25 percent match created a substantial risk of forfeiture under § 409A

Plain-English summary

An employee elected to defer salary, and the employer added matching contributions equal to 25 percent of each salary reduction. Payment of both amounts depended on the employee continuing to provide substantial services through a specified date. IRS Counsel advised that the deferred salary could be treated as subject to a substantial risk of forfeiture under § 409A because the employer's match made the present value of the deferred amount 25 percent greater than the salary the employee could have received. Counsel concluded that this was a material increase, so the combined salary deferrals and employer match remained subject to the service condition until the specified date.

Ruling snapshot

• Question: Did a 25 percent employer match make the deferred compensation materially greater so that the service condition created a substantial risk of forfeiture under § 409A?
• Outcome: advice given, the combined deferred salary and employer match were subject to a substantial risk of forfeiture
• Key authorities: IRC § 409A; Treas. Reg. § 1.409A-1(d)

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
memorandum
Number: 201645012
Release Date: 11/4/2016
CC:TEGE:EB:EC:JBRichards
POSTU-124817-16

UILC:     409A.00-00

date:    September 29, 2016

to:      Mark Hulse
         Division Counsel
         (Tax Exempt & Government Entities)

from:    Stephen Tackney
         Deputy Associate Chief Counsel (Employee Benefits)
         (Tax Exempt & Government Entities)


subject: Matching Contributions 409A Substantial Risk of Forfeiture

This Chief Counsel Advice responds to your request for assistance. This advice may
not be used or cited as precedent.


FACTS

On November 1, 2014, an employee entered into an agreement to defer $15,000
of the employee’s salary that would otherwise have been paid during 2015, with
payment of the deferred amount to be made as a lump-sum payment on January 1,
2018, but only if the employee continues to provide substantial future services until
December 31, 2017. Under the agreement the employee’s salary is reduced by $600
each biweekly pay period (so 26 x $600 or $15,600) and the employer credits matching
amounts to the employee’s deferred compensation account of 25% of each salary
reduction (so 26 x ($600 / 4) or $3,900) for a total amount deferred of $19,500. The
matching amounts are credited each time a salary reduction amount is credited, which
is the time the salary reduction amount would otherwise be paid as salary.

ISSUE

May the salary that the employee could have elected to receive as compensation
be treated as subject to a substantial risk of forfeiture under section 409A through
December 31, 2017, if as part of the imposition of the service requirement through

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December 31, 2017, the employer provides a matching contribution resulting in a 25%
increase in the present value of the amount of deferred compensation?

CONCLUSION

Yes, an amount that an employee could have elected to receive as salary may
be treated as subject to a substantial risk of forfeiture under section 409A if the
employer provides a matching contribution resulting in a 25% increase in the present
value of the amount deferred.

LAW AND ANALYSIS

Section 409A generally provides that if certain requirements related to the timing
of elections, distributions, and funding are not met at any time during a taxable year,
amounts deferred under a nonqualified deferred compensation plan for that year and all
previous taxable years are currently includible in gross income to the extent not subject
to a substantial risk of forfeiture and not previously included in gross income. Amounts
includible in income under section 409A are also subject to two additional taxes under
section 409A(a)(1)(B).

Treas. Reg. §1.409A-1(d)(1) provides that a substantial risk of forfeiture exists if
the receipt of deferred compensation is conditioned on the performance of substantial
future services or the occurrence of a condition related to a purpose of the
compensation, and the possibility of forfeiture is substantial. In general, the addition of
any risk of forfeiture after the legally binding right to the compensation arises, or any
extension of a period during which compensation is subject to a risk of forfeiture, is
disregarded for purposes of determining whether such compensation is subject to a
substantial risk of forfeiture. However, an amount will be considered subject to a
substantial risk of forfeiture beyond the date or time at which the recipient otherwise
could have elected to receive the amount of compensation if the present value of the
amount subject to a substantial risk of forfeiture is “materially greater” than the present
value of the amount the recipient otherwise could have elected to receive absent such
risk of forfeiture.

Generally, under Treas. Reg. §1.409A-1(d), the addition of a risk of forfeiture is
disregarded. However, the addition of a substantial risk of forfeiture is respected if the
present value of the amount subject to the substantial risk of forfeiture is “materially
greater” than the present value of the amount the service provider otherwise could have
elected to receive absent such risk of forfeiture. Under the facts here, the present value
of the amount deferred by the employee is 25% greater than the amount the employee
otherwise could have received absent the addition of the substantial risk of forfeiture. A
25% increase in the present value of the amount a service provider could have received
absent the risk of forfeiture is a material increase. Accordingly, the combined deferred
amount of 2015 salary ($15,600) plus the deferred amount of the employer’s matching
contribution ($3,900) is subject to a substantial risk of forfeiture for purposes of section
409A until December 31, 2017.

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This writing may contain privileged information. Any unauthorized disclosure of
this writing may undermine our ability to protect the privileged information. If disclosure
is determined to be necessary, please contact this office for our views.

Please call ---------------------- if you have any further questions.




_____________________________
Stephen B. Tackney
Deputy Division Counsel/Deputy Associate Chief
Counsel (Employee Benefits)
(Tax Exempt & Government Entities)