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Acceleration of vesting of a short term deferral


Locust

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Does an agreement that says that vesting occurs only after 3 years of service, that payment occurs as soon as the service provider is vested, and that the service recipient has the authority to accelerate, meet 409A?

I would think it would be ok (would not violate 409A), because the agreement is never subject to 409A because it's always excepted under the short term deferral rule, so that there's no prohibition against the service provider accelerating vesting and payment.

On the other hand I have this nagging thought that maybe it is a problem, because the service recipient has the discretion to determine the timing of payment and taxation.

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This is the area where it behooves the employer to expressly put in the documents that the payment will occur within the 2.5 month rule--so you get the benefit of having until the end of the calendar year in case you screw up. If you just leave it as is, you be ok but only if payment is actually made in all cases by March 15 of the year following the year of vesting (you don't get until the end of the year).

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Does an agreement that says that vesting occurs only after 3 years of service, that payment occurs as soon as the service provider is vested, and that the service recipient has the authority to accelerate, meet 409A?

I would think it would be ok (would not violate 409A), because the agreement is never subject to 409A because it's always excepted under the short term deferral rule, so that there's no prohibition against the service provider accelerating vesting and payment.

On the other hand I have this nagging thought that maybe it is a problem, because the service recipient has the discretion to determine the timing of payment and taxation.

Did you mean "service recipient" where you wrote "service provider" above? If the service provider has the ability to accelerate vesting, that wouldn't constitute a SRF and you would not be able to use the ST Deferral exception.

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Good point Chaz. would be kind of silly to allow a service provider to vest his payment early. Does anything about accelerating vesting scare you at all? I mean there's always that creeping fear that acceleration clauses will be abused, especially with the top people. Who is going to tell the CEO that his comp will be forfieted if he leaves early when there is discretion to accelerate? I've never been a fan of this.

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Steelerfan and chaz - yes, the reference should have been to service recipient.

Also - I went to an IRS meeting in D.C. on Friday (ABA Tax Section) and this issue came up, and the IRS (Stephen ? and Bill Schmidt - drafters of regs I think) said no 409A problem with service recipient (got it right this time) accelerating vesting (and payment) for an agreement that was already a short term deferral.

Also, Steelerfan - I think you were the one with whom I had the discussion about short term deferrals and severance agreements. I talked to IRS Stephen (see above) who confirmed your position - ok to designate part of severance as a st deferral to fit within the severance exception - for example, to the extent that payments would exceed 2 * pay, it will be paid within st deferral period. He said the rationale was that it would only be paid on an involuntary termination of service (the vesting requirement), so the IRS wasn't as concerned with the possibility of abuse.

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Thanks for verifying. I was pretty comfortable with it as Dan Hogans had sanctioned the idea. But even still, I can't see fussing over this. The 6 month rule really shouldn't be a big deal for those who are suject to the rule since they get gazillions of dollars while their working, and then would have to wait a whole six months for another few gazillion. I can hear the violins playing.

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