What happens On 1/01/09?

[Chaz]

Hypothetical: It is after January 1, 2009. Employment agreement with specified employee of public company provides for $1 million payment if the executive terminates employment for any reason at any time following a change in control. The agreement does not provide for a six month hold-out (oops).

Executive/Company realize this before a change in control occurs or is even contemplated (i.e., when there is a SRF) and want the agreement to be 409A compliant. Is there anything that can be done to fix this?

[Steelerfan]

Hypothetical: It is after January 1, 2009. Employment agreement with specified employee of public company provides for $1 million payment if the executive terminates employment for any reason at any time following a change in control. The agreement does not provide for a six month hold-out (oops).

Executive/Company realize this before a change in control occurs or is even contemplated (i.e., when there is a SRF) and want the agreement to be 409A compliant. Is there anything that can be done to fix this?

Maybe you could argue that the arrangement was intended to be a STD and you could just "reform" it to comply with that rule, as having been outside of 409A the entire time. I'd doubt that would work, though-- this looks like the exact trap 409A was meant to set. It's interesting that the IRS has provided relief for operationalal errors, but not innocuous document errors. I don't think the IRS would have any sympathy for the failure to comply document-wise after having had four years to amend plans.

[Chaz]

I suspect you are right. But I am having a hard time convincing my corporate-oriented colleagues that such non-compliant agreements will not be fixable (i) in the event that the 409A penalty will arise, if at all, many years later; and (ii) all the parties involved at all times intended to have these agreements comply.

This may arise not only with agreements that were in effect during the transition period but those drafted post January 1, 2009. Mistakes happen in drafting and it seems incongruous for an individual to have to pay a penalty for a document that is inadvertently non-compliant which is correctable while there is still a substantial risk of forfeiture.

Perhaps the IRS/Treasury Department will expand their corrections program to apply in these circumstances. Or is that too much to hope for?