409A Plan Amendment Question

[Scott]

A company established a directors fee deferral program in 2005 that provides that a director can elect to defer his fees to be received over a 5 year period, and he (or his beneficiary) will receive monthly payments over 10 years upon the earlier of his attainment of age 70 or death. There are no provisions for payment upon a change of control, termination of the plan, or any other event. The plan is clearly subject to 409A, and it appears to comply.

Another company is about to acquire this company and wants to get this obligation "off the books". It would like to cash-out the benefits upon the change of control. Can the plan be amended to add a change of control (using the 409A definition) payout? Assuming the acquisition goes through, the result would be that the payments will be made sooner than under the current terms of the plan, so is this a prohibited acceleration under 409A? To me it seems logical that you should be able to amend a 409A plan to add other payment events, as long as such events comply with 409A, but it's not crystal clear to me.

The transition relief provides that a plan may provide, or be amended to provide, for new payment elections on or before 12/31/07, as long as it does not apply to amounts that would be payable in 2007, or accelerate into 2007 payments that would otherwise not be payable in 2007.

I guess the question is this: What is meant by the term "new payment election"? If the term applies only to the ability of a service provider to change the timing of his payments, then I think the amendment should be OK. However, if the term covers any change to when the benefit may be paid, then the amendment appears to be a prohibited acceleration unless the transition relief applies.

This would raise another question. If the plan were so amended, and the change of control occurred in 2007, would this violate the transition relief by accelerating into 2007 payments that would not otherwise be payable in 2007?

Any thoughts are appreciated.

[namealreadyinuse]

To me it seems logical that you should be able to amend a 409A plan to add other payment events, as long as such events comply with 409A

This is the approach to take, but only during the transition period. Sometime before 12/31/07, they are going to have to amend the plan retro back to 1/1/05 to comply with 409A. That plan can only have 409A distribution events and will have to match with how they have administered since 1/1/05. All they have to do is put the CIC language in it for all. This is just an employer restatement issue, not an employee election change issue, so you don't have to worry about the anti-accelaration prohibition.

[Scott]

I like your answer, but why only during the transition period?

[namealreadyinuse]

You asked about amendments during the transition period. Before 2008, employers are required to adopt 409A compliant plans. Those are going to have new provisions that are going to have to be retro effective. That is where you add your CIC provision under the theory that it is how the employer decided to comply with 409A and the plan has been administered as if that provision was in place since 2005.

After the transition period, it will primarily be a contract question about how amendments to the 409A plan are to be made - with the overlying 409A restrictions to be considered as well. You could probably add a CIC provision then as well depending on who the service provider is, but it will probably raise the change in election issues if it relates to old money.

[Scott]

I understand that all plans must be amended by 12/31/07 to comply with 409A. I guess it's not clear to me under existing guidance that, in doing so, you more or less have free reign to add 409A compliant provisions that weren't already in the plan, which seems to be what you are saying. You still have to avoid prohibited accelerations, and that's what I'm worried about, since under these facts the amendment will cause the amounts to be paid sooner than they would have been (assuming a change of control occurs).

In my view, there are two possibilities: either (1) this amendment is not an acceleration that 409A would prohibit, in which case there should never be a problem with making the amendment, during the transition period or after, or (2) this amendment is an acceleration, in which case the transition relief for new payment elections must be used, and that relief does not appear to be available if the change of control occurs in 2007.

[namealreadyinuse]

(3)

[Guest Harry O]

I doubt the buyer can get this "off the books" without the consent of the directors. I suspect they have a contractual right under the plan to have their deferrals paid in accordance with their original elections. Adding a provision that automatically accelerates payment upon a CIC and overrides prior elections is probably not possible. Consult a lawyer.

The best you can do is amend the plan in 2007 under the transition rule to permit the directors to elect to receive their balances in 2008 rather than the date originally elected. Some may take the money and some may not.

[namealreadyinuse]

Do the employees have a contractual right to payment in the event of a "disability" or "separation" under the terms of the old plan that cannot be changed? If so, you are probably violating 409A. The plan will have to be amended to comply with 409A. Several provisions that were not approved or contemplated originally will end up being added. The amendments will have to be consistent with the administration of the plan during the transition period and with 409A. The CIC provision questioned in the original post meets both requirements.

[Guest KLCarter]

Scott,

Have you found out whether the correct answer is (1) or (2)? I am faced with the exact same question, and I think that you have correctly identified the issue. Is Namealreadyinuse implying that there is a 3rd option? Does anyone know what it is?

[Steelerfan]

A third option would be to terminate the plan in accordance with the provisions of the prop regs that allow for discretionary termination of a plan within 30 days before or 12 months after a CIC. The rub with this option is that the reg appears to require that all other "similar" plans be terminated as well. If anyone knows how this rule applies, please let me know! It could mean having to terminate all account balance plans (if that's what the directors plan is) that are sponsored by the employer including plans the employees participate in. In my mind this would never be a viable option and I would prefer to regard this part of the prop regs as a big misprint (an idiotic one at that).

Based on the discussion as I follow it, the only viable option would be (2) in Scott's post. But HarryO is on the money and the directors get to decide what to do (despite the fact that the acquiring Co. has a vested interest in the decision). And considering all the 409A uncertainties, is cashing out worth the risk if the plan does not provide for it?

This thread opens for discussion a lot of really important issues for the future.

It seems to me that option (1) is not viable as this would certainly have to be considered an acceleration, otherwise what's the point of 409A--every employer could amend there plan for an earlier payout, just like a haircut provision. I think the likely scenario is that an amendment to the plan to change the payout timing that is nonelective (that is at the sole discretion of the employer and not employee choice) that occurs during or after the transition period would be treated as a subsequent election subject to the 12 month prior and 5 year payout rule (sorry for the lack of specific language).

Also, as regards retroactive amendments affecting "old" money, we are not talking about qualified plans with protected benefits here. Every employer should carefully draft their contracts and plans allowing for discretion to change provisions. Where employee payout elections are concerned, my hats are off to companies that allow such election changes going forward and they have to keep track of which election applies to which money.