Haircut or SROF?

[sloble@crowleyfleck.com]

NQDCP provides that shareholders can, at any time, cash in their shares. The act of cashing in of their shares gives them the right to an in-service deferred compensation "Bonus" in the same year.

The shareholder can elect not to take the Bonus, in exchange for the right to a Deferred Compensation Payment only upon actual termination from service.

The Deferred Compensation Payment is calculated based on an average of compensation formula. The Bonus is computed using the same formula reduced by 25%.

Is the Deferred Compensation Payment subject to a SROF because it is materially greater than the Bonus? Or is this an impermissible haircut because the shareholder can elect to receive a deferred benefit subject to a penalty?

I think it is subject to a SROF and not a haircut because its not entirely discretionary (i.e., only in the year of retirement of shares) and it is not an insignificant cut (more than 10%).

This design is intended to pass muster under the 2009 regs.

[Guest L337pwner5]

With respect to the "bonus" on cashing in their shares, that piece does not seem to me like it would pass 409A muster. The timing of the Bonus is entirely in the discretion of the shareholder. The fact that they must cash in their shares to receive the bonus is irrelevant, because it is entirely within their discretion when they do so.

I think the Deferred Comp Payment part falls with the Bonus part. There is not a permissible time of payment if the payment turns on the shareholder-participant's discretionary decision to act (or not). Time of payment must be set before the right to the compensation arises. Something entirely within the participant's control is not a SROF (with the exception of continued employment, I think).

This whole set up is suspect. And there are no 2009 regs. I hope anyone who disagrees will jump in.

[sloble@crowleyfleck.com]

Thanks. Additional important fact:

The in service Bonus is only available after 20 years of service as a shareholder. But a shareholder can still elect to take it any time after 20 years. Is there a SROF after 20 years?

"2009 Regs" means the 2007 regs effective in 2009.

[XTitan]

Isn't this an alternative to doing a discounted stock grant, but instead of reducing the grant price there's an enhancement to the redemption price? Under that analysis, you'd need a time and form of payment at the time of grant, right?