Separate Payments / Short Term Deferral

[ERISA-Bubs]

The short term deferral exception under 409A applies separately to each payment. We have a plan that provides for one of two payments upon the earliest of: 1) an IPO, within the short term period, OR 2) separation from service.

The first payment event is not compliant with 409A, but is paid within the short term deferral period. The second payment is compliant with 409A, but is not within the short term deferral period. There is a separate calculation for each payment.

Does this comply with 409A? Does the first payment satisfy the short term deferral exception, or does the fact the plan also allows a non-short term payment upon separation ruin the entire plan?

[jpod]

I am not grasping the facts. I see only one payment, to occur upon the earlier of those two triggers. Where are the two payments? In what form would the payment or paymentss be made (e.g., lump sum)?

Can you try again with a more precise and complete statement of facts?

[ERISA-Bubs]

jpod - That is precisely my dilemma. If it is one payment, it clearly would not satisfy the short term deferral exception. If it is two payments, the IPO payment would satisfy even though the separation payment does not. Here are more specifics:

The plan calls for a lump sum payment within short term deferral of an IPO, calculated based on company value at the time.

If the employee terminates employment before an IPO occurs, the employee still gets a payment, but it is calculated pursuant to a different calculation. This is paid in 3 annual installments, and the plan does not provide that they are treated as separate payments.

Because the two payments are payable on different events and caclulated differently, I would like to treat them as two separate payments, thus preserving the short term deferral exception for the IPO payment.

[jpod]

I am assuming it is any sep from service, not just an involuntary sep from service, or we wouldn't be having this conversation. If all I need to do to get paid is to quit my job, that means there is no SRF (under the 409A definition), so I don't see how you could ever use the s-t-d exception. Unless there are still more facts which aren't clear to me, I think this structure cannot be 409A compliant.

[ERISA-Bubs]

You're correct -- any separation triggers the separation payment.

So, you think there is no argument that the two are separate payments?

[jpod]

I don't see how the concept fits here. As I see it, this is what you have:

1. General Rule: three payments made on sep from service; there is no SRF.

2. Exception: payment is accelerated if an IPO occurs first, and amount of payment is measured differently. This is the problem under 409A.

Any chance that this was created pre-2005?

[ERISA-Bubs]

Jpod -

Unfortunately not. I have a follow up question that I've posted as a new topic, but might also be appropriate to post here. I get that there is not substantial risk of forfeiture in a situation like above, because a person can quit at any time and get compensation since there is payment upon separation for any reason. What about the case where there is substantial risk of forfeiture for one nonqualifying payment event but none for a qualifying payment event?

Example:

The plan calls for payment on the earlier of:

1) IPO, in which case payment is made within 2 1/2 months of the fiscal year, OR

2) A specified date (if employed), in which case payment is made over a 3 year period.

Clearly, and IPO is not a qualified payment event under 409A. But payment is made within 2 1/2 months of IPO, and the amount is subject to a substantial risk of forfeiture at all times before the IPO. Does the fact that payment can be made outside the short term deferral period for the specified date mean I can't use the short term deferral exception to cover the IPO event?

[jpod]

I think this is problematic as well.

Here's how I analyze it under the regs. You start out with a compliant structure - payment event is a specified date, and the payout is over 3 years. However, you add on top of it an impermissible acceleration, the IPO.

However, your new facts are different, because now there is a SRF until the earlier of the two events occurs. So, can't this document problem be fixed as long as it is fixed prior to the year in which the SRF disappears?