[Federal Register Volume 72, Number 146 (Tuesday, July 31, 2007)]
[Rules and Regulations]
[Pages 41620-41623]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-14624]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9321]
RIN 1545-BE79


Application of Section 409A to Nonqualified Deferred Compensation 
Plans; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendments.

-----------------------------------------------------------------------

SUMMARY: This document contains corrections to final regulations that 
were published in the Federal Register on Tuesday, April 17, 2007 (73 
FR 19234), relating to section 409A.

DATES: This correction is effective July 31, 2007.

FOR FURTHER INFORMATION CONTACT: Stephen Tackney, (202) 622-9639 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    The final regulations that are subject to these corrections are 
under section 409A of the Internal Revenue Code.

Need for Correction

    As published, final regulations (TD 9321) contain errors that may 
prove misleading and are in need of clarification.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.


0
Accordingly, 26 CFR part 1 is corrected by making the following 
correcting amendments:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read as 
follows:

    Authority: 26 U.S.C. 7805 * * *


Sec.  1.409A-1  [Corrected]

0
Par. 2. Section 1.409A-1 is amended as follows:
0
1. Paragraph (a)(3)(i) is revised.
0
2. The first and second sentences of paragraph (a)(5) are revised.
0
3. The first sentences of paragraphs (b)(4)(i) and (b)(4)(i)(D) are 
revised.
0
4. Examples 3 and 5 in paragraph (b)(4)(iii) are amended by revising 
the last sentences of the paragraphs.
0
5. Paragraph (b)(5)(iv)(B)(2)(ii) is revised.
0
6. In paragraph (b)(8)(iii) the first sentence is revised.
0
7. The first sentence of paragraph (b)(9)(v)(A) is revised.
0
8. Paragraph (c)(2)(i)(H) is revised.
0
9. Paragraph (c)(3)(viii) is revised.
0
10. The last sentence of paragraph (f)(1) is revised.
0
11. The ninth sentence of paragraph (h)(1)(ii) is revised.
0
12. The first sentence of paragraph (i)(2) is revised.


Sec.  1.409A-1  Definitions and covered plans.

    (a) * * *
    (3) * * *
    (i) * * * With respect to an individual for a taxable year, the 
term nonqualified deferred compensation plan does not include any 
scheme, trust, arrangement, or plan maintained with respect to such 
individual, to the extent contributions made by or on behalf of such 
individual to such scheme, trust, arrangement, or plan, or credited 
allocations, accrued benefits, earnings, or other amounts constituting 
income, of such individual under such scheme, trust, arrangement, or 
plan, are excludable by such individual for Federal income tax purposes 
pursuant to any bilateral income tax convention, or other bilateral or 
multilateral agreement, to which the United States is a party.
* * * * *
    (5) * * * The term nonqualified deferred compensation plan does not 
include a plan, or a portion of a plan, to the extent that the plan 
provides bona fide vacation leave, sick leave, compensatory time, 
disability pay, or death benefits. For these purposes, the terms 
``disability pay'' and ``death benefits'' have the same meanings as 
provided in Sec.  31.3121(v)(2)-1(b)(4)(iv)(C) of this chapter, 
provided that for purposes of this paragraph, such disability pay and 
death benefits may be provided through insurance and the lifetime 
benefits payable under the plan are not treated as including the value 
of any taxable term life insurance coverage or taxable disability 
insurance coverage provided under the plan. * * *
    (b) * * *
    (4) * * * (i) In general. A deferral of compensation does not occur 
under a plan with respect to any payment (as defined in Sec.  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. * * *
* * * * *
    (D) A payment is a deferred payment if it is made pursuant to a 
provision of a plan that provides for the payment to be made or 
completed on or after any date, or upon or after the occurrence of any 
event, that will or may occur later than the end of the applicable 2\1/
2\ month period, such as a separation from service, death, disability, 
change in control event, specified time or schedule of payment, or 
unforeseeable emergency, regardless of whether an amount is actually 
paid as a result of the occurrence of such a payment date or event 
during the applicable 2\1/2\ month period. * * *
* * * * *
    (iii) * * *
    Example 3. * * * The bonus plan will not be considered to have 
provided for a deferral of compensation if the bonus is paid or made 
available to Employee C on or before March 15, 2011.
* * * * *
    Example 5. * * * The bonus plan provides for a deferral of 
compensation, and will not qualify as a short-term deferral regardless 
of whether the bonus is paid or made available on or before March 15, 
2011 (and generally any payment before June 1, 2011 would constitute an 
impermissible acceleration of a payment).
* * * * *
    (5) * * *
    (iv) * * *
    (B) * * *

