indicates that the rules and penalties were put into place to prevent what occurred with the Enron NQDC plans where executives stripped the NQDC in the months/weeks prior to the bankruptcy.

AJ
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