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Deferral of RSU Awards


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I have an RSU agreement. Normally the RSUs are to be paid out on their vesting date. Pursuant to the agreement, the RSUs can be deferred past their vesting date so long as the election to defer them is made at least 12 months prior to the vesting date.

This doesn't sit right with me. Once they are vested, they are no longer subject to a substantial risk of forfeiture. Grantees will be able to defer past the short term deferral date. The RSUs are now deferred compensation. The compensation must be deferred before the year in which the services are performed. That means, to defer the RSUs, you would generally have to defer them prior to the date they are granted, since the services are the services performed during the restricted period (from grant to vest).

Normally I would push back, but this was drafted by a very intelligent executive compensation attorney. Further, I found the following in Melbinger's materials which also goes against my understanding, which makes me think I might be missing something:

Melbinger uses this as an example of how an RSU might be structured:

"Pursuant to the ABC Corporation Stock Incentive Plan, ABC awarded 10,000 RSUs to Executive D on July 1, 2008, vesting at 25% per year. The terms of the award agreement provide that D can elect to receive a distribution of a like number of shares of ABC stock (in increments of at least 1,000 shares) at any time after the RSUs become vested, by filing a written election with ABC at least 12 months before the designated distribution date."

Can somebody please let me know what I'm missing???

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Possibly regulation section 1.409A-2(a)(5).

I thought about that too. I think that helps, but doesn't get us there. Under that section, we could allow an election to defer within 30 days of the grant of RSUs (assuming the performance period is at least 12 months and the election precedes the vesting date by at least 12 months). Under the RSU award, that wouldn't always be the case. Half the RSUs vest 2 years after grant, so making an election 12 months before those vest wouldn't meed the 30 day window requirement for 1.409A-2(a)(5). Good suggestion, though!

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Take a look at 1.409A-2(a)(4) and 1.409A-2(b)(9) Example 6. It talks about an initial deferral election for a short-term deferral that is not otherwise deferred compensation. The election cannot take effect for one year, but it also requires a five year deferral from the vesting date.

Also, the second example appears to deal with the election of the medium of payment (i.e., shares vs. cash). It indicates there is a designated distribution date, so the election doesn't change the timing.

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