[[Page 41621]]

    (2) * * *
    (ii) A valuation based upon a formula that, if used as part of a 
nonlapse restriction (as defined in Sec.  1.83-3(h)) with respect to 
the stock, would be considered to be the fair market value of the stock 
pursuant to Sec.  1.83-5, provided that such stock is valued in the 
same manner for purposes of any transfer of any shares of such class of 
stock (or any substantially similar class of stock) to the issuer or 
any person that owns stock possessing more than 10 percent of the total 
combined voting power of all classes of stock of the issuer (applying 
the stock attribution rules of Sec.  1.424-1(d)), other than an arm's 
length transaction involving the sale of all or substantially all of 
the outstanding stock of the issuer, and such valuation method is used 
consistently for all such purposes, and provided further that this 
paragraph (b)(5)(iv)(B)(2)(ii) does not apply with respect to stock 
subject to a stock right payable in stock, where the stock acquired 
pursuant to the exercise of the stock right is transferable other than 
through the operation of a nonlapse restriction.
* * * * *
    (8) * * *
    (iii) * * * A tax equalization agreement does not provide for a 
deferral of compensation if payments made under such tax equalization 
agreement are made no later than the end of the second taxable year of 
the service provider beginning after the taxable year of the service 
provider in which the service provider's U.S. Federal income tax return 
is required to be filed (including any extensions) for the year to 
which the compensation subject to the tax equalization payment relates, 
or, if later, the second taxable year of the service provider beginning 
after the latest such taxable year in which the service provider's 
foreign tax return or payment is required to be filed or made for the 
year to which the compensation subject to the tax equalization payment 
relates. * * *
* * * * *
    (9) * * *
    (v) * * *
    (A) * * * To the extent a separation pay plan (including a plan 
providing payments upon a voluntary separation from service) entitles a 
service provider to payment by the service recipient of reimbursements 
that are not otherwise excludible from gross income for expenses that 
the service provider could otherwise deduct under section 162 or 
section 167 as business expenses incurred in connection with the 
performance of services (ignoring any applicable limitation based on 
adjusted gross income), or of reasonable outplacement expenses and 
reasonable moving expenses actually incurred by the service provider 
and directly related to the termination of services for the service 
recipient, such plan does not provide for a deferral of compensation to 
the extent such rights apply during a limited period of time 
(regardless of whether such rights extend beyond the limited period of 
time). * * *
* * * * *
    (c) * * *
    (2) * * *
    (i) * * *
    (H) All deferrals of compensation with respect to that service 
provider under all plans of the service recipient to the extent such 
plans are stock rights (as defined in paragraph (l) of this section) 
subject to section 409A, are treated as deferred under a single plan.
* * * * *
    (3) * * *
    (viii) * * * The plan aggregation rules of paragraph (c)(2)(i) of 
this section do not apply to the written plan requirements of this 
paragraph (c)(3). Accordingly, deferrals of compensation under an 
agreement, method, program, or other arrangement that fails to meet the 
requirements of section 409A solely due to a failure to meet the 
written plan requirements of this paragraph (c)(3) are not aggregated 
with deferrals of compensation under other agreements, methods, 
programs, or other arrangements that meet such requirements.
* * * * *
    (f) * * *
    (1) In general. * * * The term service provider generally includes 
a person who has separated from service (a former service provider).
* * * * *
    (h) * * *
    (1) * * *
    (ii) Termination of employment. * * * Notwithstanding the foregoing 
provisions of this paragraph (h)(1)(ii), a plan may treat another level 
of reasonably anticipated permanent reduction in the level of bona fide 
services as a separation from service, provided that the level of 
reduction required must be designated in writing as a specific 
percentage, and the reasonably anticipated reduced level of bona fide 
services must be greater than 20 percent but less that 50 percent of 
the average level of bona fide services provided in the immediately 
preceding 36 months. * * *
* * * * *
    (i) * * *
    (2) * * * For purposes of identifying a specified employee by 
applying the requirements of section 416(i)(1)(A)(i), (ii), and (iii), 
the definition of compensation under Sec.  1.415(c)-2(a) is used, 
applied as if the service recipient were not using any safe harbor 
provided in Sec.  1.415(c)-2(d), were not using any of the elective 
special timing rules provided in Sec.  1.415(c)-2(e), and were not 
using any of the elective special rules provided in Sec.  1.415(c)-
2(g). * * *
* * * * *


