SAR agreement payable upon CIC

[beartd]

I am having a debate with some tax colleagues regarding 409A compliance requirements for a SAR agreement.

There is a SAR agreement that doesn't exactly look like a SAR agreement. The payment is based upon the increase is stock value but the stock right is not "exercisable" - it matures and is payable only upon change in control, death or disability. Accelerated vesting upon CIC as well.

To me it looks more like a phantom stock plan that has to comply with 409A. [Also - if payment triggers are all 409A compliant - why not just make it compliant]

Others believe that because the amount to be paid is based entirely on the increase in the stock price that it is exempt under the SAR exemption. Note the company is a start up so FMV is going to be a good faith / reasonable written report.

Any inputs into the debate would be appreciated.

[gc@chimentowebb.com]

Isn't this a short term deferral payable promptly after vesting date?

[beartd]

Vesting is actually a 3 year graded schedule. Payout isn't until CIC. It may fully vest before CIC.

[jpod]

You said it's payable only if there is a death, disability or cic. But I guess everyone will die, so maybe that means it's not a s-t deferral, unless death has to occur before a certain date. Sounds like a screwy design. Are you providing all the facts relating to payment timing and payment conditions? Aside from all of that, I don't think that an SAR has to provide a volitional exercise right in order to qualify as an SAR exempt from 409A. You need to confirm this by looking at the definition of SAR in the regulation.

[EBECatty]

Interesting question. I've had similar plans and treated them as phantom stock plans subject to 409A (unless exempt as a S-TD, which they usually are). Treasury Reg 1.409A-1(b)(5)(vi)(E) has a definition of "exercise" that can be applied by analogy to SARs under 1.409A-1(b)(5)(vi)(H). I'd say err on the side of caution and give them a 409A-compliant payment event, which in this case would only be a good CIC definition.

[jpod]

It would seem very odd that an SAR can escape 409A completely if it allows a service provider to exercise whenever he wishes, and to time his tax liability whenever he wishes, but not if there can only be compulsory excercises upon certain prescribed events or dates.