OK, people, there are two 409A "good reason" analyses that are being commonly misconstrued in some circles, at least as I see it. One involves the question of whether the existence of a bad GR provision results in accelerated vesting even absent the occurrence of the GR condition. My answer: generally, no. The other is whether the occurrence of a good GR trigger, where the service provider does not pull the trigger, results in the SP's being vested. Here, the answer seems clearly to be no. Both of these points are discussed below.
1. “Bad” Good Reason and the Question of Early Vesting
Much has been made over the consequences of having a bad GR provision. The natural inclination is to think that you've essentially accelerated the vesting event. After all, what else could be the negative? To add to (what I believe to be) the confusion, there's a line in the final preamble that could be read to imply that bad GR does bring about accelerated vesting. Final Preamble, § III(J)(3) (third sentence) (containing language that could be read to expand the significance of an overbroad good reason definition provision to whether compensation is vested merely by virtue of the existence of the provision (i.e., before a good reason condition arises)), 72 Fed. Reg. at 19,247. Regardless, I think it’s clear that this result does not arise, at least where unilateral control over whether the condition is satisfied rests with the service recipient or is otherwise outside of the control of the service provider.
A closer look reveals that the significance of a bad GR definition is not that the service provider is deemed vested from the outset, but, rather, that the occurrence of the triggering event would result in deemed vesting at that time. I know I've gone over this issue in a previous post, but I want to use this opportunity to go through it again, particularly since I also want to discuss the vesting analysis where there's good GR in "(2)" below. Here's my analysis:
A. Vesting means there's no substantial risk of forfeiture. It means that, no matter what the SP does, what is done to the SP or how bad performance is, this compensation, for all intents and purposes will (or will in the discretion of the SP) be paid.
B. The key here is to understand that the idea of good GR is that the GR provision amounts to a contractual equivalent of a constructive (involuntary) termination. It's like having a liquidated-damages provision. That is, just like liquidated damages essentially substitute for a fight over how much a contact party might owe a counterparty in the event of a breach, a GR provision is a substitute for a fight over whether a SR's conduct is so egregious that the SR has in effect fired the SP. Thus (and we'll talk more about this below), GR has nothing really directly to do with vesting, but rather has to do with whether the SP has been putatively involuntarily terminated.
C. So let's take an example of bad GR. To make it a little easier, let's say that there's no employment contract at all, and, in particular, no salary assurance.*n.1* Now let's say further that the GR provision says that any reduction in base salary is GR, and let's assume that the payroll system is such that, as a practical matter, such a reduction can't happen by accident. Let's also assume that the facts will prove that this provision has been put in place in response to legitimate concerns on the part of SPs that they may be jerked around regarding their base salaries.
D. What do the regs. do with this? Arguably (and let's assume this is so for present purposes), the rules say that a slight reduction in pay, while maybe bad and legitimately the subject of protection provided by the SR, does not rise to the level of the kind of interference with the services relationship so as to support the contention that the SP has been constructively terminated if the SP exits as a result. And, arguably, that makes some sense. See also the discussion in “2” below regarding constructive termination.
E. But what has not happened, and what policy does not compel, is that the SP has somehow magically vested from the outset. Are we suggesting that the SP now knows that this compensation will be paid? Why? There's some kind of legitimate expectation of a future immaterial salary decrease? No way. The fact of the matter is that the SP has not vested. There is no inconsistency between this conclusion and the (correct) conclusion that, if a bad GR condition occurs and the SP later pulls the separation trigger, the SP is not viewed as having been fired.
