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Selective vesting in NQDC plan


cathyw

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The plan sponsor maintains a top-hat NQDC plan with Rabbi Trust (in addition to its 401(k) plan) which includes employee deferrals and employer match.  The plan uses a 3-year cliff vesting schedule for the match.  A participant is being terminated, and the plan sponsor wants to fully vest his match account ($175,000).  I suggested that they apply the vesting schedule as is, follow the plan's provisions to forfeit the $175,000 which the plan sponsor can use towards its future match contributions.  The plan sponsor would then pay him a severance/bonus of the $175,000 so that the financial effect on the plan sponsor is the same.  For various reasons, they don't want to pay him the severance/bonus from the company.

Is there any problem with amending the plan to provide for 100% vesting for this one participant, other than possibly triggering FICA tax?  The plan also has a risk of forfeiture in the event of termination due to theft or violation of a covenant not to compete.

Thanks for your input.

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On ‎9‎/‎14‎/‎2020 at 3:59 PM, cathyw said:

I suggested that they apply the vesting schedule as is, follow the plan's provisions to forfeit the $175,000 which the plan sponsor can use towards its future match contributions.

If the payout schedule for the existing plan for that $175k would be other than a lump sum qualifying as a short-term deferral for 409A, paying him the cash bonus instead of vesting in the plan and paying out according to its payout schedule could be treated as a substitute accelerated payment and violate 409A.

On ‎9‎/‎14‎/‎2020 at 3:59 PM, cathyw said:

Is there any problem with amending the plan to provide for 100% vesting for this one participant,

Generally, no, unless the plan has some unusual provision saying that it will not exercise discretion in a discriminatory manner or the like.

 

On ‎9‎/‎14‎/‎2020 at 3:59 PM, cathyw said:

other than possibly triggering FICA tax

You're not going to avoid FICA. Assuming the FICA lands in a year in which the individual is already over the OASDI wage base, which he or she probably is by now for 2020, the earlier you have your FICA event the better, because subsequent earnings escape FICA.

 

On ‎9‎/‎14‎/‎2020 at 3:59 PM, cathyw said:

The plan also has a risk of forfeiture in the event of termination due to theft or violation of a covenant not to compete

Make sure he or she has not stolen before you pay. Also, for the covenant not to compete to be practical, presumably the amount is paid out in installments over the noncompete period. See my first response above regarding 409A issue.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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5 minutes ago, cathyw said:

Thanks Luke.  I was concerned whether the acceleration of the vesting could be viewed as an acceleration of time of payment (i.e., from never because not vested to now).

Right, cathyw. The 409A regs say it's OK to accelerate someone's vesting, but only if that does not have the consequence of accelerating payment. That's what my first point was getting at. It's hard to come up with a realistic example, but if you had a plan that said, "This vests three years from now, but only if you are still employed 3 years from now, and it pays 5 years from now, but only if it vests 3 years from now," and then you accelerated vesting so that the service provider would receive this payment even if he or she terminated before the 3 years was up, you would still be required to wait until the 5 years was up before you could pay without violating 409A.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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