Stock Valuation as Measure of Plan Account

[Guest Lane]

Deferral plan provides that value of participant's account balance is based on value of employer's privately held stock. Employer does not have valuations for any other purpose, so plan provides that value of stock will be determined by valuation method established by employer in good faith.

Does the reservation of discretion regarding stock valuation cause a problem, particularly with the language in 1.409A-3(i)(1)(i) and (ii) regarding amounts being objectively determinable and not being subject to the service recipient's discretion? The specific issue would be whether the discretion causes the payment amounts not to be objectively determinable (language from -3(i)(1)(i)) or not subject to an "objective nondiscretionary formula" (langage from -3(i)(1)(ii)), and thus not payable at a specified time or pursuant to a fixed schedule.

[Guest George Chimento]

<<Does the reservation of discretion regarding stock valuation cause a problem, particularly with the language in 1.409A-3(i)(1)(i) and (ii) regarding amounts being objectively determinable and not being subject to the service recipient's discretion? >>

I assume your plan is not a performance plan, either because of the 90 day rule or because it is tied to the full value of the stock, rather than being structured as an SAR. I also assume you don't have a short term deferral, but check that. It could be a saver for you.

If you do not have a performance plan or a short term deferral, there is probably a 409A failure, and I don't know of a correction procedure. You might be able to take the position that the amount itself (i.e. an award tied to 100 shares) is "specifically identified" (the language of the regulation) because there is no doubt as to what will be paid at the designated time. There is simply a question as to what the value is.

IRS would probably disagree, which means that short term deferrals or performance plans are the only vehicles for employer discretion. Hopefully, my reading is too narrow. It would be interesting to hear from others.

[Guest Lane]

Would the employer's argument be better if the plan required that the employer establish a reasonable formula and that such formula had to be applied consistently for all plan purposes? In other words, there is some discretion in establishing a formula, but the employer is then stuck with the formula and can't exercise discretion from year to year.

[Guest George Chimento]

<<Would the employer's argument be better if the plan required that the employer establish a reasonable formula and that such formula had to be applied consistently for all plan purposes? In other words, there is some discretion in establishing a formula, but the employer is then stuck with the formula and can't exercise discretion from year to year.>>

For a plan based on employee decisions (i.e. when to receive the award and in what form) I think that's the safe approach, but you really could argue that there has been a definite decison to pay it all, whatever it is, in a specified time. Isn't the point of 409A to prevent manipulation of payment decisions?

If the plan design is set up so that the employer timing for the award is preestablished by the employer, there is more flexibility, i.e. July 1 of the third year following the award. Unlike employee deferrals, for which elections must be prior to a service year (even if the service year predates the year of a legally binding right, which happens when discretonary bonuses are awarded after a service year), an employer election needs to be prior to the date of the legally binding right (or the service year, IF LATER). If an employee doesn't have a right to insist on a valuation method, it is discretionary by the employer, correct? If the employer has the discretion to decide what it will pay, there is no legally binding right until there is a definite determination. So, when the employer is setting the rules, the selection of a timing method is timely as long as it is prior to the decision which establishes the discretionary value. If there is a formula, the decision must be prior to the right to receive the formula payment. For an award which is part formula and part discretionary value, there really are two awards, and an employer decision of the payment terms when it sets up the plan is safe, even though part of the award is based on variable value.

That makes sense when you get your head out of the regulations and look at the policy of 409A. Shouldn't an employer be allowed to make discretionary payments to an employee whenever it wants? It's only when the employee gets a choice, or only after an emplyer has committed itself to a schedule of definite payments (through an enforceable formula) that 409A should be involved.

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[Guest ailiah]

Thank you so much for sharing this,very interesting...