Sec.  1.409A-2  [Corrected]

0
Par. 3. Section 1.409A-2 is amended as follows:
0
1. The first sentences of paragraphs (a)(6) and (a)(9) are revised.
0
2. The third sentence of paragraph (b)(2)(ii)(A) is revised.
0
3. A new sentence is added after the third sentence of paragraph 
(b)(2)(ii)(A).


Sec.  1.409A-2  Deferral elections.

    (a) * * *
    (6) * * * In the case of a service recipient with a taxable year 
that is not the same as the taxable year of the service provider, a 
plan may provide that fiscal year compensation may be deferred at the 
service provider's election if the election to defer such compensation 
is made not later than the close of the service recipient's taxable 
year immediately preceding the first taxable year of the service 
recipient in which any services are performed for which such 
compensation is payable. * * *
* * * * *
    (9) * * * If a nonqualified deferred compensation plan provides 
that the amount deferred under the plan is determined under the formula 
for determining benefits under a qualified employer plan (as defined in 
Sec.  1.409A-1(a)(2)) or a broad-based foreign retirement plan (as 
defined in Sec.  1.409A-1(a)(3)(v)) maintained by the service recipient 
but applied without regard to one or more limitations applicable to the 
qualified employer plan under the Internal Revenue Code or to the 
broad-based foreign retirement plan under other applicable law, or that 
the amount deferred under the nonqualified deferred compensation plan 
is determined as an amount offset by some or all of the benefits 
provided under the qualified employer plan or the broad-based foreign 
retirement plan, an increase in amounts deferred under the nonqualified 
deferred compensation plan that results directly from the operation of 
the qualified employer plan or broad-based foreign retirement plan 
(other than service provider actions described in paragraphs 
(a)(9)(iii) and (iv) of this section) including changes in

[[Page 41622]]

benefit limitations applicable to the qualified employer plan or the 
broad-based foreign retirement plan under the Internal Revenue Code or 
other applicable law does not constitute a deferral election under the 
nonqualified deferred compensation plan, provided that such operation 
does not otherwise result in a change in the time or form of a payment 
under the nonqualified deferred compensation plan, and provided further 
that such change in the amounts deferred under the nonqualified 
deferred compensation plan does not exceed that change in the amounts 
deferred under the qualified employer plan or the broad-based foreign 
retirement plan, as applicable. * * *
* * * * *
    (b) * * *
    (2) * * *
    (ii) * * *
    (A) * * * For purposes of Sec.  1.409A-1, this section, and 
Sec. Sec.  1.409A-3 through 1.409A-6, the term life annuity means a 
series of substantially equal periodic payments, payable not less 
frequently than annually, for the life (or life expectancy) of the 
service provider, or a series of substantially equal periodic payments, 
payable not less frequently than annually, for the life (or life 
expectancy) of the service provider, followed upon the death or end of 
the life expectancy of the service provider by a series of 
substantially equal periodic payments, payable not less frequently than 
annually, for the life (or life expectancy) of the service provider's 
designated beneficiary (if any). Notwithstanding the foregoing, a 
schedule of payments does not fail to be an annuity solely because such 
plan provides for an immediate payment of the actuarial present value 
of all remaining annuity payments if the actuarial present value of the 
remaining annuity payments falls below a predetermined amount, and the 
immediate payment of such amount does not constitute an accelerated 
payment for purposes of Sec.  1.409A-3(j), provided that such feature, 
including the predetermined amount, is established by no later than the 
time and form of payment is otherwise required to be established, and 
provided further that any change in such feature, including the 
predetermined amount, is a change in the time and form of payment. * * 
*
* * * * *


