This was a companion memo to 2020-0850281I7 and was issued to clarify that prior statements did not indicate “that solely forward-looking or future-orientated incentive plans with certain characteristics are not salary deferral arrangements (‘SDAs’).” The Directorate noted:
- Prior statements “made strictly in the context of ATR-45 SAR Plans” should not be “misconstrued as implying that a right to receive an amount after the end of a particular year is not created until the units of any given incentive plan are exercisable… .”
- A determination at any year end as to whether the rights of a plan participant give rise to a SDA turns on whether (i) the employee has a right to a deferred amount (which may be the case even for an ATR-45 SAR plan); and (ii) the purpose test is met (which generally is not considered to be the case for an ATR-45 SAR plan, and is a question of fact for other plans). Respecting (i), “it is possible for a right to a deferred amount to arise under an incentive plan even before the units of that plan are exercisable.”
- “The fact that units in other types of incentive plans have no intrinsic value when granted is not a sufficient basis to conclude that the plan is not a SDA at inception, nor to conclude that the plan need not be tested on an annual basis.”
- “Moreover, any prior statements to the effect that a particular incentive plan does not give rise to a SDA because it is future-oriented at time of grant should not be construed as a categorical statement that all future-oriented plans fall outside the scope of the SDA rules.”
- “… [A]n incentive plan can be a SDA before the final value of the units has been determined at the occurrence of the triggering event. The fact that the value of the units of an incentive plan is subject to change prior to the occurrence of a triggering event does not, in and of itself, give rise to an indeterminable amount before the occurrence of the triggering event. On the contrary, we expect that a deferred amount can be determined at any given year end after the issuance of the units, even if at that time the unit is not exercisable. If the design of an incentive plan results in a positive value of the respective units at any given year end after the issuance of the units, the employee has, at that time, a right to receive an amount after that year that is attributable to services rendered by the employee, notwithstanding the fact that this amount may fluctuate from year to year.”