F. So then what is the significance of bad GR in the S-TD context? If I’m right that there's no accelerated vesting, who cares? Well, someone cares. The correctly identified issue regarding S-TDs*n.2* is that bad GR causes you to lose S-TD treatment, and, in fact, causes you to lose S-TD treatment ab initio. Why? Because of the hypothetical, time-bending (some might say Alice in Wonderland) nature of the S-TD analysis, that's why.*n.3* To illustrate, suppose that (i) you have the salary-based bad GR provision I suggest above, (ii) salary is cut, (iii) the SP decides it's not so bad and stays put, (iv) five years later the SP is really fired, and (v) severance is promptly paid in a single sum. The idea is that, because the S-TD regulations talk in terms of the first time the substantial risk of forfeiture lapses, you never "un"-vest something that vests (in effect, by focusing on initial vesting, the regs. moot out the question of un-vesting), the vesting occurred at the point in clause (ii),*n.4* and, viewed through that prism, the payment in clause (v) is way too late. In this case, the plan is viewed as providing for this delayed payment, because the foregoing procession of events could transpire under the terms of the plan as written.*n.5*
G. It sorta has to be right that the effect of a bad GR provision is thus confined. If, conversely, there is actual accelerated vesting, then, for example, there was also the inability during transition to fix the bad GR definition, because, tautologically, the SP had already vested merely as a result of the very provision that needed to be fixed. That has to be wrong, as it was clear that bad GR was permitted to be fixed prior to vesting (a contradiction in terms if my analysis above of the effect of bad GR is not correct), and doing so would not have been possible if you surmise that bad GR accelerates vesting. See IRS Notice 2007-78, § IV(A) (Sept. 10, 2007), revoked and superseded in part, modified in part, IRS Notice 2007-86 (Oct. 22, 2007). Indeed, I understand that it was this conundrum that caused some in Treasury/IRS to agree that bad GR does not generally result in accelerated vesting.
H. While S-TD is the most significant purpose for which this question is relevant, particularly since we're now out of transition, the question is by no means moot. For example, whether or not you're vested could have a big impact on the inclusion analysis in the case of noncompliant deferred comp. There are, therefore, multiple reasons to zero in on the proper analysis.
I. Having said all that, I concede that there are cases cases in which a bad GR provision maybe does vest you out of the gate. For example, there could be a hair trigger that is so xtreme that it is effectively beyond the control of the SR. To illustrate this case, let's say that the SP can walk if on any morning coffee is late by five minutes. As the eventuality of that occurrence is probably virtually certain, the compensation is destined to vest early and may therefore be regarded as vested now. Here, the parties probably would say that, yes, the intent was to get the SP vested deferred compensation. Not an overly usual real-world fact pattern, I submit, but a useful illustration nevertheless.
J. Another permutation is the hair trigger that is within the control of the SR. As an example of this permutation, imagine a GR provision that says that if the SR moves the SP's parking space two slots over there's GR. Now that's probably woefully short of good GR, and is involves a low threshold of change; but it really can't, or at least isn't likely to, happen by accident. Here, the SP has no reason to expect or assume early vesting (absent an agreement or understanding), even though the hair trigger is easily pullable by the SR. The analysis on this one is a bit peculiar. The argument is that the SP isn't vested because, while the parking condition amounts to almost a discretionary vesting condition in the hands of the SR, it's still in the hands of the SR. On the other hand, the 409A regs. seem to eschew the notion that a condition can be unrelated to the purposes of the compensation, and still be a vesting condition. Here, though, the question is whether the discretionary accelerator actually causes a vesting acceleration before the condition occurs, not whether the condition is a good vesting condition. Indeed, if the provision were a vesting condition rather than an accelerator, would there even be a legally binding right at all? My brain hurts, and I don't care anymore about this hypothetical (maybe, instead of ”good” or “bad" GR, we’ll call this “ugly” GR?); once again, I don't really think it's overly real-world to imagine a condition that's as far away from the purpose of the compensation as this one is. For the record though, I ultimately do not think the SP is early vested in this case until the parking spot is actually moved.
2. “Good” Good Reason and the Question of Early Vesting
On the other side of this coin, there's also confusion as to what if anything transpires when a good GR condition occurs but the SP doesn't pull the separation trigger. Some wonder whether the individual has vested at that point. Let's go through that one, too.
