Short-Term Deferral Rule

[Christine Roberts]

Is is just me or did the final Sectin 409A regulations significantly curtail the short-term deferral exception?

As stated in the proposed regulations the exception applied whenever, absent an election by the employee, deferred compensation was "actually or constructively received by the [employee] by the later of the 15th day of the third month following the [employee's] first taxable year in which the amount is no longer subject to a substantial risk of forfeiture or the 15th day of the third month following the end of of the [employer's] first taxable year in which the amount is no longer subject to a substantial risk of forfeiture."

Under the final regulations, there is an additional requirement: in addition to the "timely receipt" requirement above, the deferred compensation plan may not "provide for a deferred payment" - i.e., it may not state that any payment will be made or completed on or after any date, or upon or after the occurence of any event [such as a separation from service or change in control] that will or may occur later than the end of the applicalbe 2 1/2 month period."

Example 6 in the Final Regulations (Section 1.401-1(b)(4)(iii)) describes a situation that would qualify for the short-term deferral exception under the Proposed Regs, but not the Final Regs: On November 1, 2008, employee obtains a LBR to severance pay on a separation from service. The example states: "Because the separation from service is an event that may occur after the applicable 2 1/2 month period, the bonus plan provides for a deferred payment and therefore provicdes for a deferral of compensation. Accordingly, the bonus plan will not qualify as a short-term deferral regardless of whether Employee F separates from service and the bonus is paid or maid available on or before March 15, 2009."

Any comments appreciated.

[Guest jhall]

I may be missing something but I'm not sure I find Example 6 under the final regulations to be treated differently under those as compared to the proposed regulations. It seems to me the short-term deferral period is measured from when the amounts are no longer subject to a substantial risk of forfeiture. I believe Example 6 is not just a case where severance benefits will be paid but involves a bonus that is 100% vested on November 1, 2008 but will not be paid / distributed until separation from service. Thus, the amounts are not only subject to a LBR but are also substantially vested. The employee's separation of service (for one reason or another) seems a given so the amounts are clearly going to be paid--it's just a matter of time. Because there is no deadline or timeframe set for that distribution, there is no guarantee that it will be within the short-term deferral timeframe.

Contrast that to an agreement entered into on November 1, 2008 that provides an individual severance benefits to be paid out within 2 1/2 months of the end of the year in which the employee is involuntarily separated without cause. In that case, there is an LBR but the amounts are not vested or no longer subject to a substantial risk of forfeiture unless and until the individual is involuntarily terminated without cause. Because there is a maximum deadline of 2 1/2 months following end of the termination year, the payment should be guaranteed to come within the short-term deferral period even though it is unknown if and when such an involuntary termination will occur. Because the payment is still subject to a substantial risk of forfeiture when agreement is signed, however, the March 15, 2009 date is irrelevant.

Perhaps the final regulations are more specific and so clearly prevent the arrangement in Example 6 from being exempt under 409A even if, by coincidence, the separation occurs and amounts are actually paid out before March 15, 2009. However, I'm not sure the proposed regulations should be read to say that such coincidental payouts or payments that could extend beyond the short-term deferral period were okay.

[Christine Roberts]

Thanks for the comments; I think you are right about that particular Example and I think that

my supposition is incorrect. The preamble suggests that the short-term deferral exception applies where the payment is coincedent with the lapsing of the substantial risk of forfeiture regardless of the potential that the event triggering payment/lapse of substantial risk of forfeiture could occur after the 2 1/2 month period.

In other words, if entitledment to deferred compensation is conditioned upon an employee's remaining employed on the 6-month anniversary of a change in control, with no date specified, and payment is to be made within 3 business days of that anniversary/lapse of risk of forfeiture, the short-term deferral exception would apply even though the anniversary could occur after the 2 1/2 month period.

Let me know if you think that this is on the right track. Thanks.

