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Short-Term Deferral


jpod

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Assume employer awarded restricted stock units (RSUs) that by their terms required the shares to be awarded immediately upon vesting of the RSUs. Ordinarily this would be a short-term deferral program exempt from 409A. Suppose, however, that in fact the employer never transferred the shares, not even before the end of the 2-1/2 stub period. Is there any way to "fix" the 409A problem? Assume the statute of limitations for the tax year in which the RSUs vested is still open.

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While there have been 45 viewers, nobody has commented. Will anyone step up and agree with me that the situation appears to be completely hopeless?

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By making a late payment, perhaps this short-term deferral has become subject to Section 409A? If it is documented, maybe it qualifies because it specifies how the amount is to be determined, the form and timing of payment, etc.? If so, then perhaps the operational failure to follow the terms of the document can be corrected under IRS Notice 2008-113, or if the payment was due earlier this year, by the end of this year under the rule that says later in the same tax year is deemed timely made?

Alot of "perhaps", I know.

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Unfortunately the document says nothing other than the shares will be transferred when vested, and vesting occurred in prior years. Would have been perfectly exempt under the s-t deferral rule had the shares been transferred by the end of the 2-1/2 month stub period, but since they weren't you are left with a document that is woefully 409A non-compliant. I don't see anything in 2008-113 that could be used here.

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It's a bad situation, but assuming it doesn't go back further than a couple taxable years, you might be able to use a combination of 2008-113 and 2010-6.

First, you correct the operational failure under 2008-113. Something was deferred that should have been paid in an earlier taxable year. Correct under IV.C., V.D., VI.C. or VII.D. (depending on the year/amount of the failure).

Second, you correct the bad plan language (ambiguous term) under 2010-6, Section IV.A.

There are other options, but they probably dont' apply:

1) You didn't pay because it was not administratively feasible and you paid in the first year is was administratively feasible.

2) You didn't pay because it would have jeoparized the company's ability to continue as a going concern and you paid in the first year that was not longer the case.

I think this is the best I can do for you.

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  • 2 weeks later...

If the S-T period would have been met with a distribution in early 2014, and company now distributes in late 2014, how about taking the position that the employee had a demand right to get the shares in early 2014 which amounted to constructive receipt. A variation on the fix-it-in-the-same-year-and-there-is-no-foul theory. Withholding and other issues have to be worked through I suppose, but maybe not 409A?

I have corrected late RSU distributions where the RSUs were 409A deferrals with decent documentation to begin with. I have not worked through the correction procedures for RSUs as short-term deferrals.

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