A. The regs. provide that a service provider’s separation from service for GR may qualify as an involuntary separation from service, effectively viewing a termination therefor by the service provider as being a constructive involuntary termination. Treas. Reg. § 1.409A-1(n)(2); see Final Preamble, § III(J)(3), 72 Fed. Reg. at 19,247; see also Treas. Reg. § 1.409A-1(m) (separation pay provision also implicating the “good reason” issue). As discussed further below, it seems clear that the regulatory characterization of a good GR termination as being a constructive involuntary termination leads inexorably to the conclusion that the occurrence of the GR condition does not amount to a vesting event. While the regs. and the preambles unfortunately do not flat-out come out and say so, they do come close. In particular, the final preamble, while maybe not entirely clear and specific on this point, does seem to confirm that a benefit available only upon separation for good GR may “be treated as subject to a substantial risk of forfeiture,” Final Preamble, § V, 72 Fed. Reg. at 19,251, in which case it would then seem to follow that the mere occurrence of a good GR condition does not result in vesting.
B. So when does the vesting occur? Vesting would be viewed as occurring upon the actual termination for GR (i.e., the applicable constructive termination). If the constructive involuntary termination is the vesting event, then, until there is a separation, there is by definition no vesting event. The occurrence of the good GR condition is not treated as giving the person the vested right to quit and take severance; rather, the constructive involuntary termination - which requires there to be a termination - is the vesting event. Stated another way, absent the SP's pulling of the separation trigger, when the good GR condition occurs, nothing yet has happened in the world of 409A.
C. That's why the SP’s failing to quit leaves the whole GR condition as a nullity for 409A purposes. It's the actual voluntary termination itself which becomes, 409A-wise, a deemed involuntary termination giving the SP the right to the payment - and which in turn is therefore the vesting event. Consistently with this analysis, there was no prior vesting event, notwithstanding the occurrence of the GR condition. In effect, the occurrence of the condition merges with and into the later departure to result in one single constructively involuntary separation, and the separation is thereby not viewed as a two-step process involving (i) a vesting condition and (ii) a subsequent voluntary termination.
D. I submit that, frankly, this has to be the case. If I'm wrong about the above, then even a good GR provision would always kibosh S-TD treatment ab initio. Why do I say this? Why isn't it possible that a person can be considered to have vested when the good GR condition occurs, without doing damage ab initio to S-TD characterization? For example, maybe you would suggest that, if the SP doesn't pull the separation trigger, the eventual payment isn't S-TD, even if it were otherwise, on the basis that the payment is made too late after the vesting date. Then, you might argue that there is nothing inconsistent with (i) that result and (ii) a preservation of S-TD status for the arrangement if none of that actually comes to pass.
E. But that argument, to me, patently misconstrues the rules. As discussed above, the S-TD analysis is a form-based, highly technical, hypothetical inquiry. So, for the S-TD analysis, you don't generally worry about what really happened because you may have lost the game from the outset on the face of the documents.*n.6* The reality is that, if a payment made after an involuntary termination which follows (sufficiently) long the occurrence of a good GR condition followed by an unpulled trigger is not an S-TD, then the result is that no payment under the plan can ever be an S-TD. In other words, even a good GR provision would kibosh S-TD status ab initio - an obviously incorrect result.
F. Maybe you're asking why I'm saying this? Why would S-TD status be lost altogether merely because it would be lost if a good GR condition occurred and the SP didn't pull the separation trigger? I say it precisely because, at the risk of repeating myself, the proper S-TD question generally is whether the payment could be made late (or, in the vernacular of the 409A regs., whether the plan provides for deferred payment), not whether the payment was made late. To illustrate, I'll go back to the procession of events in "(1)(F)" above, slightly modified to make this point. Suppose that (i) you have a good GR provision under which a material reduction in compensation is GR, (ii) salary is cut, (iii) the SP decides it's not so bad and stays put, (iv) five years later the SP is really fired, and (v) severance is promptly paid in a single sum. If the event in clause (ii) were a vesting event, then the payment in clause (v) would be a late payment, and that possibility - the mere possibility - would foreclose S-TD treatment from the outset. As a result, even a good GR provision would result in the unavailability of S-TD treatment. Since that's wrong, and clearly so, we can conclusively confirm the inference that the event in clause (ii) simply cannot be a vesting event. Sometimes working back from a conclusion we know is true to disprove an errant premise works, and I would suggest that this is such a case. Res ipsa loquitur, and all that rot.
