Delay in Vested SERP Distributions Upon CIC

[Guest jhall]

Would welcome thoughts on the following.

Company has a SERP plan for its directors. SERP benefits are nonelective, employer-provided funds which provide directors a specified annual payment amount for X number of years (up to maximum of 10) following retirement. The SERP provides for payout upon the later of (1) age 72, and (2) separation from service. The SERP benefits are subject to a vesting schedule which ties into the number of years of payment. The directors all have extensive service on the board such that they are all vested in the SERP benefits and all are entitled to the set annual payment amounts for the full 10 year period.

In the event of a change in control, all SERP benefits receive accelerated vesting if not already vested and will be paid to the directors in an accelerated lump sum payment equal to the present value of their benefit if it were to have been paid out over the 10 year period. Company is contemplating an event which would constitute a change in control under the SERP and thus result in accelerated distribution of SERP benefits.

If change in control occurs, half of directors will leave board and thus do not really have a problem with receiving their SERP benefits on an accelerated basis. (Some are actually over age 72 and thus would be entitled to distribution under normal plan provisions upon separation from service.) The other half of the directors, however, will continue on Board of the merged company. Some of them do not want to have their payments accelerated. Parties to the merger don't want their payments accelerated either since it would be a cash drain on the company.

I am not sure there is an easy way to delay those payments under 409A or traditional constructive receipt rules. I suppose they might try changing the definition of a CIC so as not to provide for immediate payout on that trigger but that would presumably carry over to the retiring directors as well--some of whom are interested in getting accelerated payouts. The subsequent deferral rules under 409A wouldn't seem to work here because there is no way the election to put off the deferral could be made 12 months in advance. I read the special change in control exception provided in Treas. Reg. § 1.409A-3(i)(5)(iv)(B) to apply to only nonvested compensation / amounts such that an election to avoid change in control acceleration would not apply where benefits are already vested and not subject to a substantial risk of forfeiture. Also, from a general constructive receipt standpoint, it seems the continuing directors are basically on the verge of receiving the payments (although not final agreement has been reached) and would be turning their backs on the SERP benefits if they delayed receipt now.

Am I missing an easy argument or method for basically waiving accelerated distribution of the vested SERP benefits that doesn't raise significant risks. Thanks.

[jpod]

Without spending any brain matter on your question(s), the thought occurs to me that perhaps the transition rules in Notice 2006-79 will allow the Company and its directors to do anything which they would like to do assuming the CC will not occur until 2008.

[Guest jhall]

Thanks, Jpod.

Unfortunately, the hope would be to have a quick closing at the end of the year--actually the week before Christmas--so the payments would be due or generally due in 2007.

[Steelerfan]

Chances are the plan doesn't have a 409A compliant definition of CIC--right?, so you'd have to amend the plan in order for accelerated distributions to occur. Since a CIC has not occured yet, why can't you just amend the plan to remove the accelerated payment feature? A right to payment has not accrued because no CIC, so what does it matter that the payments would be paid if a CIC occured. As long as all the participants are on board (since this would be a reduction in benefits or rights), I'm not sure why you can't remove the feature.

For the one's who do want their payments, provide for a 2008 payout under the transition rules just for them. Since constructive receipt could be an issue, don't wait to amend the plan--do it ASAP (preferably before the 4th Q)

[Guest mbw]

Chances are the plan doesn't have a 409A compliant definition of CIC--right?, so you'd have to amend the plan in order for accelerated distributions to occur. Since a CIC has not occured yet, why can't you just amend the plan to remove the accelerated payment feature? A right to payment has not accrued because no CIC, so what does it matter that the payments would be paid if a CIC occured. As long as all the participants are on board (since this would be a reduction in benefits or rights), I'm not sure why you can't remove the feature.

For the one's who do want their payments, provide for a 2008 payout under the transition rules just for them. Since constructive receipt could be an issue, don't wait to amend the plan--do it ASAP (preferably before the 4th Q)

We have the same issue and I agree with your comments jhall. We generally cannot think of a workable way to avoid the payouts. Steelerfan, even if the definition does not comply right now, as long as you payout because of a compliant definition in operation, you really don't need to amend, correct? If the plan terminates after all benefits are paid after the CIC, I don't recall an obligation to bring the plan up to date prior to 1-1-08.

