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Deferring Restricted Stock into SERP


Guest taxingmybrain

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Guest taxingmybrain

i cant determine whether 409A will allow a participant who receives restricted stock with say a 4yr vest (passage of time, cliff vesting) to elect to defer that stock into the SERP (nonqual salary deferral plan) with 1 year or more of vesting left on the restricted stock. the only exception from the initial deferral rules that could work but doesnt is the one for unexpected compensation rec'd that is subject to continued employment for at least 12 mos. problem is that the restricted stock grant is not unexpected and in fact will have been made 3 yrs prior to its deferral. it seems like this should be able to work under constructive receipt principles but i cant get there under 409A. HELP!

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If you are outside of 409A, then the analysis is for initial deferral elections and not election changes, correct? This sounds too late to be an initial deferral election unless you play with the initial eligiblity rules and the SERP is new.

Anyway, I don't think it works unless the restricted stock is 409A and not relying on the 83 exception. Doesn't the 83 exception apply only where there are no additional features for the deferral of compensation? The ability to roll risk of forfeiture, change the risk of forfeiture date, or defer into a SERP sounds to me like an additional feature for the deferral of comp.

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The "no additional deferral feature" applies to "stock rights" under Section 409A. "Stock rights" are defined as stock options and stock appreciation rights only. Restricted stock is not a stock right under Section 409A subject to the "no additional deferral feature" rule. Because restricted stock is taxed under Section 83, the "old" rules regarding the timing of a deferral election would apply. However, once the amount is deferred, it becomes subject to Section 409A.

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Even if it is initial eligiblity for the SERP, I don't think the deferral can be for compensation attributable to prior service.

The 83 exception is certainly not absolute. Regs say there is no deferral of comp "merely because the value of the property is not includible in income in the year of receipt by reason of the property being substantially nonvested" under 83. I definitely wouldn't try do further defer by extending the risk of forfeiture, for example.

However, in the "promises to transfer property" section it does say that the vesting of substantially nonvested property subject to section 83 may be treated as a payment for purposes section 409A."

This sounds like it would allow you to treat it a payment election change somehow, but I don't understand how that works if you are not even under 409A at the time.

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Restricted stock is property that is actually transferred subject to the risk of forfeiture for failure to perform services. It can't be subject to anything but 83. (In no case would a property transfer be governed by 409A.)

Are you saying that the individual is willing to extend the vesting period - instead of being vested after 4 years, vest after 6 years? I don't know if that works; I don't think so; but I haven't gone through the analysis.

Also what is "passage of time" vesting? No such thing under 83. It's not a vesting condition if it doesn't require the performance of services (or the forbearance). Unless you're talking about a promise to transfer stock sometime in the future - if so, it would be subject to 409A and you'd run into problems changing the payment date.

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Guest taxingmybrain

sorry, let me clarify. the stock has already been granted. it is subject to vesting based on continued service for a period of years. before it vests, the recipient wants to defer the income event that will accompany vesting and defer the receipt of the stock under the company's existing SERP. i agree that the services for which the stock grant were made already occurred. but the income event udner 83 hasnt occurred yet. it does not occur til the stock vests. the 409A rules dont tell us when section 83 property is treated as a payment......the safe analysiss seems to be when it is granted rather than when it vests.

im struggling b/c but for 409A i dont have any issues with such a deferral of already granted restricted stock so long as it is deferred into the SERP with at least a year's worth of vesting on it.....

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The facts are still a little muddled (imho), but it appears that the stock has been transferred to the employee subject to the condition that he remain in service for a certain period of time. This is a standard restricted stock arrangement. If this is accurate, I don't think that you can say that the employee has already performed the services that "the services for which the stock grant were made already occurred."

Under the facts above, you would have taxation when the vesting condition is met (unless a ss 83(b) election was made on transfer). I do not think 409A would apply.

If your question is whether the employee could further defer taxation beyond the initial vesting date by adding a new vesting condition, I think that's unclear and controversial. It's like "rolling vesting" under the 457(f) rules. You might want to review what the IRS says about 457(f) plans - there are discussions of rolling vesting and whether it works with the enactment of 409A in the 457 message boards.

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Guest taxingmybrain

i can appreciate that i am not being as clear as i could be.....sorry.

you are correct that the stock has been issued. no 83b was made. the stock is still subject to vesting. before it vests and is taxable, the employee would like to defer it into the company's SERP so that upon vesting there will be no income event - the value of the stock will be deferred pursuant to the NQDC plan and will pay out pursuant to the plan (for example on retirement). so the question is can you defer under 409A unvested property that has already been granted.

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I don't think that you can say that the employee has already performed the services that "the services for which the stock grant were made already occurred."

The "First Year of Eligiblity Rule" only permits elections to "apply to compensation with respect to services perfored after the election." [Preamble]. I understand that the RS is not 409A, but aren't the services perfored under the RS agreement to date the services performed before the election under this rule?

Isn't the bottom line that deferral of RS into a SERP CAN"T be ok?

Is it really even unclear and controversial?

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My statement was clearly unclear (and perhaps controversial).

What I think is unclear and controversial is whether you can extend a vesting period in order to further defer taxation. This is the "rolling vesting" concept which has been common for 457(f) arrangements, but has been brought into question by the IRS proposed 409A regulations.

namein... - I agree that converting the restricted stock to an unfunded promise to pay in the future (a SERP) doesn't work - what I'm not sure about is whether the rolling vesting concept would work for restricted stock.

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Guest taxingmybrain

ok, lets try slightly "better" facts.

#1 a new RS award will be made. any problem with electing to defer the award of a new RS award into the SERP? the initial deferral election will be made within 30 days of the RS grant date (thus satisfying the unforseeable/mid year exception to electing in the prior calendar year).

#2 what if we cancel existing unvested RS awards and regrant new RS awards that add an additional year of vesting. can we elect to defer into the SERP this new RS award? (let's ignore any possible accting issues).

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  • 4 weeks later...

Check Q&A 10 of Notice 2005-1 about vesting--you can't roll vesting.

Under the origial arrangement described in this thread, the arrangement is not subject to 409A, but can be treated as a deferral of comp. The payment of the stock can be deferred pursuant to the subsequent election rules as described below in the regs:

(3) Initial deferral election with respect to short-term deferrals. With respect to a legally binding right to a payment of compensation in a subsequent taxable year that, absent a deferral election, would not be treated as a deferral of compensation pursuant to §1.409A- 1(b)(4), an election to defer such compensation may be made in accordance with the requirements of paragraph (b) of this section, applied as if the amount were a deferral of compensation and the scheduled payment date for the amount were the date the substantial risk of forfeiture lapses. Notwithstanding the requirements of paragraph (b) of this section, such a deferral election may provide that the deferred amounts will be payable upon a change in control event (as defined in §1.409A-3(g)(5)) without regard to the 5-year additional deferral requirement.

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