Impermissible Acceleration/Substition

[jpod]

Employer has a perfectly 409A-compliant phantom stock agreement with an Employee that provides for payment at Separation from Service or Change in Control, whichever occurs first. Employee now wants to receive some sort of interim payment, and Employer is willing to pay it, but only if it would serve as an offset to any future payment at Separation from Service or Change in Control. If this is done clearly it is an impermissible acceleration and not only is the interim payment subject to the additional 20% tax but the entire agreement blows up and is subject to the additional adverse tax consequences under 409A on vested amounts under the agreement.

Can we handle it differently?

1. Terminate the existing agreement and pay the Employee $X.

2. Simultaneously, and as part of the negotiated package, the Employer and Employee enter into a new and identical agreement that by its terms is 409A-compliant, but the amount payable at Separation from Service of Change in Control under the new Agreement is reduced by the amount paid per #1 above.

3. It is aknowledged that the payment of $X is an impermissible termination/acceleration and the $X will be subject to the additional 20% tax. But, is the new agreement also in violation of 409A from the get-go because of the substitution principle?