Chaz Posted June 16, 2021 Report Share Posted June 16, 2021 In my daily perusing of employee benefits and executive compensation news, I came across an article discussing Trevor Bauer's contract with the Dodgers. The article stated: Quote Bauer received a $10MM signing bonus, $5MM of which was paid in March. The other $5MM will be paid next month. Beyond that, his 2021 salary is $28MM, but with the quirk that it’s all payable on November 1st of this year. Here’s what happens if he opts out after the 2021 season, according to Cot’s: Bauer may opt out of the contract after the 2021 season, receiving a $2M buyout, with Dodgers deferring $20M of 2021 salary without interest, paid in $2M installments each Dec. 1, 2031-40 Doesn't Section 409A prohibit such an arrangement? Link to comment Share on other sites More sharing options...
ratherbereading Posted June 16, 2021 Report Share Posted June 16, 2021 I'm sure it's legal. These teams have attorneys/accountants, etc. The Yankees CEO Randy Levine is an attorney. I wouldn't mind that salary. 4 out of 3 people struggle with math Link to comment Share on other sites More sharing options...
Popular Post Belgarath Posted June 16, 2021 Popular Post Report Share Posted June 16, 2021 I couldn't settle for 28 million per year. Too big a cut from what I make now. Everyone knows that the best way to get rich is to work in a TPA office. 😁 Bri, Bill Presson, Trudy Horn and 3 others 1 4 1 Link to comment Share on other sites More sharing options...
Bri Posted June 16, 2021 Report Share Posted June 16, 2021 Plus contract rules are collectively bargained with the MLBPA, so I suppose there might be something to that as well? Link to comment Share on other sites More sharing options...
BG5150 Posted June 16, 2021 Report Share Posted June 16, 2021 Is all that part of a non-qualified deferred compensation plan? QKA, QPA, CPC, ERPATwo wrongs don't make a right, but three rights make a left. Link to comment Share on other sites More sharing options...
Linda Wilkins Posted June 16, 2021 Report Share Posted June 16, 2021 His 2021 season salary is payable in a lump sum in November 2021. (Presumably this is after the season is over.) This creates a short-term deferral arrangement (not 409A deferred compensation), because it is paid no later than November of the year it is earned and vested However, Bauer can opt out of the contract after the season ends (anytime until the November payment date??), and if he does, $20M of his salary is deferred and paid in $2M installments over the period 2031-2040. This creates 409A deferred compensation. You cannot have an elective deferral of a short-term deferral arrangement unless you comply with the one year/five year rule. Here Bauer is not required to make the election more than 1 year before the salary is otherwise payable. (The 5-year rule is met, because he defers the initial installment for at least 5 years, until 2031.) I expect there may be more to this contract than we know, I'm pretty sure his tax advisors would not design a non-compliant deferred compensation arrangement! If anyone finds out more about it, please post! Luke Bailey 1 Link to comment Share on other sites More sharing options...
Luke Bailey Posted June 17, 2021 Report Share Posted June 17, 2021 I agree completely with Linda's analysis, especially the part about perhaps there being more to the contract than is in your description, Chaz. I am a great fan of good journalism of all sorts, but have noticed that articles will often have details wrong, especially if the details are long and dull and likely to bore readers. But I'm actually not even sure of what you're saying, Chaz. If he doesn't want to play after 2021, wouldn't he have to buy them out, not the other way around? And if he gets paid for 2021 in November of 2021, how would they defer his 2021 salary to 2031 - 2040 if he opts out? Does he have to exercise his option not to play after 2021 before November? Confusing. Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
Chaz Posted June 17, 2021 Author Report Share Posted June 17, 2021 Thanks for the responses. I agree that news articles geared to the general public may leave out important details. In this case, it's probably because the general public is not as enraptured with the nuances of the Internal Revenue Code as we are. I will paraphrase a prominent "news" organization's former tagline by saying "I report, you decide" with respect to those details as I just copied and pasted the quote from the article I read. I would guess, however, that the Dodgers are paying Bauer $2MM in exchange for being able to defer payment into the future without owing any interest. Even having to pay $2MM more, the team would effectively pay less than it would if it had to pay the full salary in November. I think he would have to elect to opt out before receiving the payment in November; that's the only way the deal makes any sense. I still don't know how this arrangement satisfies Section 409A as I agree that, as the deal is described in the article at least, the 1 year/5 year rule is not met. Link to comment Share on other sites More sharing options...