II. Still Lost? Well, You’re Almost Found
So, hopefully, you agree with my analyses above and now feel less . . . Lost; which reminds me (yeah, yeah, I know there’s no valid transition here) of the impending finale of that fine show. We're just about at the end, and, after a whole bunch of excess episodes brought about by ABC's insistence on dragging this thing out too long, Lost seems to have . . . found . . . its footing. The last couple of episodes have been terrific television, and quite interesting.
Now that the Last Episode (as they called it, but it was the Last Episode Before the Series Finale Event, or something like that) has come and gone, but, while we're still before the Series Finale Event, I want to go on the record with where I think this is heading.
As a preliminary matter, J.J. Abrams is cool. The new Trek was cool. See my prior post. This has been a fun ride. And, yes, I completely get it that I probably belie my lack of coolness by asserting that Trek and Lost are cool.
As to what I think about the Series Finale Event, I think that the surviving core characters will go on living in the flash-sideways alternative timeline (think Abrams watched Star Trek much?), but with full and current memories of the Island time line in which most of the series took place. It's sorta like - what if you got to understand what you'd be like in a Lord of the Flies-type reality, without ever having to live that reality through? Dare I say - fascinating.
I think that the idea is that the Island - or Jacob, or whatever - knew that one of the people on the fateful Oceanic flight would be a good fit for Jacob's role, and, in whatever parallel dimension made sense, created a world in which the key pool of people would get to a point where one could be selected to attend to the future of the Island. It now seems clear that taking care of the Island is important because, in some LRon/TomCruise-like fashion, there’s an emanation from the Island which shouldn’t be disturbed that fuels the souls of the world's inhabitants. And it looks like the winner is Jack, which in some ways makes sense as he seems, more than any of the others, to be at odds with his regular earthly existence.
If I'm right, Jack now has to be pulled from his home in the flash-sideways world and be brought to the Island in that timeline, because at some point . . . and I think this is the key . . . the Island timeline that's been at the heart of the series will discontinue, and merge into the flash-sideways timeline.*n.7* In other words, the characters will have all their memories, from both timelines, but will live on only in the flash-sideways timeline. This is not a Dallas-type cheat or a Newhart-type device - the timeline we've all followed doesn't disappear nunc pro tunc; it merely stops. Just as things in the past don't marginalize because they aren't any longer occurring, the Island timeline happened, and will always have happened, in an overlapping dimension. But, I’m guessing, it won’t continue. When you think about it, it's people’s memories of the past that give the past its continuing reality, and this discontinued timeline will, I'm suggesting, be fully recollected by its participants, without being denigrated by its own cessation.*n.8*
So a central question will be - how to get Jack back on the Island in the flash-sideways reality? Here's my guess. As a first step, Jack's parting shot to Locke will be to operate on Locke so that he can walk. Jack then gets on another Oceanic flight to the Island (maybe as arranged by Desmond?). The flight (here we go again, to paraphrase Mr. Coverdale) crashes back on the Island. So there Jack be.
I wouldn’t be surprised if Hurley becomes the new Widmore, puppetmastering the world from a stateside perch in concert with Jack so that the Island, and ergo the world, remain safe. And, hey - remember that someone always needs to be the caretaker (unlike in The Shining, Jack (!!!!) was not always and will not always be, the caretaker (ha ha)), but that Jack is not immortal.
When the latest plane crashes, there'll be a new crew from which Jack, the new Jacob, will select his eventual replacement. With Jack gone, I see Kate winding up with Sawyer, which seems right, and Aaron, in a role much less significant that might’ve been, winds up as their kid. Maybe Aaron winds up as some kind of significant reincarnation of someone or another. He is a blood relative of Jack's, so maybe there's an angle there. I admit it - at this point, I'm just flailing.
