Is this a prohibited toggle?

[HTO]

A deferred compensation plan allows a company's directors to elect to defer a portion of their director fees.  The deferred amounts are distributed upon the earlier of a 409A change of control or a director's separation from service.  At the time of an election to defer, the director can elect to receive payments upon a separation from service either in a lump sum or in annual installments.  The plan provides that if installments are elected, the number of annual installments will equal the number of full calendar years the director was a participant in the plan, up to 10 installments.  So, for example, if a director has a separation from service after 6 years in the plan, he or she will receive 6 annual installments, and if the director has a separation from service after 12 years in the plan, he or she will receive 10 annual installments.

This seems like a violation of the toggle rule because it provides for different times and forms of payment for the same 409A payment event, and I don't believe that any of the exceptions apply, but I'd love to entertain an argument that it's permissible.

[M Gerald]

I agree that this this sounds like it violates the toggle rule. It probably would be permissible if each year of service simply adds another installment without changing the value of the prior installments, e.g., going from $600,000 over 6 equal annual installments to $1 million over 10 equal annual installments.   

[gc@chimentowebb.com]

Seems OK to me, espeically if each installment is a separate payment. Year 1 - I earn a right to a payment at separation. Year 2 - I earn a right to a second payment paid in the 2nd year after termination. Year 3 - I earn a right to third payment 3 years after separation, etc., etc. In other words, each year of service creates a separate deferred payment. 

As a follow up, I was asked what if the annuity form is not separate payments but a single payment? Stuill no problem. The formula is fixed, definitely determinable AT THE TIME OF THE PAYMENT EVENT, and does not allow for any discretion. No 409A problem per § 1.409A-3(b) :

..." a schedule that is objectively determinable and nondiscretionary based on the date the event occurs and that would qualify as a fixed schedule under paragraph (i)(1) of this section if the payment event were instead a fixed date, provided that the schedule must be fixed at the time the permissible payment event is designated."  

[Peter Gulia]

Here’s another way to think about this:

Which adviser advises which advisee?

How confident must a conclusion be to serve one’s advisee’s purposes?

How much must an adviser explain to steer clear of malpractice and negligent-communication risks?

Recognize that tax law consequences for an employee or service provider might not be entirely aligned with consequences for an employer or service recipient.

Recognize that an employee or service provider often does not get the employer’s or service recipient’s indemnity if a plan does not get a desired tax treatment.

[Artie M]

I think there is a problem.  Initially, @M Gerald's view seems problematic because the directors appear to be able to defer different amounts each year ("allows a company's directors to elect to defer a portion of their director fees") so there are no "consistent" amounts to support that take.   @gc@chimentowebb.com's view seems more plausible because his view is premised on each year's deferral being a separately identifiable amount under a plan, which they are.  The anti-toggling rules apply to each separately identifiable amount.  It is very typical of deferred compensation plans that permit service providers to defer all or a portion of their compensation for an upcoming year to have separate elections for each of those "tranches".   However, the installment form of payment with the 10 installment limit throw a wrench into this argument, at least to me, because with the 10-installment form of payment it does not seem that the director's are making different elections for each tranche.  Also, because they are "installments," generally that would mean there are 10 equal annual installments (equal inasmuch as they can be with potential earnings/losses of principal in later years).  So, the issue again comes back to there is no "consistent" deferral amount (plus the additional years of deferral after 10) that would support the installments.  So, just spit balling here but there seems to be an issue because a separately identifiable payment type of argument doesn't seem to fit the OP's facts.

I generally also agree with @Peter Gulia's sentiments but these facts involve a directors' plan ...

 

 

[HTO]

On 2/6/2026 at 9:11 PM, gc@chimentowebb.com said:

Seems OK to me, espeically if each installment is a separate payment. Year 1 - I earn a right to a payment at separation. Year 2 - I earn a right to a second payment paid in the 2nd year after termination. Year 3 - I earn a right to third payment 3 years after separation, etc., etc. In other words, each year of service creates a separate deferred payment. 

Thanks for the response.  Here are some additional facts that may or may not affect your answer.  A participant can elect to defer or not to defer each year, but the election regarding the form of distribution (lump sum or installments) is made with the initial deferral election and, once made, is permanent and applies to all amounts deferred (i.e., a participant can't elect a lump sum distribution with respect to one year's deferrals and installments with respect to another year's deferrals).  Each installment is NOT designated as a separate payment under the plan terms.  

I agree that there can be different times and forms of payments for separately identifiable amounts, but in this case I don't see how the amounts are separately identifiable, and I don't see much difference between this and the example of a violation in the regulations, where there is one payment schedule if a separation from service occurs on a Monday and a different payment schedule if a separation occurs on any other day of the week.  In both cases, the service provider and service recipient have the ability to manipulate the time of payment by determining when the separation will occur.

[Peter Gulia]

Although a nonexecutive director of an organization is not its employee, one is a service provider.

Much in the § 409A rules is conceptually similar whether the relationship is employee-employer or service provider and service recipient.

[Artie M]

@Peter GuliaI understand that service provider encompasses a broader group than just employee.  I simply meant that the dynamics of determining advisee/advisor issues can be extremely different depending on the character of the service provider.  if advising a company regarding an individual employee and the tax consequences under 409A, one often notes the adverse tax consequences, at least at this time, are almost entirely on the employee.  In which case, the employer might take a riskier path than another.  The dynamics change drastically if you tell the same company client the adverse tax consequence would land on the directors even if you have language stating the company doesn't guarantee any tax consequences and has no liability, etc..  That's all I was saying.  

[Peter Gulia]

Artie M, now I see your observation.

An organization that otherwise might tolerate some risk about a tax treatment of an employee’s compensation might be more cautious about a director’s compensation, because the directors govern the organization. Likewise, the organization’s C-suite executives, including the general counsel, might seek to maintain the directors’ respect, trust, and good graces, and might find that doing so is in the organization’s proper interests.

Also, an organization’s caution regarding a director’s risk might be influenced by knowing that some, many, or all the directors each engages one’s personal counsel, independent of the organization’s inside and outside counsel.

Further, many law firms could face positional or issue conflicts (even if not conduct-violating, at least practically) if they would provide arguably inconsistent advice even to differently situated clients.