Fixed Payment Date in SAR

[J2D2]

Would this situation run afoul of 409A? SAR for non-publicly traded company is exercisable for cash. Notice 2005-1, Q&A 4(d)(i) states that SAR generally will be subject to 409A, but that they may be structured to comply, and notes that a SAR with a "fixed payment date" generally will comply. Could our plan provide that SAR becomes exercisable 3 years after grant and that the participant may exercise at any time up to 10 years from grant? Haven't been able to find anything that discusses exactly what "fixed payment date" means.

Thanks for any insights or references.

[Guest LeeNunn]

The key is separating exercise from distribution. In the past, the two events have been simultaneous, absent deferral of the gain into a NQDC plan. Exercise of the SAR reduces the leverage and volatility of the intrinsic value. Distribution is the payment to the executive.

You could have a plan with three year cliff vesting and that expires ten years from date of grant. Distribution of the award is limited to the six events in 409A, including a specified time. If the participant exercises before distribution, the intrinsic value is poured into a notional account measured anyway you and the participant want to measure it. It could be anything from 6% simple interest to phantom shares.

Fixed payment date means a calendar date such as January 1, 2008. Some plans refer to this as an in-service account. The participant who chooses the fixed payment date will be in constructive receipt of the benefit on the fixed payment date absent a second election provision (subject to the 12 month and five year rules) or one of the other five events.

[J2D2]

Thanks, Lee. Distinguishing exercise from distribution makes sense. Your response also addresses a second question I had - can distribution be made at the first to occur of one of the 6 specified events? Section 409A and the Notice weren't specific, but, again, it makes sense that the SAR could provide for distribution at the first to occur of one of the permitted events.

Another question - Q&A 4(d)(i) of the Notice uses the term "fixed payment date." IRC 409A(a)(2)(A)(iv) refers to a "specified time (or pursuant to a fixed schedule)." Do you think this difference is intentional? In other words, could the Notice be intended to refer to any of the 6 events listed in 409A(a)(2) as "fixed payment dates?" I guess the alternative would be that the difference in terminology is not intentional and that "fixed payment date" should be read as referring to the specified date or fixed schedule of IRC 409A(a)(2)(A)(iv).

Any other thoughts? Is everyone else having as much fun as I am with 409A?

[Alf]

The earliest of the six is fine. I think fixed schedule means just that, a predetermined schedule of dates instead of just one date.

I wouldn't call your new arrangement an SAR, though, because once it is revised to meet 409A, it no longer resembles a traditional SAR at all. It will just be a bonus pegged at stock price or a NQDC plan that bases its investment returns on the stock price.