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Guest woodchuck

409A

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Guest woodchuck

Does the transition rule in Notice 2007-46 allow an employer to amend a 409A deferred compensation plan that would otherwise not pay out until 2011 to pay out all deferrals in 2007? The argument is that the employer is amending the plan to comply with 409A by taking it out of 409A by having payments qualify under the short-term deferral rule.

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Don't know about Notice 2007-46, but the transition relief does not permit acceleration into the year you make the acceleration. That is, in 2007 you cannot accelerate a payment into 2007 itself. For action taken in 2007, the earliest that you can accelerate payment is into 2008. And this is only under the transition relief that ends 12/31/2008.

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Not only can you NOT amend a plan in 2007 to make amounts payable in 2007 that would otherwise have been payable later under the transition rules, the IRS has repeatedly said you cannot amend a 409A arrangement in such a way that is becomes a short term deferral (to prevent abusive amendments akin to the one you are suggesting).

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woodchuck -

Can you give more explanation of your statement that the IRS says you can't amend an agreement during the transition period to make it a short term deferral.

Is the issue vesting? That you can't add a new vesting condition - I can see that but what is abusive about utilizing the short term deferral rule?

For example, suppose you had a involuntary severance agreement that didn't meet the 409A exception - is there any reason why you couldn't amend it to say that the entire amount would be paid immediately upon involuntary severance? What is abusive about that?

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Guest woodchuck

Thanks All - - my question involves a plan that has full vesting in 2007, payment to be made in 2009. The question is whether the Plan can be amended now to accelerate payment into 2007. I don't think it can, because while you can amend plans during the transition period to change the time and form of payment, you can't accelerate a payment that would have otherwise been made in future years into 2007 (in my situation). See underlined language below.

The other interpretation I have is that an amendment to accelerate into 2007 causes the plan to qualify for the short-term deferral rule, and therefore isn't subject to 409A anymore; thus, you don't get to the language prohibiting acceleration into 2007 - - see bolded language.

I think my interpretation is the correct one. Agree?

Here is the relevant language from Notice 2007-86:

.02. Change in payment elections or conditions on or before December 31, 2008

The transition relief provided in section XI.C of the preamble to the proposed regulations generally continues to apply through December 31, 2008, with certain clarifications described below, and subject to limitations for certain discounted stock rights also described below. Accordingly, with respect to amounts subject to section 409A, a plan may provide, or be amended to provide, for new payment elections on or before December 31, 2008, with respect to both the time and form of payment of such amounts and the election or amendment will not be treated as a change in the time or form of payment under section 409A(a)(4) or an acceleration of a payment under section 409A(a)(3), provided that the plan is so amended and elections are made on or before December 31, 2008. With respect to an election or amendment to change a time and form of payment made on or after January 1, 2006 and on or before December 31, 2006, the election or amendment may apply only to amounts that would not otherwise be payable in 2006 and may not cause an amount to be paid in 2006 that would not otherwise be payable in 2006. With respect to an election or amendment to change a time and form of payment made on or after January 1, 2007 and on or before December 31, 2007, the election or amendment may apply only to amounts that would not otherwise be payable in 2007 and may not cause an amount to be paid in 2007 that would not otherwise be payable in 2007.

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You wouldn't be able to amend the plan to make it a STD because that would be akin to cancelling the deferral, which could only be done under transition guidance during 2005. After 2005, I don't think a plan that is subject to 409A can be removed from its purview. You can't get a payment any sooner than 2008 if you make the election before the end of 2007.

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Your interpretation is correct. You didn't explain, but I'll assume that there is an important reason why one or both of the parties want the amount to be taxable and/or deductible in 2007, rather than 2008. Otherwise you can amend the thing in 2007 to have a payment on Jan. 2, 2008.

Have you considered the "plan termination" exceptions to the anti-acceleration rule? Admittedly they are pretty narrow, but we don't know the background to your original question.

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I agree with Steelerfan...you can't amend an arrangement after 2005 that is subject to 409A to make it no longer subject to 409A, thus effectively skirting around the anti-accleration rules.

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I don't think that makes sense, at least regarding severance. If an executive had an employment agreement that said he or she would be entitled to 4 years of severance payments on involuntary termination payable over 4 years that was renegotiated to provide for 4 years of severance payments paid immediately after involuntary termination, that would be ok under the transitional rule provided that the new agreement is made before the end of 2008 and that there is no involuntary severance in the year of the change.

If the agreement is changed as allowed under the transitional rules so that it meets the short term deferral exception, it still meets the short term deferral exception.

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In your scenario, the first payment in the 4 year installment series, if drafted to be a separate payment, would automatically be able to qualify for STD if the payments were SRF. The renegotiation would act as an election to permissiblty accelerate all payments into the STD exception, but it's more or less coincidence since you are really only changing the timing of the payment and not creating an SRF. If payments under severance plan were not already SRF, you would not be able to fit it into the STD exception, you would just be changing the timing of the payment, which is OK.

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I think what Locust was getting at was whether you could amend a separation agreement to fit within the involuntary separation pay plan exception (involuntary only, 2X comp, 2 year rule). That might be OK, I haven't really looked at that, but I do know the IRS has said you can't amend an agreement that is subject to 409A into the short term deferral exception...i.e., to be able to cash it out quickly in violation of the anti-acceleration prohibition.

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Steelerfan and justme - so maybe the fact that the involuntary termination is a substantial risk of forfeiture allows the change in the payment date to bring the arrangement within the short term deferral exception?

But you still haven't explained the basis for saying that the amendment of an agreement to change the payment date so that it fits within the short term deferral exception doesn't result in an exemption from 409A. I accept that the IRS may have said at a conference that they had doubts, but is that just "hearsay"?, or was there some basis for it in the rules or something in writing? What is the IRS rationale?

I suppose this is most important for the 6 month rule applicable to specified employees. Do you think that an agreement to provide that all payments (say they were originally payable monthly over a 4 year period) are made immediately following a separation from service (within the short term deferral period) would not take the agreement out of 409A, with the result that the lump sum would have to be delayed for 6 months?

Also Steelerfan - I still disagree over your reading of the severance rules. I think it possible that the 409A regulations require all severance payments to be aggregated, including those payable within the short term deferral period, in applying the 2Xpay/2year exception. So you couldn't ignore payments made in the short term deferral period in determining whether the 2Xpay condition of the exception is met.

I think there are lot of issues on the severance side of 409A that are still in doubt.

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I think Steelerfan is applying the execeptions correctly. Part of a payment can be short term deferral, and part can be a involuntary separation pay plan. This is the "stacking" concept that the IRS and Final Regs talk about, i.e., applying multiple exceptions to a single payment or stream of payments and seeing what's left that must be subject to 409A, if anything.

I agree with Locust that doubt still exists in this area....

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The thrust of the original question was whether under the transition rule you can accelerate payments subject to 409A to be made within a time period that would (if the plan had originally be drafted that way) now come within the STD exception. I'm saying I don't think so because it is clear from the language of the final regulations and the guidance that after 2005, you cannot "get out" of 409A, you can only make certain beneficial election changes that will go away after 08. You cannot create an SRF where there wasn't one before and you cannot amend a plan to be exempt from the 409A (as in using the short term deferral exception to avoid the 6 month rule) because you are only changing the timing of the payment; you are not changing the fact that you already have a deferral of compensation in place that cannot be abrogated. The only special exception I recall from the guidance is that you can amend a severance plan to come within the 2 year/2x rule, but this is different from the short term deferral exception (the former are amounts that would be deferred comp but for the exeption, whereas the latter is NOT deferred compensation.

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