RatherBeGolfing Posted June 17, 2021 Report Share Posted June 17, 2021 This is a very creative contract, even for baseball. It is designed to allow the player to walk away after each season, avoid some luxury tax for going over the soft cap, and defer some salary payments if the player opts out (probably partly for cashflow reasons) It goes like this: Player signs contract prior to 2021 season, and receives a $10 million in signing bonus payable in 2 installments (3/1 & 7/1) Players salary is $28 Million for 2021, and $32 million for each of the final 2 years of the contract Players salary for 2021 is payable on 11/1/2021 (after the end of the 2021 season) If player opts out of the 2022-2023 seasons in the contract, $20 million out of the $28 million salary will be payed out in annual $2 million installments from 2031-2040. So if player opts out, he is payed on 11/1/2021: $8 million salary and a $2 million buyout, with the remaining salary paid out during 2031-2040. The contract binds the team to the $2 million buyout if exercised, but defers the majority of the salary interest free. If player opts out after 2022, he would receive his $32 million 2022 salary and a $15 million buyout. While this sounds like a bad deal for the team, it really isn't (in baseball salary terms at least). It is basically two year contract with a player option for just one year or three years, but in reverse 😎 The team pays the most per year if it is 2 years, due to the $15 million buyout after the second year, but the player can elect to stay for the third year, dropping the per year salary for staying the extra year. The team is also "protected" if the player bails after the first year, since they get the interest free salary deferment. I hope that clears it up a little bit more Bill Presson 1 Link to comment Share on other sites More sharing options...
EBECatty Posted June 17, 2021 Report Share Posted June 17, 2021 I don't know anything about the nuances of professional athletes' contracts, but if you converted the terms into more recognizable employment agreement language couldn't something similar work? For example: Employee signs employment agreement on January 1, 2021. It has a three-year term. His "base salary" for 2021 is $80,000. He will be paid his entire base salary for 2021 in one lump sum on December 31, 2021 (setting aside minimum wage, state wage payment laws, etc.). He also becomes entitled to a "bonus" of $200,000 on the earlier of (1) his remaining employed until December 31, 2021, or (2) his termination of employment (including voluntary resignation) before December 31, 2021. If he becomes entitled to the bonus under (1), the entire $200,000 is paid in a lump sum on December 31, 2021. If he becomes entitled to the bonus under (2), it is paid in one installment of $20,000 on December 31, 2021, and the remaining $180,000 is payable in 10 equal installments of $18,000 each in 2031-2040. In that case, there's an "opt out" (walk away before December 31 and choose not to work the 2022-2023 years) but there is no deferral election. Payment is triggered by the first to occur of a fixed date (December 31, 2021) or separation from service. The time and form of payment may be different for each of the two triggering events. There is no toggle because each separate event entitles the employee to one predetermined time and form of payment. Link to comment Share on other sites More sharing options...
Luke Bailey Posted June 18, 2021 Report Share Posted June 18, 2021 This is one of the reasons I'm not a professional sports fan. Glad some of you are though! Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
RatherBeGolfing Posted June 18, 2021 Report Share Posted June 18, 2021 8 hours ago, Luke Bailey said: This is one of the reasons I'm not a professional sports fan. Glad some of you are though! With the exception of hockey, I prefer college sports, but I don't watch much of it anymore. I do enjoy the business end of pro sports though, especially contracts. One of my old law professors worked on a database of college coach and AD contracts that was very interesting. Some of them were openly available, others obtained through FOIA requests. Link to comment Share on other sites More sharing options...
Luke Bailey Posted June 18, 2021 Report Share Posted June 18, 2021 RatherBeGolfing, databases! Now you're talking my language. Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
gc@chimentowebb.com Posted June 22, 2021 Report Share Posted June 22, 2021 Fun question. I don't see a non-compliant deferral election or a 409A failure. He gets paid with short term deferrals if he continues employment. If he quits he gets paid under a deferred schedule, presumably with no options to accelerate or postpone those payments. Link to comment Share on other sites More sharing options...
Lou S. Posted June 22, 2021 Report Share Posted June 22, 2021 Bobby Bonilla Day is coming up, July 1. These deferred payments for professional sports contracts are nothing new. And as others have siad, I'm sure they have plenty of lawyers to dot the is and cross the ts to make sure it's all legal. Bill Presson 1 Link to comment Share on other sites More sharing options...
Bill Presson Posted June 23, 2021 Report Share Posted June 23, 2021 20 hours ago, Lou S. said: I'm sure they have plenty of lawyers to dot the is and cross the ts to make sure it's all legal. While true, how many business M & A transactions have you seen where the attorney's didn't even consider the impact of the retirement plan? William C. Presson, ERPA, QPA, QKA bill.presson@gmail.com C 205.994.4070 Link to comment Share on other sites More sharing options...
RatherBeGolfing Posted June 23, 2021 Report Share Posted June 23, 2021 22 minutes ago, Bill Presson said: While true, how many business M & A transactions have you seen where the attorney's didn't even consider the impact of the retirement plan? The better question is: how many business M & A transactions have you seen where the attorney's DID consider the impact of the retirement plan? I might not even need both hands to count... Bill Presson 1 Link to comment Share on other sites More sharing options...
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