As for the removal of the accelerated feature and a special 2008 payout for those who want their money under the transition rules, do you think you can do this? The transition rules do not permit a payment that would be made in 2007 to be delayed, correct? Even though there has not yet been a CIC, it will occur, so is this a problem under the transition rules?

[Guest jhall]

MBW,

Thanks for your thoughts. I had the good fortune to have our deal tank so this is no longer a live issue for me and we never had to reach a final conclusion.

In our case, the SERP CIC definition was 409A compliant--really the whole SERP is very simple and had previously been amended to comply with the proposed regs and so I think the SERP, as drafted, is 409A compliant. As a result, we were not planning on amending further to comply with 409A and only were thinking about amending in order to try and accomplish what the client desired with the change in payout in light of the particular transaction they had negotiated.

Even if we did have to amend the CIC definition or other provisions for 409A reasons though, I remained concerned that any amendment to change the distribution provisions of amounts that, but for the amendment, would have clearly been due and payable in 2007 could fall outside the transition exception. Perhaps there is an argument that unless and until the deal documents are signed and participants have a clear right to the payments that the distribution terms could be amended. Certainly this is more removed that amending a provision or election that provided for a set 2007 payment date but it really is basically amending on the eve of a payment coming due. That seems a bit risky to me under traditional constructive receipt rules and considering the penalties involved.

Of course, the participants were generally okay with getting the payments under the existing terms. Buyer objected because of the optics and need to come up with cash to pay people that would still be working which is a fair point. Our executives had agreed to delay payment if Buyer agreed to indemnify them for any 409A risks. For some reason Buyer refused to do that although their counsel had--until then--been pretty confident there were no 409A issues to worry about.

[Steelerfan]

It just seems to me that there is a big difference between a payment that is due and payable in 2007 with no additional condition attached (such as a planned installment) and a payment that is set to occur only if a CIC occurs. Isn't it theoretically possible when you have such a provision in your plan, that any time merger talks occur, the payments become potentially payable in that year? At what point is a CIC payment due and payable? Doesn't jhall's example kinda prove the point that the amount was not payable despite the possibility of payment because the deal fell through? Considering (assuming) that the IRS isn't going to be using 409A to seek out penalties, the transition rule will likely be applied liberally.

Does anyone see any reason why an employer couldn't, before a CIC occurs, amend a plan post 2008 to completely remove a provision requiring accelerated payment on CIC (assuming the participants consent)? I don't think most employers would necessarily want to do this, but such payments can be onerous and raise unwanted 280G issues.

[Steelerfan]

Even if we did have to amend the CIC definition or other provisions for 409A reasons though, I remained concerned that any amendment to change the distribution provisions of amounts that, but for the amendment, would have clearly been due and payable in 2007 could fall outside the transition exception. Perhaps there is an argument that unless and until the deal documents are signed and participants have a clear right to the payments that the distribution terms could be amended.

I agree that if the amounts had become payable due to a CIC in 2007, the transition rule could not be used to delay payment to 2008--the transition rule would seem not to apply to amounts that could be payable, but won't necessarily be paid. For example, an amount that is payable on separation from service in 2007 could not be delayed to 2008 if the employee separates in 2007.

[Guest jhall]

Steelerfan,

I don't necessarily disagree with you--I'm just a worrywart.

To expand your example, what do you think of a situation where plan provides for amounts to be paid out upon separation from service. If the plan is amended (and participant obviously consents) to amend the plan during the transition year to simply provide for payouts upon a fixed schedule at age 70 rather than separation from service, could that be done in transition. If so, what if the day following the amendment the individual separates from service. Any concerns there? I can certainly appreciate the argument that this is very different from trying to amend a fixed payout provision that provides for payment of $___ on September 1, 2007 but it just makes me nervous the IRS could find a way to disagree. Thanks.

[jpod]

jhall: I think it would be a problem if the participant separated from service in 2007 if the plan says you get paid in the year of separation. What you have to do, and the best you can do, is write the amendment to say that the change in payment schedule is inapplicable if the participant separates from service in 2007 (or at a time in 2007 that would trigger a payment in 2007 under the terms of the plan prior to the amendment).

[Steelerfan]

I agree with jpod. I was agreeing with you jhall, I don't think you're being a worrywart on this one. Any amount that becomes payable in 2007 (for whatever reason) would have to be paid in 2007.