What should be made of the significance of a death in the Island timeline? It seems wrong that death would be a total irrelevancy, although it seems even more clear that death on the Island does not result in death in the flash-sideways timeline. My guess: if there's a death on the Island than the consciousness of the person who's died does not in the flash-sideways fully acquire the memories of the Island, although there may be some general sense of having been in the world of the Island. Jin and Sun maybe just simply go their own way in the flash-sideways world, possibly with some kind of vague Heaven Can Wait inkling of some kind of connection with each other. Sayid? I'm not sure if he's dead or alive, at all. But, maybe more importantly, if I'm right as a general matter on this, Juliet (in that she died on the Island) won't have any memory of the Island, further solidifying the Kate/Sawyer relationship.
Desmond will somehow wind up with Penny, the love of his life/lives; he's been living in multiple simultaneous dimensions for some time now, anyhow, and I’m guessing that this aspect of his existence accounts for his eerie and relaxed comfort level. As an aside, I thought Desmond’s question, "What is the point in being afraid?", in response to the question from "Locke" to Desmond as to why Desmond wasn’t scared, was priceless.
And what of Locke? I think that Locke stays alive, qua Locke, unaware (in that he died on the Island) of the specifics of the Island existence. I think that this result somehow leaves Jacob’s brother without a body, thus causing him to take Ben’s visage. Ben’s come over to the dark side anyway, so - why not? Eventually, he would presumably take the visage of one of the new Island inhabitants, as he did Locke’s. I do think that Jacob’s brother has to stay in esse, whether as black smoke (forgive me, but I won’t use the phrase, “Smoke Monster”) or as a human incarnation, because the risk he poses to the light at the center of the Island is, after all, Jack's new raison d'être.
Good stuff, although I have to admit that I am not looking forward to Lost II. “II” tired, I guess. Good night.
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1. Personally, as I've noted in a previous post, I think that the analysis of a provision under which an immaterial reduction in compensation is GR should be much different in the face of a contractual obligation not to reduce salary to any extent.
2. There are other and more straightforward adverse results to having a bad GR definition, such as compromising the plan's characterization as providing for payments only upon involuntary termination. See Treas. Reg. § 1.409A-1(n)(2); Final Preamble, § III(J)(3), 72 Fed. Reg. at 19,247; see also Treas. Reg. § 1.409A-1(m) (separation pay provision also implicating the “good reason” issue).
3. Temporal distortions abound! See also my prior
4. I still think that it might be possible to argue that, at least under certain provisions, the occurrence of the bad GR condition should not be viewed as a vesting event because, echoing a constructive-receipt analysis, the service provider would have to terminate (and forego future compensation) in order to benefit from the occurrence of the condition. But I acknowledge that we’re dealing with an SRoF analysis, not a CR analysis, and it does not appear that the two are being viewed analogously on this point by regulatory personnel.
5. Note that the foregoing would not be enough to truncate the extent to which you can slice and dice, if actual separation is early enough in the year, because the final regs. as technically corrected treat the time of payment emanating from the time of actual separation, effectively allowing you to take the actual termination date as it comes to you, and creating an exception to the approach that otherwise gives rise to the need to go down the Where's-Waldo find-the-bad-hypothetical route I go down above.
6. There are exceptions. If you've got a plan that would provide for S-TDs but for an actual late payment, then the actual lateness of the payment could cause it not to be an S-TD. But that's an actual-lateness question, whereas the question being explored in text is whether there's been a premature vesting event. (Also, note that, on another matter that causes enormous confusion, the plan does not have to foreclose late payment - it simply can't affirmatively provide for late payment. This is a straightforward clarification to the proposed rules, and example 2 of Section 1.409A-1(b)(iv)(iii) of the Regulations succeeds in leaving absolutely no doubt about that favorable result.)
7. We can leave for another day whether this merger of timelines is more or less interesting that the merger of a GR condition with and into a subsequent separation discussed in “2(C)” in the discussion in “I” above.
8. This almost (but not exactly) reminds me of the experience of the Dennis Weaver character in a mindbending Twilight Zone dream episode.
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