Linda Wilkins

I would check on Plan language absolving the Plan Administrator from any duty to take any actions as described so long as it acts reasonably and not arbitrarily or capriciously. Continental Airlines tried to investigate a bunch of Texas pilots getting sham divorces (in order to access their DB benefits through QDROs and then immediately re-marry). In a 2011 decision, the Fifth US Court of Appeals ruled that the administrator COULD NOT consider or investigate why employees get divorced or whether the divorce was genuine. See https://www.nbcdfw.com/news/local/pilots-win-sham-divorce-case-against-continental/2121509/ Even assuming that an administrator even has this authority, I would not want to put an administrator through intrusive activities outside the scope of the Plan document to confirm a beneficiary designation when it has never sought such evidentiary proof previously.

"would buyback of the shares held in the plan by the plan sponsor be an option?" BZorc, be very careful of this alternative. I'm assuming the plan is a KSOP, in order to permit the fiduciaries to offer an un-diversified investment fund. Under the ESOP regulations, a purchase by the plan sponsor (a disqualified person) from the plan is required to be priced at the FMV as of the date of the transaction, not at the price determined by an annual valuation. Otherwise it is a prohibited transaction. jsample's approach of having the employer contribute cash to retire the shares upon a distribution is safe. This scenario is described in an NCEO publication on ESOPs called "Don't Do That!"

Sometimes legal counsel drafting the client's plan must educate the client whether a client's idea of "time saving" approaches really makes sense. Here I don't think it does.

I agree with all of the comments in the scenario where the funds remain in the retirement plan. However, if the funds are transferred to an inherited IRA (for any beneficiary other than the spouse), I think the creditor may prevail. Clark v. Rameker (U.S. 2014) found that inherited IRAs are not considered “retirement funds” as defined in 11 U.S.C. 522(b)(3)(C) of the Bankruptcy Code. Therefore, inherited IRAs do not have the same protection from creditor claims as other retirement accounts.

Beiser, the options were exercised in exchange for restricted stock subject to Code section 83(b). The options weren't "modified" before exercise so I don't see any impact of 424(h). If the executive is to obtain additional stock compensation, rather than grant more early exercisable options (with a new FMV exercise price), I'd recommend granting new shares of restricted stock (although the 83(b) election may be cost prohibitive). Your idea to accelerated vest the existing restricted shares (or improve the vesting schedule) is feasible although it wouldn't increase the overall equity compensation for the executive.

I think this should be drafted as an incentive or bonus plan. It's not an ERISA pension plan because it does not "systematically defer" payouts until termination of covered employment which is the ERISA pension plan definition under section 3(2)(A). There's a good blog on this topic at https://www.winston.com/en/executive-compensation-blog/guest-blog-is-your-bonus-plan-subject-to-erisa.html Analyzing this as a deferred compensation arrangement or bonus plan, it fails to comply with Code section 409A because it allows payouts upon request, rather than fixing payment dates by reference to events (separation from service or change in control) or fixed dates.

I agree, Carol, that this is not the kind of plan design that 409A was intended to regulate. Generally, 409A cares only about the timing of payments and not the amount of the payments. So I think that EBECatty's bullet point 2 is the better analysis. His example assumes that you pay the benefit as an annual amount on 12/31 each year. If the plan so provides, that seems workable within 409A. Even if the payments are to be made "during the calendar year" without specifying a date within that year, I think that would meet the timing requirements of 409A.

IMHO, this is an operational error (failure to follow the plan document) and the sponsor should investigate correction through EPCRS or risks plan disqualification. Sounds like it may not be eligible for self-correction because of how long this error occurred. It would be corrected by reallocating all forfeitures in the plan’s forfeiture suspense account to any participants who should have received them had the forfeitures been allocated on a timely basis. In VCP, the plan sponsor could also ask for correction through a PS allocation to current employees.

Having reviewed the IRS correction Notice 2008-113 recently for a client, my recollection is that, if the participant is an "insider," then the amount that should have been distributed in a prior year (even if corrected in the very next year) will incur the 20% penalty tax (but not the premium tax, and the entire plan benefit is not deemed taxable when vested). Also the amount that should have been distributed is taxable for the year in which it should have been distributed, not the year paid. Part VII.D. of the Notice applies, I believe. Please check me on this! I think EBECatty's suggestion on how you calculate his payouts sounds like a reasonable reading of the plan provisions.

His 2021 season salary is payable in a lump sum in November 2021. (Presumably this is after the season is over.) This creates a short-term deferral arrangement (not 409A deferred compensation), because it is paid no later than November of the year it is earned and vested However, Bauer can opt out of the contract after the season ends (anytime until the November payment date??), and if he does, $20M of his salary is deferred and paid in $2M installments over the period 2031-2040. This creates 409A deferred compensation. You cannot have an elective deferral of a short-term deferral arrangement unless you comply with the one year/five year rule. Here Bauer is not required to make the election more than 1 year before the salary is otherwise payable. (The 5-year rule is met, because he defers the initial installment for at least 5 years, until 2031.) I expect there may be more to this contract than we know, I'm pretty sure his tax advisors would not design a non-compliant deferred compensation arrangement! If anyone finds out more about it, please post!

I have two questions. First, ESOPMomma states that individually designed ESOPS MUST be amended to allow diversification elections to be made until after the updated valuation is known. The cited LRM-5 states that the plan "MAY provide" an extension until 90 days after the date that the value of the shares is provided to the participant. Am I missing something? Second, the post assumes that participants who are eligible to diversify are entitled to a notice. That is not in the Code or any published guidance that I have located. What is the authority for this?

I know that the ABA Employee Benefits Committee (ESOP subcommittee) worked extensively with the Treasury on the development of the volume submitter plan document, so I expect it to have a good chance of "fitting" most custom plan designs. (I think Erin Turley at McDermott Will worked on this.) I have my fingers crossed.

The IRS will begin approving prototype and volume submitter ESOP plans shortly, and many sponsor will want to consider adopting one so that they can have an updated current D letter. Does anyone know whether these plans will be approved for adoption and which firms will be sponsoring volume submitter ESOPs?

I understand that the IRS has expressed the opinion that a COC is NOT a substantial risk of forfeiture unless you condition that it must occur within a fixed period such as 5 years. This is on the theory that, at some point in the indefinite future, it is substantially certain that a company will undergo a COC. This is NOT a concern, for example, if the vesting condition is an IPO. It is not substantially certain that every company will have an IPO. Don't see any problem with this director compensation being deductible by the company.

Luke, your answer brought to mind a question. Many award agreements that I review include the statement that the payment upon exercise or vesting will not be counted as compensation for purposes of benefit plans. Period. I would think that language would be ineffective because it would be "trumped" by the typical safe harbor W-2 compensation definition in the 401(k) plan. What say you?