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Identifying Payment Event under 409A


kmhaab
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What is the Payment Event under 409A when a Transaction Bonus (calculated as a % of net proceeds) is payable 12 months following a CIC, but the bonus will be forfeited if the employee voluntarily terminates employment prior to the payment date. 

Is the Payment Event the CIC or a fixed date (the date 12 months after the CIC)? I believe it's a fixed date. 

But what if the plan language says the bonus is payable "within 12 months" after the CIC, and is still subject to forfeiture if employee voluntarily terminates employment prior to the payment date? I believe it is a drafting error as the actual language is "60% shall be paid within 12 months after the CIC and 40% 18 months after the CIC" and it appears to be intended to retain the employee past the transaction. I initially looked into correction methods for a payment period longer than 90 days following a Payment Event, interpreting the CIC as the Payment Event, but with the possible forfeiture I'm now leaning toward the Payment Event really being the date of payment.  And possibly correcting under IRS Notice 2010-6 Section VII(E), "Service Recipient Impermissible Discretion to Accelerate Payment Events." The argument would be that the Payment Event is a fixed date which is 12 months after the CIC and the "within 12 months" language is giving the Service Recipient the (impermissible) discretion to accelerate that payment event. Any thoughts?  

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My initial reaction is to look at both fact patterns ("12 months following" and "within 12 months following") as two or more independent conditions that each constitute a substantial risk of forfeiture. 

Per the preamble to the 409A final regulations:

A right to an amount deferred may be subject to the satisfaction of two or more different conditions that each independently would be a substantial risk of forfeiture. In that case, the substantial risk of forfeiture generally would continue until all of such conditions had been met.

Remaining employed until the CIC is one condition. Remaining employed for 12 more months is a second condition. Both are required to receive payment, so the substantial risk of forfeiture does not lapse until 12 months following the CIC, provided the employee remains employed. Assuming payment is very soon after the 12-month anniversary, it would be a short-term deferral.

I think payment "within 12 months following" a CIC, provided the employee remains employed until the date of payment, is a similar analysis. The payment is still subject to a substantial risk of forfeiture until 12 months following the CIC. Removing the CIC condition from the example, say the employer tells the employee "we'll pay you a bonus at some point within the next 12 months, but if you leave before payment you forfeit the bonus." I think, again, you have a substantial risk of forfeiture until the date payment is actually made. 

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kmhaab, first, I completely agree with EBECatty's analysis. What you describe seems to me also to be a short-term deferral (STD) with two different substantial risks of forfeiture (SRFs).

On 10/7/2021 at 5:33 PM, kmhaab said:

the actual language is "60% shall be paid within 12 months after the CIC and 40% 18 months after the CIC"

As to the language  (which of course I am not seeing in the context of the entire agreement or surrounding facts, and so treating as a hypothetical), if this is all there is I would read it literally. The second payment is the easier of the two, because you can interpret it as saying simply that a lump sum equal to 40% of the total amount will be paid 18 months after the CIC, provided the executive is still employed on that date. (I said, "you can interpret it," because of course there is an argument that "within" applies to the 18-month period as well as the 12.) This implies that it is to be paid immediately after the expiration of the 18-month period, so as long as it is paid within the STD period following the end of the 18th months, it would be an STD, whether it states the STD period formulaically or not (here of course, it does not).

The first, 60%, payment is harder because "within" seems to give the payor leeway to vest and pay at any time within the first 365 days after the C in C (although it seems unlikely that this is what the draftsperson had in mind). This gets you into the slightly murky area of acceleration of vesting vs. acceleration of time of payment. The reg clearly says you can accelerate vesting, but not payment, and opinions may vary on what that means in this or any other context. I think it probably means that if you had an agreement with a fixed payment date ("We'll pay you $X on the fifth anniversary of today") and a vesting event (", but only if you're still working for us then"), you could accelerate the vesting date, but not the payment date, i.e. you could vest the amount after a year, or a month, but could not pay until the end of year 5, whereas if you have an agreement that is an STD and you accelerate vesting, you can pay within the STD period calculated based on the accelerated vesting date.

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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  • 4 weeks later...

EBECatty and Luke Bailey - Thank you both, your responses were extremely helpful.  Am I interpreting correctly that you do not believe correction of the payment timing language in my original post is necessary because there is a substantial risk of forfeiture until the date payment is made? 

 

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I believe this may be a short-term deferral with SRF that would be a key factor in the analysis, kmhaab, but of course without knowing all your facts, examining documents, etc., I can't really comment on your actual case/situation, I can just try to point you down some areas to look at.

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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