More Hair Splitting

[401 Chaos]

Existing employee first becomes eligible to defer amounts under company's NQDC plan in February. 409A(a)(4)(B)(ii) allows new participants to defer amounts related to services performed subsequent to the election provided election is made within 30 days of participant first becoming eligible. Thus, newly eligible participant is presumably only able to defer that portion of his 2005 bonus attributable to services following eligibility. The bonus qualifies as a performance-based bonus so participants generally have until June 30, 2005 to make bonus deferral elections. First, I assume the June 30th performance-based deadline would trump the 30 day first year eligibility deadline? Second, assuming he has until June 30th, is there any argument that he can defer ALL of his 2005 bonus since everyone got until June 30th to make deferral elections or is he limited to deferring just that portion of the bonus prorated to account for services after becoming eligible for the deferred comp plan?

[Guest Harry O]

I agree that is seems reasonable that the 6-month performance comp exception would trump the new hire rule. I also think that the employee could defer his entire bonus.

[JDuns]

I have been concerned that the IRS has clearly indicated that 409A lies atop current rules about constructive receipt and also that "performance based bonus" has not yet been defined.

If a bonus program is based on a calendar year and an employee is promoted in December (when he has a fair idea of the bonus to be paid), is everyone comfortable allowing him to defer the entire bonus so long as the election is made "within the first 30 days of eligiblity"? What about allowing deferral of a prorated portion of the bonus based on the number of days in the measurement period after the election date?

I realize that informal comments have indicated that the performance based standard will be looser than 162(m) but we don't know yet what the definition will be. If a company reserves the right to adjust the bonuses (e.g., to adjust EPS by adding back a non-recurring charge), that bonus would not qualify as performance based for 162(m). Would anyone else be uncomfortable allowing mid-year deferrals of such a bonus?

[Alf]

I agree with all of the above. The new hire rule shouldn't apply for performance bonuses and the rule about elections after comp is already earned won't apply to them either. Finally, I agree that we don't know anything about the performance bonus rules, so I wouldn't rely on them. I would get elecitons now.

[Guest Harry O]

I'm not sure that the company's act of adding back a "non-recurring" charge necessarily violates 162(m). It depends on how the performance goal is defined. If the non-recurring charge is adequately defined up front, there should be no problem. Many 162(m)-compliant plans exclude specified charges or extraordinary items.

That said, earlier elections are almost always better than later elections . . .