This is a unique situation and I'm having a hard time finding a resource. Executive of startup agrees to defer 50% of his salary each year for the term of his agreement. The 50% is payable upon a change of control (I didn't draft the agreement). Executive realizes that company is in bad shape and that the accrual of this deferred comp makes it a poor target. He wants to surrender or cancel these prior deferrals (and doesn't want anything in return). See any problems with amending his employment agreement to accomplish this? Of course, if they agreed to cancel the deferrals and pay out some amount, then of course its an acceleration, but that's not the case...they aren't paying out any of the deferrals and never will...they just want to document this by amending the agreement.

Problems?

I don't see a 409A problem, although if he is the sole owner query whether IRS might question whether there was no substance to it and its sole purposes was to attempt to convert ordinary income into more long term capital gain. Probably not much of a risk unless they have an offer on the table already.

Another thought, perhaps an overly simplistic one: why bother? If the liability for the deferred comp. is X, and a buyer would pay Y for the company if the liability disappeared, why should a buyer care if it pays Y for the company free of the liability or Y-X for the company with the liability (unless, of course, X is greater than Y)?

Any compensation in any form that the individual receives after the cancellation, other than amounts specified in a pre-deferral contract, are under suspicion as accelerated deferred compensation payments. Raise? Bonus? Options? Stock? Can he live with his predetermined compensation package? Depending on the terms of his deferral election, he may not be able to cancel the future deferral of a portion of his predetermined compensation.

Great point. This isn't something being considered now, but I'm sure if he got a significant bonus in the future (larger than what he'd received before), the IRS would question it under audit...though I don't seem to see any authority for that presumption?

Treas. Reg. section 1.409A-3(f).