Deferring Substantial Risk of Forfeiture Under Section 83

[Carol V. Calhoun]

This is only indirectly about 409A, but I'm looking for guidance when both section 83 and 409A apply to a plan.

Has anyone thought about whether an employee can voluntarily delay the lapse of a substantial risk of forfeiture under section 83? Regulations under 409A and 457(f) deal with this issue, but I can find nothing under section 83.

Example: Jane is given restricted stock as part of her compensation. She must forfeit the stock unless she remains with the employer for at least five years. She does not make an 83(b) election.

When the end of the five-year period is nearing, she decides that she would rather take the risk of forfeiting the stock rather than paying the income tax right now. She therefore agrees with her employer that the stock will be forfeitable unless she remains with the employer for at least another two years beyond the five-year period originally provided for.

Does this work to defer the taxation? Obviously, if you did this, you'd want also to comply with the 409A rules governing second deferrals, but I'm just trying to figure out whether it's even possible under section 83.

[James B]

I have been asked the same question by a client that is working on an IPO. They have restricted stock awards will become vested between now and the post IPO lock-up period. They don't want to use their precious cash today to fund the required withholding and hope employees can take advantage of a liquid stock market to cover taxes. It reminds me of the SERP deals pitched by insurance brokers with a "rolling risk of forfeiture." The IRS obviously hates this now under 409A and 457(f). I never thought that concept worked because, in truth, the risk of forfeiture was illusory in those deals.

For my current client, I'm advising that we should not do it unless we can come up with a business element in the bargain to give employees something other than deferring taxation. Their executives may be legally restricted from trading during this period, which will help. I think the issue is demonstrating that the risk of forfeiture remains "substantial."

[Carol V. Calhoun]

I have been asked the same question by a client that is working on an IPO. They have restricted stock awards will become vested between now and the post IPO lock-up period. They don't want to use their precious cash today to fund the required withholding and hope employees can take advantage of a liquid stock market to cover taxes. It reminds me of the SERP deals pitched by insurance brokers with a "rolling risk of forfeiture." The IRS obviously hates this now under 409A and 457(f). I never thought that concept worked because, in truth, the risk of forfeiture was illusory in those deals.

For my current client, I'm advising that we should not do it unless we can come up with a business element in the bargain to give employees something other than deferring taxation. Their executives may be legally restricted from trading during this period, which will help. I think the issue is demonstrating that the risk of forfeiture remains "substantial."

We've got the same "substantial risk of forfeiture" standard in 457(f). And the new proposed regulations under that section impose conditions before a voluntary deferral or rolling risk of forfeiture works, but they allow it in at least some situations. Since 83(b) seems generally to be a more liberal standard than 457(f), you'd think it should also be allowed in 83(b) situations. But I can't find any guidance on the issue.

[James B]

Advising on another deal where the concern is 280G. They want to provide a normal vesting for SERP benefits so that they are already vested prior to a change in control. But they also want to impose forfeiture on a termination for cause and for a voluntary quit that isn't for a good reason. I think they mean a pretty good reason rather than "good reason" under 409A. In other words, the risk of forfeiture can't be "substantial." Anyone ever addressed that?