Jump to content
Sign in to follow this  
EGB

Additional of distribution trigger

Recommended Posts

I understand that a new distributable event cannot be added to an arrangement that has "deferred compensation" (as defined in 409A) if the addition of that event could cause the timing of the payment to be accelerated. However, is there any problem with adding a distributable event that could cause acceleration of the timing of payment if the benefits under the arrangement are exempt from 409A pursuant to the 2 1/2 Month Rule. For example, suppose I have an agreement that has deferred compensation that is paid within 30 days of a change in control. This would be exempt from 409A per the 2 1/2 month rule. Can I amend the arrangement to add termination of employment as a distribution trigger? Though the termination of employment could occur before a change in control, thus accelerating payment, is it ok to add the termination of employment trigger since the arrangement I am amending is exempt from 409A?

Any thoughts would be greatly appreciated.

Share this post


Link to post
Share on other sites

Even if the plan is subject to 409A, the transition rule should cover this change as long as a separation from service doesn't occur in 2007.

Since it is impossible for us to determine whether or not your plan is a valid short term deferral, no one on the board would want attempt to answer your question other than to say that if the plan is a STD, then you would presumably be free at any time to turn it into a 409A plan without running afoul of any 409A rules (as long as you start it up right). However, based on the facts you gave, you should probably seek an opinion from counsel on whether the CIC payment is subject to a substantial risk of forfeiture such that the 2.5 month rule is applicable--but note that few attorneys will feel comfortable at this early stage opining on whether or not an event, such as a CIC, will succeed in creating a valid SRF and therefore you may not get the concrete answer you need.

But assuming the plan isn't currenlty covered by 409A, what would make you think you couldn't turn the plan into deferred comp? You should maybe think about what you are trying you accomplish with this plan. Do you want a golden handcuff, is severance the main goal, retirement, etc.?

Share this post


Link to post
Share on other sites
Guest Harry O

EGB -

Why do you think a plan that pays within 2.5 months of CIC qualifies as a short-term deferral? That would only work if the compensation actually vested on the CIC . . . Remember that the final regs make it clear that an amount only qualifies for the STD exception if the amount will IN ALL EVENTS be paid within the 2.5 month period.

Share this post


Link to post
Share on other sites
EGB -

Why do you think a plan that pays within 2.5 months of CIC qualifies as a short-term deferral? That would only work if the compensation actually vested on the CIC . . . Remember that the final regs make it clear that an amount only qualifies for the STD exception if the amount will IN ALL EVENTS be paid within the 2.5 month period.

Harry 0 - If you have a single trigger CIC agreement that pays a lump sum upon the occurrence of the CIC (there are no other payments or distribution triggers), it should qualify for the short-term deferral exemption. Of course, if at the time you enter into the agreement, the CIC is impending, ie, the CIC does not create a SRF, then it would not qualify for the short-term deferral rule.

Share this post


Link to post
Share on other sites
Guest Harry O

I was just confused by your initial post where you said that your plan was paying "deferred compensation" following a CIC????

Share this post


Link to post
Share on other sites
Guest Harry O

So you have a plan that right now ONLY pays upon a CIC. If there is never a CIC, the employee gets nothing. You now want to add a provision that says the employee will get paid upon the earlier of a CIC or termination of employment? Since everyone eventually terminates employment, you now have a vested benefit that is not subject to a substantial risk of forfeiture. This means your plan is now longer exempt under the short term deferral exception since the plan will not, in all cases, pay within 2.5 months of the vesting date.

I must say this is a weird plan design . . .

Share this post


Link to post
Share on other sites

I don't think it's that uncommon to see this design. A single trigger CIC payment is considered "extra" protection if the company changes hands, so it's not meant to be payment for normal severance. If the person's payment is not contingent on a CIC, it wouldn't be a golden parachute.

I've never liked single triggers because it seems to me that you should only "deserve" the extra money if you involuntarily lose your job--under the single trigger design you get paid no matter what after CIC and you can voluntarily terminate after you get paid. Buying companies hate single triggers because executives can take the money and leave employment and thus it is harder to retain them as necessary throughout and after the change in control.

The bottom line is that if you get it done by 12/31/07, you shouldn't have any 409A concerns at all.

Share this post


Link to post
Share on other sites

He does not wish to change it to a double trigger. He wishes to change it to alternative single triggers.

Share this post


Link to post
Share on other sites
He does not wish to change it to a double trigger. He wishes to change it to alternative single triggers.

Yeah I see that now--I removed the double trigger discussion from my earlier post

Share this post


Link to post
Share on other sites
So you have a plan that right now ONLY pays upon a CIC. If there is never a CIC, the employee gets nothing. You now want to add a provision that says the employee will get paid upon the earlier of a CIC or termination of employment? Since everyone eventually terminates employment, you now have a vested benefit that is not subject to a substantial risk of forfeiture. This means your plan is now longer exempt under the short term deferral exception since the plan will not, in all cases, pay within 2.5 months of the vesting date.

I must say this is a weird plan design . . .

How is this any different from taking a typical bonus plan payable on March 15 and turning it into deferred compensation? Not that I would recommend it, but you just have to make sure you meet 409A. (small rant follows) It wouldn't be such a big deal if everyone weren't so spooked about 409A. The large law firms that sat on their thumbs for two years want an extra year to amend their clients plans. I'm not saying its easy to transition to the final regs, but I wonder how many of these lawyers got the ball rolling earlier than this year (almost three years after the legislation)

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

×
×
  • Create New...