An employee was promised continued medical coverage for life after retirement. This is going to be a taxable benefit and would not appear to meet any 409A exclusion after the COBRA exclusion period. This benefit will start in 2008. Does anyone see anything inherently wrong with modifying the agreement by 12/31/07 under the transition rules to permit a total cash out in 2008 equal to the actuarial equivalent of the cost of continued medical coverage?

At first glance, I don't see a problem, but I'm not sure why you are cashing it out. Just because it doesn't meet an exclusion after the COBRA exclusion period doesn't mean it can't be done. Is there some other non-409A reason for cashing it out?

Yes, they would prefer to pay him out and be done with it.