Steelerfan

I asked this question today at a TEI breakfast with a prominent speaker (not with the IRS, but used to be). She asked the IRS about this and said they are taking the position that not only would it not be an SRF, but that 409A plans cannot even have such a provision because the employer has discretion over whether a termination is for cause and it would be an alternative payment schedule upon separation. A lot of compnanies apparently had such provisions in their plans under the rationale that the company would rather cash out a criminal than have to keep the money earning interest while some corporate $%$bag sits in jail. Now they must be removed. Although I'm still not sure why the company wouldn't rather forfeit than pay out (unless it's salary deferal or earned bonus money). I also don't understand why a termination for cause is more discretionary than an involuntary termination without cause. Any ideas? She also said that even though she has gotten a lot of questions on this, the IRS thinks it's a stupid question.

you should think about satisfying the 6 month delay rule unless you want to try and structure the first payment (separately) to fall within the short term deferral rule.

I'm still confused. Can an employer continue to pay the premiums for medical benefits or group term life insurance for 3 years after termination of employment without regard to the 6 month delay rule? Based on CABatty's resonse, it seems like you can't. I hope that is not the case.

It would be a transfer subject to section 83. I think the option would be considered " otherwise disposed of" under reg 1.83-7. Thus there is no additional deferral feature that would violate 409A.

Take a look at the regs pp. 19256-57 for ideas on objective formula limitations that are fixed or non-discretionary. If an employee has a bona fide separation and has no more compensation to defer, I don't see how that creates an acceleration, unless there are additional amounts paid immediately upon termination that would have been subject to the deferral election. Otherwise it looks like your methods are objective--you would have to build into the formula that up to 10% of compensation subject to the overall plan limitation of x amount may be deferred. There can't be any subsequent discretion or manipulation.

If the plan already provides for deferred compensation, you can't meet the STD rule on an ad hoc basis by paying in a lump sum immediately after termination. If we were talking about a separation pay plan that imposes an SRF on all payments, then it could work that way.

That rule is for set payment dates and only applies when payment is made after the scheduled date (but within the same calendar year), or not more than 30 days before (as explained in the preamble you can't pay at any time earlier in the year, such as Jan 1 because of the timing of subsequent elections). You can get the whole year to pay if you designate a calendar year as a payment date. In OP, payment is upon an event--separation from service, so those rules don't apply. Your idea would appear not to meet the time and form requirements. You'd have to pay within 90 days of separation. In your example, Jan 1 could be more than 90 days from separation.

The conversion or exchange of a stock right for a legally binding right to compensation in a future tax year is an extension that creates an additional deferral feature from the date of grant. Because the option would be "in the money" at the time of the extension, the option would be treated as noncompliant under 409A from the date of grant, with penalties and interest applying retroactively.

If you break down this question in it's simplist form, the confusion comes down to the fact that in NQDC plans, the absence or presence of an SRF is not a critical taxation event, as it is under section 83. E.G. Under section 83, there was no SRF if a transferee was required to give the property back upon termination for cause because (as others have pointed out) the likelihood of that happening is too remote for the risk of forfeiture to be "substantial." But that fact had an immediate impact on taxation. Whereas in NQDC plan, we can get tax deferral with or without an SRF. So if you draft a NQDC plan to say, "l hereby promise to pay YYZ $1 dollar when you terminate employment unless you are involuntarily terminated for cause", we wouldn't normally care if there was an SRF since tax on the dollar would be deferred by virtue of the unfunded promise to pay. But if I put the dollar in trust, is there an SRF to prevent taxation? No because section 83 says the risk is not substantial. But if I add a provision to say that YYZ also won't get the dollar if he leaves employment voluntarily, does that create an SRF? It should, based on the regulations. So the question is whether or not the presence of a payment upon a termination for cause abrogates the SRF. I don't see how, you still lose it if you leave voluntarily. That's the long way of trying to prove what jpod and chaz were saying.

to your question, I really think the IRS never considered that an employer would want to pay someone who was terminated for cause. Actually I'm flipping to your side based on an old case I found, EDWARD L. BURNETTA, O.D. P.A. v. COMMR., 68 TC 387 (1977). It was a funded nonqualified deferred comp plan analyzed under Sec 83. The court ruled that a discharge for cause provision did not create an SRF such that contributions to the trust were not includible in income. But it is clear under the facts and rationale that if an employee terminated voluntarily, nonvested benefits would still be forfeitable. Therefore, despite the "for cause" termination provision, benefits were still subject to SRF by virtue of the standard vesting schedule (2 years) under the plan, which would be forfeited if an employee voluntarily left within 2 years. Past 2 years, benefits were vested despite the bad boy clause. Although I've still never seen any cases (and I checked the Utz Executive comp litigation articles) where anyone gets paid after a for cause termination, I'm willing to admint that there could be an SRF, but I'd call the IRS and talk to an agent about it.