I may be missing something but I'm not sure I find Example 6 under the final regulations to be treated differently under those as compared to the proposed regulations. It seems to me the short-term deferral period is measured from when the amounts are no longer subject to a substantial risk of forfeiture. I believe Example 6 is not just a case where severance benefits will be paid but involves a bonus that is 100% vested on November 1, 2008 but will not be paid / distributed until separation from service. Thus, the amounts are not only subject to a LBR but are also substantially vested. The employee's separation of service (for one reason or another) seems a given so the amounts are clearly going to be paid--it's just a matter of time. Because there is no deadline or timeframe set for that distribution, there is no guarantee that it will be within the short-term deferral timeframe.

Contrast that to an agreement entered into on November 1, 2008 that provides an individual severance benefits to be paid out within 2 1/2 months of the end of the year in which the employee is involuntarily separated without cause. In that case, there is an LBR but the amounts are not vested or no longer subject to a substantial risk of forfeiture unless and until the individual is involuntarily terminated without cause. Because there is a maximum deadline of 2 1/2 months following end of the termination year, the payment should be guaranteed to come within the short-term deferral period even though it is unknown if and when such an involuntary termination will occur. Because the payment is still subject to a substantial risk of forfeiture when agreement is signed, however, the March 15, 2009 date is irrelevant.

Perhaps the final regulations are more specific and so clearly prevent the arrangement in Example 6 from being exempt under 409A even if, by coincidence, the separation occurs and amounts are actually paid out before March 15, 2009. However, I'm not sure the proposed regulations should be read to say that such coincidental payouts or payments that could extend beyond the short-term deferral period were okay.

[401 Chaos]

I think that is correct.

[Steelerfan]

Actually, I agree with you that the final regs did significantly curtail the STD exception, but no one seemed to talk much about it--more or less assuming that the change was not really a change, as the above poster suggests.

But before the final regs, my understanding was that it was "clear" that a payment made within the STD period could have been considered "not deferred compensation" even if it could have been paid later. The final regs closed that loophole, as dicussed above. Now, in order to meet the STD exception, a bonus plan must vest and pay with regard to all payments. I don't think that was the conventional wisdom under the prop regs.

The 2.5 months starts running on the later of the attachment of an LBR or the lapse of an SRF. You seemed to be confused about that when you said "the short-term deferral exception would apply even though the anniversary could occur after the 2 1/2 month period." In fact, the 2.5 period didn't begin to run until the anniversary, which is the lapse of SRF.

[Christine Roberts]

Actually, I agree with you that the final regs did significantly curtail the STD exception, but no one seemed to talk much about it--more or less assuming that the change was not really a change, as the above poster suggests.

But before the final regs, my understanding was that it was "clear" that a payment made within the STD period could have been considered "not deferred compensation" even if it could have been paid later. The final regs closed that loophole, as dicussed above. Now, in order to meet the STD exception, a bonus plan must vest and pay with regard to all payments. I don't think that was the conventional wisdom under the prop regs.

The 2.5 months starts running on the later of the attachment of an LBR or the lapse of an SRF. You seemed to be confused about that when you said "the short-term deferral exception would apply even though the anniversary could occur after the 2 1/2 month period." In fact, the 2.5 period didn't begin to run until the anniversary, which is the lapse of SRF.

[Christine Roberts]

Thank you for that clarification.

Actually, I agree with you that the final regs did significantly curtail the STD exception, but no one seemed to talk much about it--more or less assuming that the change was not really a change, as the above poster suggests.

But before the final regs, my understanding was that it was "clear" that a payment made within the STD period could have been considered "not deferred compensation" even if it could have been paid later. The final regs closed that loophole, as dicussed above. Now, in order to meet the STD exception, a bonus plan must vest and pay with regard to all payments. I don't think that was the conventional wisdom under the prop regs.

The 2.5 months starts running on the later of the attachment of an LBR or the lapse of an SRF. You seemed to be confused about that when you said "the short-term deferral exception would apply even though the anniversary could occur after the 2 1/2 month period." In fact, the 2.5 period didn't begin to run until the anniversary, which is the lapse of SRF.