Director as Specified Employee

[Chaz]

Employee is a "specified employee" and also serves as a member of the board of directors of the same company. The employee participates in various arrangements as an employee but also participates in a otherwise 409A-compliant plan in which he can defer his directors fees until he ends his service as a director, which is the distribution event. Is the director's fee deferral distribution subject to the six-month hold out requirement?

[Steelerfan]

My understanding of the regs on this is that if the director's plan is not aggregated with any plan in which he participates as an employee, then he can terminate as a director and take a distribution without regard to the six month delay rule because in this situation there is no separation from service of a specified employee. By contrast if the plans are aggregated, then no separation from service ocurs until he separates from both positions and then the six month rule would apply to both distributions. I can't believe the regs don't squarely address this. Any one else care to speculate?

[Chaz]

I agree that a terminating director has "separated from service" under 409A and can take his distribution (if the plans are not aggregated) even if he stays on as an employee, but where do you find the language that the director does not have to wait six months? The regs all talk about the six month hold out being required if the service provider is a specified employee upon the separation from service. The regs do not state that the service has to be a specified employee with respect to the compensation being distributed.

I think that the reasonable rule would be not to require the six month hold out, but a plain reading of the regs may dictate otherwise. (Hopefully, you or someone else can show me where I am going astray.)

[Steelerfan]

I think that the reasonable rule would be not to require the six month hold out, but a plain reading of the regs may dictate otherwise. (Hopefully, you or someone else can show me where I am going astray.)

Reading the regs plainly, you could come to that result, but they aren't exactly crystal clear. If you are still an employee, then you did not separate from service as a specified employee, which is arguably what the rule requires. You could read the regs as requiring that the separation from service be both a separation by a specified employee and as a specified employee. It doesn't make much sense to apply the six month rule to the retirement of a specified employee from services as a director while he continues on in employment as a specified empoyee, but that could be correct.

This is probably something else the IRS considers a stupid question while they continue to provide detailed explanations for other rules that that are simple enough for my cat to understand.

[401 Chaos]

Just to revisit this issue with a slightly broader question. Seems pretty clear from the definition of "key employee" that a director not also serving as an employee in some fashion would not be considered a "specified employee" since the def of key employee speaks in terms of employees. Seems that is true even where the director is a more than 1% stockholder with high income.

Does anybody think it overkill though to include possible six-month holdback provision in a director deferred comp plan to the extent applicable just in case a director may later do some work as an employee or arguably serves as an employee on an interim basis in the future, etc.?

[XTitan]

I think it's overkill. Why do it if you don't have to.

416(i) must of sounded like a good idea at the time (the key employees for qualified plans are the specified employees for nonqualified plans) but the cure is worse than the disease.

[Just Me]

I think it's overkill. Why do it if you don't have to.

I have included such language in directors' arrangements where we already have some directors that are specified employees. The regulations are just not clear on this point.

Why include if you don't have any current directors that are specified employees? Well, what if one of them becomes a specified employee or the company elects a specified employee to the board in the future, and the 6 month delay turns out to apply (based on more clear IRS guidance)? Are you going to remember to add this to the plan at that time? Remember, the 6 month delay is a mandatory document requirement for 409A compliance if it applies. No harm if it never applies. Big harm if it does and you don't have the magic words in the plan.