Forfeiture if no stock purchase?

[ERISAatty]

I'm trying to vet a consultant's 409A plan design proposal. This would be a deferred compensation plan for key employees of a privately held C-corporation.

The plan is set up as a defined contribution plan, with credits placed annually in participant's bookkeeping account.

Although this is not being (and they don't want it to be) set up as a stock option plan, what the company would really like to 'incent' is that when money become payable (on specified date), it is used to purchase company stock.

If the money is not used to purchase company stock, the amount (cash) received is forfeited by 50%.

My take on this is that it's a no-go under 409A - or at least, that, forfeiture or not, they're still going to have to include FMV of the whole vested amount in income (reduction notwithstanding).

Further, I believe this design specifically violates 1.409A-3(i)(1)(i), which says that an "amount is not objectively determinable [for purposes of being payable as of a specified date] if the amount of the payment is based all or in part upon the occurrence of an event, including the consummation of a transaction by, or a payment of an amount to, a service recipient."

Do you agree that this means you can't make the amount/value of payment, as of a specified date, contingent upon whether or not there is a stock purchase/sale?

I believe a better proposal is to allow amounts to be paid upon a certain schedule (as they become vested over a graded schedule). The Company can allow each payable amount to be used to purchase stock, or not, but there is no reduction in amount payable if stock is not purchased. The only disincentive to employee for *not* buying stock is that, if they don't buy stock when amount is first payable, they lose that 'stock purchase opportunity,' and the paid amount will not be able to be used to buy stock in future.

Anyone else ever seen a similar proposal or have other insights to share? I'm all ears.

Many thanks.

[jpod]

You may not have given us all the facts, but from what you've described I don't see a problem. The employer is giving the employee a 100% match if he or she invests his/her account balance in stock, and the employer match will be distributed at the same time as the account balance is distributed. Where is there a 409A issue (assuming the handling of the underlying account balance is in accordance with 409A)?

[ERISAatty]

Hmm! I hadn't thought of it as being framed as a match, but I'm intrigued, and thinking it over.

Not familiar with matches in 409A design, but that alone doesn't mean it can't exist!

It's appealing, because the match amount isn't deferred, and therefore isn't subject to 409A... (unless the IRS would disregard that approach and step it back together anyway).

Thanks!

[Guest ailiah]

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