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Acceleration of Short Term Deferral

Just Me

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I keep hearing various practitioners taking the position that you can't accelerate the payment of a short term deferral because it raises 409A issues. I know that it seems extraordinarily logical that if it is a short-term deferral, 409A does not apply, so there is no prohibition on accelerating payment. But this keeps coming up -- can anybody tell me what part of the regulations would lead you to think this is a problem?

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  • 2 weeks later...

In my view acceleration is not a problem (a well accepted view). Short term deferral depends on the existence of a substantial risk of forfeiture. To qualify as a short term deferral, distribution has to be within the short term period after this SRF lapses. If the company decides to pay out something that was subject to an SRF, it has accelerated the lapse of the SRF, which is not prohibited under the regs. The company then must honor the terms of the award saying (I hope) distribution is triggered by the lapse of the SRF. Treas. Reg 1.409A-1(b)(4)(i)(A) keys the 2.5 month STD period to the lapse of the SRF. Nothing says that it is a problem if the company decides to lapse the SRF early.

From the earliest days of 409A the IRS guys speaking on 409A confirmed this view.

As a thought experiment: Severance triggered by termination not for cause is purely an event the timing of which is controlled by the company. It is a short-term deferral arrangement forfeited if the exec voluntarily quits and vested if the company fires him or her for cause. It is well accepted that this can qualify as a short-term deferral.

I have seen lawyers fuss about constructive receipt or lack of a "substantial" risk of forfeiture if there is fiddling with the timing of vesting/distribution of a short-term deferral arrangement, and that is legitimate.

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