Replacing 409A plans/substitution

[Guest thefades]

Facts: Client was supposed to pay out (in lump sum) US employees under compliant 409A plan in certain traded securities with a FMV of $1000X. The securities stopped trading prior to the payment. Client is forced to scrap this plan and wants to institute a new plan which would pay the same employees in 48 monthly cash payments, with the first payment being made on the date the lump sum payment of securities would have been made. The total of the cash installment payments will be about $500X, materially less than the $1000X lump sump payment under the original plan.

Question 1: Is this a "substitution" under 1.409A-3(f) or are there any other provisions in the Regs. that would make this problematic?

Question 2: If this is a "substitution", I assume that the payments would be in violation of 409A as a prohibited subsequent deferral. How is the amount to be taxed calculated based on the proposed regs. under 1.409A-4? More specifically, is the violation of 409A occuring in the year of the "substituion" or is each payment after the initial payment considered a separate violation, with penalty taxes being imposed on each annual payment?

Any advice or guidance is extremely appreciated! Thanks in advance.

[401 Chaos]

I'm assuming from your post that there is no argument that the lump sum payment was exempt from 409A because it provided for payout within short-term deferral period (i.e., that these amounts were already vested and the lump sum arrangement was intended to provide for 409A-compliant fixed time of payment. If that is the case, seems to me switching over to 4-year arrangement probably would create a violation. I do think though that the 409A preamble or maybe some earlier guidance indicated that the medium of payment did not necessarily have to be fixed as part of the up front terms so maybe you have an argument that you can safely switch from securities to cash if you can get around the subsequent deferral issue?