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ERISA-Bubs

NQDC to a non-Service Provider

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Code Section 409A governs NQDC when granted to a service provider from a service recipient.  We want to grant NQDC -- specifically, phantom stock -- to a non-service provider.  Basically, the company owes money to a creditor and wants to grant the creditor phantom stock to cover the debt.  

First, can this be done?  I don't see why not.

But, second, what rules apply?  I assume if it is vested, constructive receipt somehow plays a role.  But say it's vested this year but is to be settled in year 3 -- what are the tax consequences there?  I assume we wouldn't be limited to 409A's payment triggers (fixed time, death, disability, etc.) since 409A wouldn't apply?  Any other issues?

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ERISA-Bubs, I started out years ago (actually, decades) as an income tax lawyer, but now do employee benefits/exec comp. You are right that 409A and Section 83 are irrelevant. You need to talk to an tax lawyer. This sounds like an equity for debt exchange. You might Google that phrase, but you really need to talk to a tax lawyer.

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If it is just "phantom" stock, it doesn't sound like a debt-for-equity exchange to me; rather, all they would be doing is changing the terms for debt repayment.  I don't see any tax consequences from this action unless there are cancellation of indebtedness issues, which doesn't seem likely.  Certainly no "constructive receipt" or "economic benefit" issues just because the interest in the phantom stock is "vested."  But I agree that (if the dollars are large enough) both parties should seek tax advice.  

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