guaranteed exercise price of options?

[Guest Mr. Kite]

I asked this question earlier in a convoluted sort of way, so I'll try again. I keep going around and around on whether this arrangement is 409A-safe. Some of the facts have been changed for simplicity.

An executive has been awarded a stock option to purchase several thousand shares under the company stock option plan, and the award is structured in such a way that it clearly satisfies the stock-based compensation exemption from 409A. The option will vest in two years if he is still employed at the time. The executive's employment agreement provides, in addition, that if he does not exercise the option for 1 year after the vesting date, and if he is still employed at the time, he may, during a 1-month window period, surrender the option in exchange for a cash payment of $X.

My ultimate conclusion is that this arrangement is compliant with 409A, because the regulations (or at least the preamble) provides that 409A does not apply if the employee may choose between two or more types of compensation, none of which are subject to 409A. In this case the executive may choose to be compensated by the stock option (which is not subject to 409A), or he may choose to receive the cash payment, the right to which does not vest unless he is still employed at the time of the 1-month window (and is not subject to 409A under the short term deferral rule).

I have some reservations about this conclusion. I would appreciate any thoughts on this arrangement.