What're the Odds? - 409A flexibility? - 8/22/08

Friday, August 22, 2008

What're the Odds?

http://xtremerisa.blogspot.com/2008/08/whatre-odds.html

Did you notice how Shawn Johnson seemed genuinely happy for Nastia
Liukin after the latter's balance-beam routine, even though it might
have cost Shawn the gold? That was really nice - I thought it was great
that Shawn finally got her gold for that difficult and amazing routine
(Nastia, another apparently very nice person (name notwithstanding),
had hers already).

Still
on the Olympics, I was reflecting further on the whole Phelps thing,
and the incredible odds against his really having gotten the Amazing
Eight, given those all-but-impossible butterfly and relay finishes. I
guess in so many cases it's true that the odds that any particular
occurrence would actually take place in this world are maybe a billion
to one or more, and yet . . . each and every one of them in fact
happens. There's nothing like sports to remind us of things like that.

And,
speaking of odds, what're the odds that "they" would give away relief
under the 409A regulations not expressly set forth in the regulatory
language? ({moan/groan} - I know; these segues grow increasingly
painful.) Well, there seems to be one place where they've done so.
Under what have come to be known as the anti-"toggling" rules (of
Section 1.409A-3(c)), you can generally (unless an exception applies)
only have one time and form of payment per particular type of cap-A
triggering event.

There may be some emerging informal evidence
(rely at your own risk) that, showing some flexibility, Treasury
personnel are gravitating to what I'll call a permissible "subset"
analysis. To wit, let's say a plan has a provision that provides that
the service provider gets paid on date X, or earlier in the event of an
involuntary termination. Is that (i) an impermissible toggle (as,
frankly, I would've thought) because you've now ultimately got two
different payout times depending on the details of the separation, or
(ii) a permissible payment date applicable to one type of trigger
(separation from service, in my example), albeit a subset thereof, and
another permissible payment date applicable to a different type of
payment trigger (definite time, in my example)?

The idea is
apparently that you're not impermissibly toggling within a trigger
type, but rather providing for different rules for two different
triggers, even if only for a subset of one of the triggers. Note that
the analysis could also help, for example, with accelerations for some
but not all "disability" distributions. (Note also the express ability
to use subset treatment in the CiC context for toggling within that
trigger type, at -3(i)(5)(i).)

This approach would confer
helpful flexibility. Indeed, I always thought the regulations way
overshot the mark on toggling. The anti-toggling rule expressly scares
up and prohibits the possibility that you may write a provision that
provides for one type of distribution in the case of Monday separations
and another in the cases of all other separations. In effect, all
distinctions within a trigger are equated with that extreme theoretical
possibility. I would have preferred a regulatory approach under which
you could have provided for different times and forms of payment for
subsets of triggering types, so long as the distinctions being drawn
were for bona fide business purposes, and were not intended to serve as
a device for avoiding cap-A constraints. Well, that just didn't happen;
but now we have the possibility of some relief in this more flexible
approach to subsets where two different types of triggers are involved.

So
how far can you take this possible largess? Maybe some will be focusing
on how to draft the "involuntary" concepts and on other technical
matters. But can the whole thing be taken quite a bit further?
Consider: "Payment shall be made on December 31, 2010, or, if earlier,
on termination of employment occurring on a Tuesday." Ooh. (I've
avoided using Monday, since the regulations seem to be quite upset with
Mondays.)

On the one hand, maybe you'll say that the provision
I suggest effectively amounts to a putative distribution election. But
hasn't the cow left the barn as to this type of reasoning? As noted,
the regulations have essentially lumped all intra-trigger distinctions
together as being potentially abusive, and solved the problem of
potential abuse by universally prohibiting toggling (unless an express
exception applies). With that backdrop, it would arguably make no sense
to try to rank one type of distinction as being worse than another -
they're all equally prohibited. And so, if a flexible analysis in the
case of two different triggers results in concluding that acceleration
for a subset of a trigger is permissible, then, since the regulations
effectively view all distinctions within a trigger as comparable, it is
arguably the case that there should be no further rating or ranking of
various different possible distinctions. Put another way - if using a
subset analysis for involuntary terminations works, then the use of a
subset analysis for Tuesday terminations should work, too.

I'm
not necessarily suggesting that anyone is really going to push the
analysis quite so far. Having said that, though, there may be more
nuanced attempts to explore the use of subsets in creative ways. Maybe
it's somewhat ironic, but the regulations' use of extensive and complex
rules to address potential workarounds may wind up encouraging
exploration of just the kind of workarounds with which the regulatory
draftspeople seem to have become concerned.