Can we still pay a benefit that is supposed to be forfeited?

[ERISA-Bubs]

We have an employee who is leaving and his benefit will be forfeited because he is not due to vest for a couple years.

Can we do the following:

1) accelerate vesting and pay the benefit according to the schedule?

2) offer him the exact same (or modified, even) benefit in a second agreement that is fully vested, and then just let the current benefit forfeit?

I'm concerned with (2) because I know that there are issues with replacing one benefit for another, but that doesn't seem to be the case here.  The current benefit is being forfeited pursuant to the terms of the plan, so we are in a position where we don't owe him anything -- why shouldn't we be able to provide a separate benefit, even if it looks like the one being forfeited?  It would be maybe an issue if he voluntarily forfeited it for a new benefit, but that isn't the case here.

Second random question.  If the Plan currently says the benefit will grow at 5% annually, can we revise the Plan to say the benefit will grow based on some other metric (e.g. company performance) starting on a future date (e.g. tomorrow or next month)?  Or is that an impermissible modification?

[EBECatty]

I think 1.409A-3(j)(1) addresses the situation. May take a few more facts to figure out the answer. If the payment was conditioned on a vesting schedule, but then was payable on separation from service, it looks like it's permissible because the payment event (separation from service) is still acceptable. On the other hand, if the original plan provided a fixed payment date, that probably cannot be accelerated and paid now without causing an impermissible acceleration.

[ERISA-Bubs]

OK, the additional facts are, it is to be paid in 3 years, but only if the participant is still employed at the time.  The participant is leaving, so the benefit will be forfeited as soon as he leaves.  I understand if we accelerate vesting, we will have to stay on the same payment schedule and pay him out in 3 years.  

But, what if we just offer him an identical benefit (not conditioned on him forfeiting the current benefit, but in reality, the current benefit will be forfeited by reason of him leaving) and make it payable at an earlier  date of our choosing.  I don't know if that constitutes an acceleration because the original payment is forfeited pursuant to the terms of the plan, and the new payment is not being paid in consideration of the participant forfeiting the original payment.

[EBECatty]

Without the benefit of time to look at the 409A substitution rules, I believe they are broad enough to cover a forfeiture even if it's not voluntary, but could be mistaken.

Also, if it's a one-time payment to be made on a fixed date provided the employee is employed on that date, could you use the short-term deferral exemption? If so, you can forfeit, relinquish, replace, substitute, etc.

[ERISA-Bubs]

Catty -

Upon further reflection, I believe you're right.  The regulations on substitutions of payments cover both "forfeitures" and "voluntary relinquishment" and are not limited to voluntary forfeitures.  Thanks for the help!

[Luke Bailey]

In case you want additional support, I will pile on. Have had this situation many times. The referenced reg (1.409A-3(j)(1)) is absolutely on point. The exec does not have to forfeit, but does need to wait 3 years.