For purposes of the STD exception, is a life annuity considered a "single payment" such that there is no deferred compensation where the annuity is scheduled to commence (and actually commences) within 2.5 months following the end of the service recipient's fiscal year?

A life annuity is clearly a single payment for purposes of subsequent changes to the time/form of payment (1.409A-2(b)(2)(ii)), but what about for purposes of the STD rule?

Anyone have any thoughts or know of any guidance that I'm unaware of?

I believe the STD exception refers to "all amounts received" by the 2.5-month deadline , or something like that, rather than a "single payment." In any event, your idea clearly does not work, I am just not sure of the precise explanation (without reviewing the regulation).

1.409A-1(b)(4) (Short term deferrals) provides that "(i) In general. A deferral of compensation does not occur if the plan under which a payment (as defined in section 1.409A-2(b)(2)) is made [1] does not provide for a deferred payment and [2] the service provider actually or constructively receives such payment on or before the last day of the applicable 2 1/2 month period... The following fules apply for purposes of this paragraphy (b)(4)(i):...

(F) This paragraph (b)(4)(i) is applied separately to each payment (as defined in section 1.409A-2(b)(2)) required
to be made under a plan.

(G) If a plan provides for a deferred payment with respect to part of a payment (for example a life annuity or a series of
installment amounts treated as a single payment), the plan provides for a deferred payment with respect to the
entire payment." Emphasis added.

1.409A-2(b)(2)("Definition of payments for purposes of subsequent changes in the time or form of payment) - ...

(ii) Life annuities. - (A) In general. The entitlement to a life annuity is treated as the entitlement to a single payment
." Emphasis added.

Therefore, if a life annuity is treated as a single payment and, pursuant to its terms, commences within 2.5 months of the end of the employer's fiscal year, then it would seem to qualify as a short term deferral.

However, I can also interpret paragraph (G) as supporting the opposite conclusion. This conclusion is more logical, as the first would provide an opportunity to circumvent the acceleration restrictions in a way that would seem inconsistent with section 409A.

Having typed up this analysis, I am leaning heavily toward the latter conclusion, that commencing a life annuity wtihin the STD period does not qualify as a STD.

Agree?

The following language in the short-term deferral rule provides that one of the requirements to be a short-term deferral is that the payment must be includible in income within the 2 1/2 month period:

"(4) Short-term deferrals--(i) In general. A deferral of compensation does not occur under a plan with respect to any payment (as defined in § 1.409A-2(b)(2)) that is not a deferred payment, provided that the service provider actually or constructively receives such payment on or before the last day of the applicable 2 1/2 month period. The following rules apply for purposes of this paragraph (b)(4)(i):
"(A) * * * *
"(B) A payment is treated as actually or constructively received if the payment is INCLUDIBLE IN INCOME, including if the payment is includible in income under section 83, the economic benefit doctrine, section 402(b), or section 457(f)."

So the annuity cannot be a short-term deferral unless the value of the annuity is includible in income within the 2 1/2 month period.

Thanks. I think I have a good argument that the value of the annuity was constructively received within the 2.5 month period. That would satisfy that part of the short term deferral rule. I have a controlling shareholder/president who was awarded an annuity that could have been payable as a lump sum at the election of his subordinate officers.

I'm having difficulty with the other requirement, that the plan "not provide for a deferred payment." For this purpose, "payment" is defined in 1.409A-2(b)(2), par (H) of which defines a life annuity as a single payment (supports my position), but (G) states that "[i]f a plan provides for a deferred payment with respect to part of a payment (for example a life annuity...), the plan provides for a deferred payment with respect to the entire payment."

I suppose I may be able to argue that "payment" in par (G) refers to a payment that's includible in income when paid and not to an annuity the present value of which is taxed in the STD period.

Agree?

I think this example is on point.

Example 7. On November 1, 2008, Employer T grants Employee G a legally binding right to the payment of a life annuity with the first annuity payment on November 1, 2013, provided that Employee G continues performing services for Employer T continuously through November 1, 2013. Because the life annuity is treated as a single payment, and because all payments of the life annuity may not occur during the applicable 2 ½ month period, the plan provides for a deferred payment and none of the amounts payable under the annuity will qualify as a short-term deferral, so that section 409A applies to all amounts that are payable under the plan.

This is helpful because the life annuity is regarded as a single payment. In this example, however, it's possible that a payment takes place after the short-term deferral period. That's different than my situation, in which the life annuity commences during the short-term deferral period.

Ex 7 would be more helpful if it said "Because the life annuity is treated as a single payment, and because the life annuity will not commence ] all payments of the life annuity may not occur during the applicable 2 1/2 month period, the plan provides for a deferred payment..."