HTO

A deferred compensation plan allows a company's directors to elect to defer a portion of their director fees. The deferred amounts are distributed upon the earlier of a 409A change of control or a director's separation from service. At the time of an election to defer, the director can elect to receive payments upon a separation from service either in a lump sum or in annual installments. The plan provides that if installments are elected, the number of annual installments will equal the number of full calendar years the director was a participant in the plan, up to 10 installments. So, for example, if a director has a separation from service after 6 years in the plan, he or she will receive 6 annual installments, and if the director has a separation from service after 12 years in the plan, he or she will receive 10 annual installments. This seems like a violation of the toggle rule because it provides for different times and forms of payment for the same 409A payment event, and I don't believe that any of the exceptions apply, but I'd love to entertain an argument that it's permissible.

Thank you. For your answer to (ii), are you considering the payments to be made upon disability not to constitute "lifetime benefits"?

A bit of a brain teaser here. A proposed arrangement would provide installment payments to an employee (or beneficiary) over a period up to 3 years only upon the employee's disability or death that occurs while employed and prior to a change in control of the employer. The 409A regs provide that 409A does not apply to a plan to the extent that it provides disability pay or death benefits. For this purpose, "disability pay" and "death benefits" are defined under the FICA regs. The FICA regs (31.3121(v)(2)-1(b)(3)(iv)) provide that payments under a plan in the event of disability are disability pay to the extent that the disability benefits payable under the plan exceed the lifetime benefits payable under the plan. The regs define "lifetime benefits" as the present value of the benefits that could be payable to the employee under the plan during the employee's lifetime. Because the only other benefits payable under the plan would be after the employee's death, it appears that the payments upon disability are "disability pay" not subject to 409A. Similarly, the FICA regs provide that payments under a plan in the event of death are death benefits to the extent that the total benefits payable under the plan exceed the lifetime benefits payable under the plan. Using the same definition of "lifetime benefits" as above, it appears that the disability payments (which could be payable during the employee's lifetime) would prevent the death payments from qualifying as "death benefits," thus subjecting the arrangement to 409A. But this seems like an odd result, considering the similarity of the provisions for disability pay and death benefits, so is there an argument that benefits that constitute "disability pay" are disregarded in determining "lifetime benefits" so that the death payments constitute "death benefits" and the entire arrangement is not covered by 409A?