Payment Upon Involuntary Termination For Any Reason

[Guest Perseo]

I am late to this game, and stunned by the report that the IRS views this as a no brainer that a payout authorized for any involuntary termination -- including cause -- would not qualify as an SRF under 409A.

Just a small point, mentioned at places in the above threads but (it strikes me) at times lost:

The provision of the regs (p 259 in my print out) says "f a service provider's entitlement to the amount is conditioned on the occurrence of the service provider's involuntary separation from service without cause, the right is subject to a substantial risk of forfeiture if the possibility of forfeiture is substantial."

This does not literally address the issue of whether involuntary termination for cause could be an SRF, unless we apply the rule "Expresio unios est exclusio alterius."

A friend of mine describes these regs as "prohibiting someone from sticking a pencil in his eye in order to claim an exemption for blindness." This would be a perfect example: The employee can control his termination by engaging in embezzlement or a wide stance (someone said this above -- very funny) etc.

The company still gets to decide whether to fire the guy. Voluntarily quitting to avoid embarrassment is an alternative and -- voila -- that would forfeit the compensation. It seems that the theory that a "for cause" provision authorizing a payout gives the employee a way to control his leaving and getting paid is sort of the flip side of "good reason." If so, the absence of a definition of cause is a huge omission, if the IRS really intended this.

Contrary to what the IRS says, I am throwing in with the view that involuntary termination that does not make the distinction between cause and bad events less than cause still qualifies as an SRF. The reference on p. 259 was just an errant one, reflecting the by far most common structure of these arrangements but not setting down a hard and fast rule that involuntary termination for cause cannot constitute a 409A SRF.

This kind of debate shows why we need a release defining, for example, death. This thing is moving beyond tragedy to farce.

[Guest CABatty]

This kind of debate shows why we need a release defining, for example, death. This thing is moving beyond tragedy to farce.

Perseo, you're in luck - we do have a definition of "death", in case you haven't seen it.

(yes, it's a joke)

notice2007_90.pdf

[Steelerfan]

The regs state generally that conditions under the discretionary control of the employee (other than the decision whether or not to continue working) do not create an SRF. Regardless of the absurdity of an employee being in discretionary control of the "cause" event, note that only conditions that relate to the performance of services, such as continued substantial performance or meeting a performance goal can create and SRF. (these are ideas borrowed from the section 83 concept).

I agree it should be cleared up, but those rules can be interpreted to reach the result the IRS wants without defining cause. A payment conditioned on termination for cause, regardless of the definition, is NOT conditioned on an event that is related to the performance of services. The event--Cause--has nothing to do with the employee's performance or the employment relationship.

You might get clarification from the IRS but it might not be what you're looking for.

Also, are you willing to take the risk of drafting your plan to provide for payment upon involuntary termination (without mentioning cause or not cause), only to have the IRS subject your plan to 409A because you didn't make the clarification stated clearly in the regs that the an involuntary termination NOT FOR CAUSE is what creates an SRF?