Below Market Options

[Guest aaronk]

Private corporation wants to issue $0.01 options to its CEO. If the options vest immediately but may only be exercised during the 60 day period following a change in control (meeting the regulatory definition) or separation from service, do you think this award would be 409A compliant? It seems to me it would be deferred compensation but that payment triggers would comply with 1.409A-3. Just wanted to get other people's impressions.

Thanks.

Aaron

[Locust]

Don't know about the 60 days (may be too long?) but the only 2 payment events,- change in control and separation from service, are permissible payment events. The concern with 60 days is that it would allow the executive to time the compensation - could delay into the next tax year - and this does not meet the short term deferral exception because vesting occurs when the options are granted. Maybe it should be the earlier of 60 days or the end of the calendar year in which he change in control or separation occurs?

[XTitan]

It's not so much that 60 days is too long, it's that the CEO would retain the right to determine the year of payment via exercise. Limiting the ability to exercise to the calendar following the triggering event would be a great idea.

§1.409A-3(b) ...A plan may also provide that a payment, including a payment that is part of a schedule, is to be made during a designated period objectively determinable and nondiscretionary at the time the payment event occurs, but only if the designated period both begins and ends within one taxable year of the service provider or the designated period is not more than 90 days and the service provider does not have a right to designate the taxable year of the payment