Short-term deferral question--early vesting at disability and retirement

[Guest steverino]

Assume a long term incentive plan provides for payment by March 15 following the end of a three year cycle but provides for earlier vesting (but payment date does not change) due to Disabiltiy (assume 409A compliant definition). Does this mean that this plan can not meet the short-term deferral exception even for those who never become disabled? Assume that a disability occurs only once every 10 years. Does that matter? I can see an IRS argument that becuase the plan provides for the "possibility" of a payment that won't be a short-term deferal (if a disability occurs for example in the first year of the cycle), there can be no short-term deferral but this does not seem like the right answer to me.

Same question but assume instead of disabiltiy that earlier vesting (but not payment) occurs at a separation if the participant is retirement eligible (say at some combination of service and age)? I would argue that as long as the participant would not be eligible to retire prior to the third year of the cycle, that particpant's award would qualify as a short-term deferral.

Any thoughts? Thanks for any insight.

[Guest Harry O]

So what if the plan is not eligible for the STD exception on account of disability and retirement (but only for those employees who attain retirement eligibility in performance years 1 and 2)? You are still paying at a fixed date, etc. The only hiccups are (1) you need to wait 6 months for payments to specified employees on account of termination (maybe not a problem on these facts), and (2) your ability to change payment dates is limited (e.g., you may not be able to accelerate payment or further defer payment except in accordance with strict 409A rules).

[Guest steverino]

Thanks Harry O. The problem is other provisions in the plan that may violate 409A if applied in a plan subject to 409A. For example, the plan actually provides for payment in three annual installments after the end of the cycle. Participant must be there for each 3rd to get paid but there is a provision permitting the employer in its disccretion to accelerate vesting and payment if there is a termination without cause prior to the completion of the three payments. In my view, that provision could only be applied to a short-term deferral. If the disabilityvesting prevents the plan from ever being able t to satsify the short-term deferral exception, I am concerned that I have a documenation violation since there is an explicit provision permitting a payment acceleration of an amount subject to section 409A. Just wondering whether there is a consensus that the vesting at disability would preclude short-term deferral treatment. Thanks.