Getting back to the OP, if the IRS looks at a termination for cause as the essential equivalent of voluntary termination, then the case is closed. This agreement will not have a valid SRF. I'm assuming that the issue here is preservation of an SRF so the plan can be amended to comply with 409A. Unfortunately it seems hard to argue that an amount is subject to forfeiture if you can get paid under the ultimate forteiture provision known to man--the "bad boy" clause. I would feel uncomfortable concluding that an SRF exists. Good luck Chaz. Not to mention if this is a public compnany, shareholders wouldn't be too happy that you paid out on firing for cause.

Basically what they said was ""a fired for cause" clause does not raise a substantial risk of forfeiture." Not sure I understand your distinction.

I just read an article and the commentator stated that payments on termination for cause are not SRF (no authority cited). They are treated like a voluntary termination (not for good reason)

Right. Maybe installments 2 and 3 could be paid in 08 and the first installment be made as scheduled. I don't see how an accelerated payment of the full amount in 07 can be accomplished without penalty. The plan should be amended to comply with actual operation, but it wouldn't save you from a penalty for an impermissible acceleration, so why bother.

Of course there's a need to comply with 409A, and it doesn't sound like anyone thought about it. Based on what you've said, this looks like an impermissible acceleration (you can't choose between the two payout forms after the LBR attached.) Why can't you use the transition rule to change the time and form of payment and pay in a lump sum on 1/1/08? Don't wait until it's too close to the end of the year.

Unless the person is/was a director or independent contractor, W-2. Otherwise 1099-MISC.

That's interesting. There are no new liabilities here though, retiree health was cut off a while ago. Hard to find an employer today who continues retiree health programs.

Wouldn't that be something!

Only if payment is conditioned solely on the occurrence of an IPO (thus creating a substantial risk of forfeiture) and required to be paid within 2.5 months after the end of the year in which the IPO occured. IOW, you would not be able to have this as a payment event for deferred compensation, rather only for short term deferral.

I don't understand this comment. If the balance is forfeited and reallocated to other participants and then the plan is terminated, all assets will be distributed to all participants (full vesting). What amount would be left to remit to the PBGC and why does the PBGC care, aren't we talking DC plan?--there is no such thing as a reallocation in a DB plan.

Thanks Don: I don't know what an emloyee pay all VEBA is, but in this instance it doesn't sound like you can ge the preferable FAS 106 treatment, i.e., the VEBA assets would not qualify as FAS 106 assets (to offset the liability)

409A had no impact on the timing of FICA taxation for NQDC.

That's an interesting question, whether a payment conditioned on a termination for cause is a valid SRF. It seems the IRS assumes that standard practice is that "for cause" termination creates a forfeiture. If it creates a forfeiture, then it should follow that the right was not vested and therefore subject to SRF. Without the benefit of research, it seems to me that there should still be an SRF unless the "cause" is considered within the control of the employee--an odd circumstance no doubt. I"d feel more comfortable putting the decision to pay in the hands of a compensation committee after termination rather than pay automatically upon termination for cause. That way you can say that the amount would have been forfieted but the compensation commitee decided to pay the bum anyway.

I think you're right, but to clear up the confusion, the IRS considers a short term deferral to be an exception from the definition of deferred compensation and the 2-year/2-times to be an exclusion. The former is never deferred compensation, the latter would be but for the exclusion. That explains alot. On p. 20, they state that the payment of deferred compensation can be modified to be made only upon an involuntary separation from service, thus excluding it from the definition of deferred compensation (putting it under the 2-year/2-times rule). The IRS has already conceded that the amount is deferred compensation and so the ST deferral rule cannot apply. So it seems clear that such actions cannot cause the amount to be subject to an SRF so that the ST deferral rule applies, but can be excluded for purposes of the 2-year/2-times rule. You must be genius.

I think you're getting caught up way too much in the "without cause" language. If there is cause for a termination, the executive will usually not receive payment. Any other involuntary termination (for reasons other than cause) should create a valid SRF--meaning that before you terminated you had no right to payment. So, I would say that if you truly have a right to payment upon an involuntary termination, you kill two birds with one stone, meaning that you can potentially have both the short term deferral and 2x/2year rule apply. I can't think of a situation where there would be no SRF, but the 2x/2year rule would still apply.