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Unintentional Deferral


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The CEO of a company is owed $100,000 per year. In 2012 and 2013 the company was struggling so the CEO didn't take compensation. He didn't waive it either, he just didn't take it those years thinking he'd take it later when the company was doing better.

In 2014 the CEO waived his right to the $200,000 salary for 2012 and 2013 in exchange for a $1 million loan from the company.

1) It seems to me the CEO impermissibly deferred his 2012 and 2013 compensation to 2014. There was no agreement deferring it to a permissible trigger date under 409A. Is there any way to categorize this as anything other than a deferral under 409A?

2) The company was struggling but probably not to the extent that paying the CEO would have risked the company's ability to continue as a going concern, so I can't get out of 409A that way. Is there any other argument to get out of 409A?

3) Since this only dates back to 2012, I can use the correction procedure under Notice 2008-113. Part of that correction procedure says the company must pay the distribution to the employee and cannot compensate him (interest, etc.) for the late payment. So are we going to have issues since we traded the $200,000 for a $1 million loan?

Any help is appreciated.

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  • 3 weeks later...

I have not yet thought of a way around correction, but would concede that avoiding correction procedures is worth the effort.

What confuses me is the implication that in 2014 the company can make a $1 million loan to a CEO who is owed $200,000 on an undocumented basis, with the loan treated as bona fide and not resulting in taxable income to the CEO. Even if the $200k were a valid and compliant deferral, I would be uneasy about the loan (as open to challenge as really a form of income).

With correction, wouldn't you need to recharacterize the loan (within 2014) as the payout of the $200k under the correction procedure and a loan for the remainder?

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Were these dealings negotiated with a person who was independent of the CEO?

If so, why wasn't everything in writing?

If not, should an advisor be concerned that the CEO might have complete control over the timing of his compensation?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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