Golden Handcuffs

[Guest KLCarter]

If an executive is given non-elective deferrals of $X per year, to be received only if he remains employed until normal retirement age, may he be allowed to elect the manner of distributions as late as Dec 31 of the year prior to his retirement, without violating 409A? This payment is intended as a golden handcuff, and will be forfeited if employment is terminated prior to retirement (except for death or if the executive is terminated by the employer without just cause).

[E as in ERISA]

No. It must generally be made in advance of earning it. He can be allowed to change it using the five-year rule, etc.

[Guest KLCarter]

So, it does not matter that the funds are not vested until he reaches retirement age?

[namealreadyinuse]

I would go the other way if the forfeiture conditions is really valid, the exec is not in a position of power over his own fate, etc.

If the comp is not earned AND vested, it is not subject to 409A. I am sure an expert will chime in though . . .

[Guest Harry O]

This is clearly a deferred compensation plan subject to 409A. The employee has a legally binding obligation to compensation that has not been received currently and that is payable in a later year. The presence of a forfeiture condition may mean the right is not vested but just makes the right to future compensation subject to a condition. Second, since these amounts were apparently not vested on 12/31/2004, the arrangement is not grandfathered.

However, all is not lost just because you are subject to 409A. Presumably the plan has a default payment method and commencement date if the employee fails to make an election. If the employee wants to change that payout method or commencement date he needs to do it at least 12 months before payments would otherwise start and the new election must defer payment at least 5 years later than the original payment date as a prior poster indicated.

If this is not attractive or the plan has no default payout method, you should run, don't walk, to take advantage of the transition rules in Notice 2005-1, Q&A 19. The executive can make a payout election in 2006 (as long as the election doesn't effect amounts that would otherwise be paid in 2006). This election will be effective under 409A even of it doesn't defer the start of payments for 5 years. In other words, it is a window of opportunity in 2006 to tidy up your payout elections without worrying about meeting the normal 409A rules that will apply beginning in 2007.

Since the penalty to the executive is so severe if you blow 409A, you should consult with a qualified tax or benefits attorney.

[Steelerfan]

It seems counterintuitive, but the arrangement described here looks like it could fit under the short-term deferral exception because the amount payable could be made within 2 1/2 months after the taxable year in which the amount is not suject to a SRF. This can happen even if you have a LBR to comp that will be payable in another year. However, any transition relief would be highly preferable becaue even under this excpetion, you are hampered by the need to make the payment election 12 months before the removal of the SRF and cannot receive payment for another five years after that.