409A Alternate Payment Amounts

[EBECatty 65]

I'm hoping to get input on an atypical nonqualified plan design. Say you have a standard NQDC plan that allows for employee deferrals, employer contributions, etc. All distributions would be in a lump sum on the earliest of termination, death, disability, or change in control. The participant would have no control over investments in their account.

However, the amount of the payment would differ based on which event triggers the payment. Termination (for any reason), death, or disability would result in a payment of the participant's account plus a specified and reasonable rate of interest. But a change in control would result in a payment of the participant's account plus a rate of return based on the increase/decrease of the employer's stock over the period of the employee's participation in the plan.

So, for example, a participant is in the plan for five years and has an account balance of $100,000, then retires. The payment amount would be $100,000 with a prespecified interest rate of, say, 5% applied over the five years of participation.

But if the same participant is employed at a change in control, the payment amount would be $100,000 increased (or decreased) by the increase (or decrease) in the value of the employer's stock over the five years preceding the change in control. 

The 409A Handbook has an example in the anti-toggling section stating a "toggle" between amounts is compliant because it doesn't change the time or form of payment. I don't see anything else that immediately jumps out at me as impermissible, but would appreciate any thoughts.

[XTitan 35]

I think it's a little messy if, the day before the change of control, someone quits because the stock price is down, as opposed to getting a lower balance the next day if they don't quit.  But I don't see the toggle rule applying either.

[EBECatty 65]

Thanks XTitan, and good point. I suppose you could make the amount of the other payment events the lesser of the fixed interest rate or the employer stock value to control for that. 

[401 Chaos 6]

FWIW, not obvious to me that there's a toggle or other 409A issue but gosh that seems a bit screwy.  I'm assuming that's intended to operate as some sort of CIC bonus plan / incentive and retention reward program all within a deferred comp plan.  Perhaps the company doesn't offer any equity compensation?  In any event, I'd think there could be lots of questions or wrinkles along the way. Maybe one thing to do that with employer contributions but not sure I'd really like that for my own deferrals unless I felt i could really impact the value of the business.  Maybe you agree to pay the greater of the normal amount or appreciation if there is a CIC so that folks don't benefit from moving out and are incented to grow and stay with the company.  Guess part of me wonders if that is the most efficient way at coming out incentive and retention effort if somebody has to sign up for a deferred comp plan to basically get a CIC bonus.  Interesting.  

[EBECatty 65]

401 Chaos, thanks, and you're correct it's intended to be a variation where there would otherwise be an employee equity investment. The employee would essentially "buy in" by deferring pre-tax (or receiving employer contributions) into the plan, and would "sell" by getting cashed out in the sale transaction. All other scenarios that don't involve a liquidity event for the equity owners would give the participants a small interest return. The group would be limited to those who have influence and would otherwise invest their own funds into the employer if feasible (which it isn't here for a few reasons). 

[Luke Bailey 259]

409A's rules are limited to three broad areas. It limits payment events and times of payment, and prohibits certain security devices. The feature of the plan that you describe, EBECatty, does not involve any of the three areas covered by 409A, so I do not think a 409A violation would occur based solely on that feature.

[gc@chimentowebb.com 2]

I don't see a 409A problem with different payout amounts for different events, and even for the same event (separation from service). You see this in SERPs sometime, where one amount is paid for voluntary resignation and a higher amount is paid for termination without cause. 

[EBECatty 65]

Thank you all--appreciate the input. 

[FORMER ESQ. 56]

Not a 409(A) issue.