Pro-rated Bonus

[Guest Mr. Kite]

5-year Employment agreement, effective on June 30, provides for discretionary annual bonus payable within 2 months following end of an "agreement year" (i.e, after each subsequent June 30), if certain goals are met and if employee is employed on the date of payment. However, another section of the employment agreement provides that if there is a termination of service for any reason (including for cause), the employee will be entitled to a pro-rated bonus amount based on performance as of the termination date, payable within 30 days after the termination date.

This agreement doesn't even involve deferral elections, but it appears to me that it may involve 409A. Even though the first provision indicates that the payment is subject to a substantial risk of forfeiture until payment, and thus would be a short-term deferral, the second provision suggests the right to the bonus vests ratably over the agreement year (even though amount of the payment is not determinable). Assuming both employee and employer have a calendar year, some portion of the bonus will be paid later than the short-term deferral period, and therefore will be subject to 409A

If this payment is subject to 409A, is it noncompliant?

[Just Me]

Since there is some amount payable even if the employee terminates for any reason (including voluntary quit), then there is no substantial risk of forfeiture from the start. This means that the short term deferral rule will not apply, since amounts are not always payable within 2½ months after the end of a tax year in which the substantial risk of forfeiture no longer applies.

So it's subject to Section 409A. However, it provides for payment upon the earlier of a fixed date (August 31 each year) or separation from service. This seems to comply with Section 409A already.