Can’t Stop the AI*

by Benjamin Gibbons

Today’s Benefits Dial post was written in part by a special guest author, ChatGPT. With all of the buzz surrounding AI chatbots, I decided to see how ChatGPT would do composing a blog post on a somewhat technical but fairly common executive compensation scenario. As discussed below, the results were not so good. Here is our guest author’s blog on the ability to make subsequent deferral elections in a nonqualified deferred compensation plan:

Making a Section 409A subsequent deferral election can be a complex process, but it is an important step for individuals who have previously deferred compensation under a nonqualified deferred compensation plan. The subsequent deferral election allows these individuals to change the timing of their future payments, providing greater flexibility and control over their income streams.

To make a subsequent deferral election under Section 409A, an individual must first meet certain eligibility requirements. Specifically, the individual must have originally deferred compensation under a nonqualified deferred compensation plan that complies with Section 409A, and the election must be made at least 12 months before the original payment date. Once eligibility is established, the individual must submit a written election to the plan administrator outlining the new deferral election terms.

It is important to note that making a subsequent deferral election is not a decision to be taken lightly. There may be significant tax consequences associated with a change in payment timing, and it is important to consult with a tax professional before making any changes to a nonqualified deferred compensation plan. In addition, the plan document may contain specific rules and procedures for making a subsequent deferral election, and failure to follow these rules could result in adverse tax consequences.

In summary, a subsequent deferral election under Section 409A can provide valuable flexibility for individuals who have previously deferred compensation under a nonqualified deferred compensation plan. However, it is important to carefully consider the tax implications and procedural requirements before making any changes to a plan. For more information on making a subsequent deferral election, consult with a benefits attorney or tax professional.

We can probably all agree that stylistically, ChatGPT’s writing style could use a little work. What might not be so obvious to everybody who is reading this though, is that ChatGPT’s blog omits some of the requirements to make a subsequent deferral election under the general rule [Treasury Reg. 1.409A-3(b)(1)]. While ChatGPT got the rule that the subsequent deferral election must be made at least 12 months before the original payment date, it failed to mention that (1) the subsequent election may not take effect until at least 12 months after the date on which the subsequent election is made, and (2) the payment must be deferred for a period of not less than five years from the date the payment would have otherwise been paid (this would be a critical failure for attorney advice). The blog post contains other minor inaccuracies as well.

While AI chatbots may be coming for our jobs, they aren’t quite ready to take them over yet (give them a few years, perhaps). Were someone to follow ChatGPT’s advice above and make a subsequent deferral election that deferred compensation less than five years from the original payment date of such compensation, the individual would be facing potentially significant adverse tax consequences (and it is not clear that ChatGPT has malpractice insurance). Cleaning up an issue like that would take more help than an AI chatbot could provide. If you do decide to run legal questions by an AI chatbot, trust that there is a reason that it recommends consulting a benefits attorney or tax professional.

*This week’s song-based title is also courtesy of ChatGPT which suggested the following AI- themed title:
“Can’t Stop the AI: How Artificial Intelligence is Changing the World” (inspired by “Can’t Stop the Feeling” by Justin Timberlake)