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Guest JJ25

409A - stock grant versus stok option

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Guest JJ25

I have a company that is looking to hire a new VP. The company wants to grant the new hire a 10% of the company's stock after 4 years of service. This is not a stock option, but a stock grant. Is such a grant subject to 409A since it is a direct grant of stock and not an option to purchase. Also, how is such a grant tailored to satisfy 409A (assuming it applies) and/or how is it tailored to circumvent 409A.

Any help is appreciated. Thanks

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Is it vested (does he get it in 4 years if he leaves tomorrow)?

If yes, it is 409A. It could be structured to be distributed on a set date in four years and pass with flying colors unless you try and get fancy.

If no, you should be able to avoid 409A by paying it out soon after vesting under the short term deferral rules or it may fit the restriced stock exception.

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Guest JJ25

Thank you for the respone. The employee would not vest until year 4. he would get nothing if he left before year 4.

I was just confused becuase it is a grant of stock and not an option. Therefore, is it safe to say that 409A applies UNLESS, I am able the short term deferral or another exception. Thanks again

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No, just the opposite. No legal right to payment = No 409A. When the risk of forfeiture lapses, it is deferred comp. Pay it out quickly and you can meet the short term deferral exception. Is there any potential for rapid appreciation of the stock? If so, you should think about restricted stock so that the executive can make an 83(b) election.

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The following might be helpful.

70 Federal Register 57930, 57936-37 (October 4, 2005):

"D. Restricted Property

"Consistent with Notice 2005-1, Q&A-4(e), these regulations provide that if a service provider receives property from, or pursuant to, a plan maintained by a service recipient, there is no deferral of compensation merely because the value of the property is not includible in income in the year of receipt by reason of the property being nontransferable and subject to a substantial risk of forfeiture, or is includible in income solely due to a valid election under section 83(b). However, a plan under which a service provider obtains a legally binding right to receive property (whether or not the property is restricted property) in a future year may provide for the deferral of compensation and, accordingly, may constitute a nonqualified deferred compensation plan.

"Commentators asked for clarification with respect to how this provision applies to a promise to transfer restricted property in a subsequent tax year. Specifically, commentators questioned how section 409A would apply to a bonus program offering a choice between a payment in cash and a payment in substantially nonvested property. Because the promise grants the service recipient a legally binding right to receive property in a future year, this promise generally could not constitute property for section 83 purposes under Sec. 1.83-3(e), and could constitute deferred compensation for purposes of section 409A. However, the regulations provide that the vesting of substantially nonvested property subject to section 83 may be treated as a payment for purposes of section 409A, including for purposes of applying the short-term deferral rule. Accordingly, where the promise to transfer the substantially nonvested property and the right to retain the substantially nonvested property after the transfer are both subject to a substantial risk of forfeiture (as defined for purposes of section 409A), the arrangement generally would constitute a short-term deferral because the payment would occur simultaneously with the vesting of the right to the property. For example, where an employee participates in a two-year bonus program such that, if the employee continues in employment for two years, the employee is entitled to either the immediate payment of a $10,000 cash bonus or the grant of restricted stock with a $15,000 fair market value subject to a vesting requirement of three additional years of service, the arrangement generally would constitute a short-term deferral because under either alternative the payment would be received within the short-term deferral period."

Proposed Treasury Regulation Section 1.409A-1(b)(6):

"(6) Restricted Property--(i) In general. If a service provider receives property from, or pursuant to, a plan maintained by a service recipient, there is no deferral of compensation 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 (as defined in Sec. 1.83-3(b)), or is includible in income solely due to a valid election under section 83(b). For purposes of this paragraph (b)(6)(i), a transfer of property includes the transfer of a beneficial interest in a trust or annuity plan, or a transfer to or from a trust or under an annuity plan, to the extent such a transfer is subject to section 83, section 402(b) or section 403©.

"(ii) Promises to transfer property. A plan under which a service provider obtains a legally binding right to receive property (whether or not the property will be substantially nonvested (as defined in Sec. 1.83-3(b)) at the time of grant) in a future year may provide for the deferral of compensation and, accordingly, may constitute a nonqualified deferred compensation plan. The vesting of substantially nonvested property subject to section 83 may be treated as a payment for purposes of section 409A, including for purposes of applying the short-term deferral rules under paragraph (b)(4) of this section. Accordingly, where the promise to transfer the substantially nonvested property and the right to retain the substantially nonvested property are both subject to a substantial risk of forfeiture (as defined under paragraph (d) of this section), the arrangement generally would constitute a short-term deferral under paragraph (b)(4) of this section because the payment would occur simultaneously with the vesting of the right to the property. For example, where an employee participates in a two-year bonus program such that, if the employee continues in employment for two years, the employee is entitled to either the immediate payment of a $10,000 cash bonus or the grant of restricted stock with a $15,000 fair market value subject to a vesting requirement of three additional years of service, the arrangement generally would constitute a short-term deferral under paragraph (b)(4) of this section because under either alternative the payment would be received within the short-term deferral period."

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It sounds like your company wants to do a traditional restriced stock grant. After 409A, this the only sensible thing to do since it is clear that such arrangements by virtue of being subject to 83(b) will be outside the scope of 409A unless the right provides for a further deferral of payment. Try to find a BNA portfolio or some tax law authority describing restricted stock arrangemets.

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