Elections for bonus due on liquidation event - need help

[Locust]

A client has an arrangement with executives to pay them a bonus if the client goes public or is sold (liquidation event). The client wants some flexibility on when to pay the bonus after the liquidation event - if there is enough cash available at the time it would pay out the entire bonus immediately, otherwise it would pay it out over time (ex. over a 5 year period). There would be a period before the actual liquidation event in which the parties could work out the payment details, which would be in place before the liquidation event.

Can you do this under the new 409A rules? I don't think you can, at least under the proposed regulations. The proposed regulations seem to say that you either have to make an election 1. before the compensation was earned (I suppose this means before the original agreement), or 2. 12 months before the liquidation event and the payment date has to be at least 5 years from the liquidation event - the liquidation date is treated as the original payment date that can be delayed only under the 1 year/5year rule. Neither would work here - there's no way to know when payment should be made until shortly before the liquidation event.

This is impractical for my client and puts it in a big bind.

Am I reading the proposed regulations correctly? Any suggestions would be appreciated.

[Guest Harry O]

It doesn't look like this is an elective deferral arrangement -- that is, employees are not being given a choice on when they will be paid. If so, why can't the plan be drafted to say that payment will be made in a lump sum upon the liquidation event if the employer has more than $x cash on such date or in 5 annual payments if the employer has less than $x in cash on such date? It seems like this would qualify as a payment made pursuant to a specified time or fixed schedule under 409A.

[Locust]

That's a good idea, Harry O. It's wouldn't be exactly what the client wants, but maybe there is something to work with. The client wants the obligation to make the payment, but it also wants to be able to negotiate the timing of the payments as part of the sale negotiation. In other words if the buyer balks at paying out a big cash payment at the sale, it could negotiate payment in installments over a 5 or 10 year period.