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Post-Termination Compensation from Inter-Company Payments


SycamoreFan

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How are practitioners dealing with clients whose arrangements provide for post-termination of employment compensation based on payments within the controlled group? This can occur in a variety of sales situations. For example, Company A is the sales division of Goliathco and sells many products, including the products manufactured by Company B, which is the manufacturing division of Goliathco. Salesperson 1 is the top salesperson at Goliathco and would like to retire. Company A would like Saleperson 1 to transition her clients to Salesperson 2 prior to retirement. As such, Company A typically enters into an agreement to pay Salesperson 1 a portion of the commissions generated by Salesperson 2 due to sales to Salesperson 1's former clients for a period of 2 years following retirement.

Because Company A and Company B are the same 409A "service recipient," the special date or fixed time rule does not appear to be available for any compensation paid based on the receipt of payment by Company A from Company B. None of the other 409A permissible payment events are triggers, so the only option left appears to be exemption as a short-term deferral. That approach would be premised on the likelihood of a sale not occurring constituting a substantial risk of forfeiture. That is so facts-and-circumstances based it seems risky. Am I missing something here? Thanks!

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I would view these as short term deferrals.

In the context of 3121(v), the Office of General Counsel was clear that renewal commissions are non-vested deferred compensation until payment is made, even when there is actuarial certainty of payment. See CCA 200813042.

If the IRS took a different approach under 409A (and held that renewal rights were vested at termination, rather than at later payment dates), it would essentially be conceding that no FICA would be owed with each renewal payment due to 3121(v).

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I agree with George's technical answer, but would also note that this, clearly, is not in the universe of "deferred compensation" which the IRS has tried to regulate since 1972 (if not before then) and is also not something which Congress had in mind post-Enron and in the development of 409A.

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Thanks for the insight and the citation. The Chief Counsel Advice is very helpful. I agree that this type of program is not what Congress was worried about when it enacted 409A, but the 409A regs are so broad that they have to be considered. While the CCA does not mention 409A, it is significant to me that it was written on Dec. 17, 2007 after the 409A final regs were published (April 17, 2007) and that the prong of Section 83 that is relied on in the substantial risk of forfeiture analysis in the CCA is also included in the definition of substantial risk of forfeiture under 409A (the substantial risk of forfeiture definitions under 83 and 409A are different in other ways).

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