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Accelerating vesting/payment Short-term deferral exception


Moosen14

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I wanted to revisit a post that I reviewed  from a few years ago relating to the acceleration of vesting/payment that is appropriately treated as a short-term deferral (see prior post here https://benefitslink.com/boards/index.php?/topic/63098-accelerating-payments-under-short-term-deferral-exception/ ). The question I have is generally whether company discretion to accelerate the vesting payment could serve as a premise the payment is no longer subject to a substantial risk of forfeiture. below is a brief fact-pattern of a situation that may present this issue, of course the facts are exhaustive so add in any points or items that may impact the analysis. 

Example - under a long-term bonus plan an employee is entitled to as a bonus payment of a portion of net company earnings for years 1 with 50% of the bonus being payable on 3/15 year 2 and 50% payable on 3/15 year three. The plan provides the employee must be employed on the payment date to receive the bonus. An employee wants to retire 1/1 Year three, and the company decides to move up the vesting date and payment of the second 50% payable on 3/15 to the employee's retirement. 

My understanding from the previous post is that since the payment was not covered under 409A to begin with, as a short term deferral, the acceleration is permissible and not a 409A violation. My question however, is whether the employer's discretion to accelerate the payment could be argued to no longer make the amounts subject to a substantial risk of forfeiture due to the risk of forfeiture not being substantial due to the company's discretion to voluntary accelerate the payments, cause the payment to fall outside of the short-term deferral. I know this is a facts and circumstances test, but does anyone have any insight on whether the company discretion may impact the substantial risk of forfeiture analysis? Thanks in advance for your time in reviewing and responding!

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  • 1 month later...

This should generally not blow the short term deferral exception.  You could look at it this way -- the participant lost his benefit under the plan when he retired early and the company voluntarily decided to give a payment anyway.  It's not a substitution, since the participant isn't giving up anything -- his benefit was forfeited.  Even if it was a substitution, trading one short term deferral payment for another doesn't blow the exception.

However, like you said, there are some facts and circumstances considerations.  If the company regularly accelerates, the IRS could view that as an indication there there is no real substantial risk of forfeiture.  Likewise, acceleration cannot be under the control of the participant him/herself -- if the participant has any say over whether there is acceleration, that will almost certainly blow the short term deferral exception.  Other than that, it should be an issue.  You also want to make sure the acceleration doesn't happen too early.  For example, if the company accelerates vesting 12/31/2021, the person retires in 2022, and the payment occurs after 3/15/2022, it will not longer be a short term deferral.

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