Sec.  1.409A-3  [Corrected]

0
Par. 4. Section 1.409A-3 is amended as follows:
0
1. The first sentence of paragraph (c) is revised.
0
2. The last sentence of paragraph (i)(1)(ii)(B) is revised.
0
3. The fourth sentence of paragraph (i)(3)(ii) is revised.
0
4. The last sentence of paragraph (j)(4)(vi) is revised.
0
5. The last sentence of paragraph (j)(4)(ix)(B) is revised.
0
6. The first sentence of paragraph (j)(5) is revised.
0
7. Paragraph (j)(5)(iv) is revised.


Sec.  1.409A-3  Permissible payments.

* * * * *
    (c) * * * Except as otherwise provided in this paragraph (c), for 
an amount of deferred compensation under a plan, the plan may designate 
only one time and form of payment upon the occurrence of each event 
described in paragraph (a)(1), (2), (3), (5), or (6) of this section. * 
* *
* * * * *
    (i) * * *
    (1) * * *
    (ii) * * *
    (B) * * * A change in the limitation or a change in the time and 
form of payment of any payment that is not otherwise made at the 
scheduled payment date due to application of the formula limitation is 
subject to the requirements of Sec.  1.409A-2(b) (subsequent deferral 
elections) and paragraph (j) of this section (accelerated payments).
* * * * *
    (3) * * *
    (ii) * * * However, the determination of amounts reasonably 
necessary to satisfy the emergency need is not required to take into 
account any additional compensation that is available from a qualified 
employer plan as defined in Sec.  1.409A-1(a)(2) (including any amount 
available by obtaining a loan under the plan), or that due to the 
unforeseeable emergency is available under another nonqualified 
deferred compensation plan (including a plan that would provide for 
deferred compensation except due to the application of the effective 
date provisions under Sec.  1.409A-6). * * *
* * * * *
    (j) * * *
    (4) * * *
    (vi) * * * However, the total payment under this acceleration 
provision must not exceed the aggregate of the FICA or RRTA amount, and 
the income tax withholding related to such FICA or RRTA amount.
* * * * *
    (ix) * * *
    (B) * * * Solely for purposes of this paragraph (j)(4)(ix)(B), the 
applicable service recipient with the discretion to liquidate and 
terminate the agreements, methods, programs, and other arrangements is 
the service recipient that is primarily liable immediately after the 
transaction for the payment of the deferred compensation.
* * * * *
    (5) * * * If a nonqualified deferred compensation plan provides 
that the amount deferred under the plan is the amount determined under 
the formula determining benefits under a qualified employer plan (as 
defined in Sec.  1.409A-1(a)(2)), or a broad-based foreign retirement 
plan (as defined in Sec.  1.409A-1(a)(3)(v)) maintained by the service 
recipient but applied without regard to one or more limitations 
applicable to the qualified employer plan under the Internal Revenue 
Code or to the broad-based foreign retirement plan under other 
applicable law, or that the amount deferred under the nonqualified 
deferred compensation plan is determined as an amount offset by some or 
all of the benefits provided under the qualified employer plan or 
broad-based foreign retirement plan, a decrease in amounts deferred 
under the nonqualified deferred compensation plan that results directly 
from the operation of the qualified employer plan or broad-based 
foreign retirement plan (other than service provider actions described 
in paragraphs (j)(5)(iii) and (iv) of this section) including changes 
in benefit limitations applicable to the qualified employer plan or the 
broad-based foreign retirement plan under the Internal Revenue Code or 
other applicable law does not constitute an acceleration of a payment 
under the nonqualified deferred compensation plan, provided that such 
operation does not otherwise result in a change in the time or form of 
a payment under the nonqualified deferred compensation plan, and 
provided further that the change in the amounts deferred under the 
nonqualified deferred compensation plan does not exceed such change in 
the amounts deferred under the qualified employer plan or the broad-
based foreign retirement plan, as applicable. * * *
* * * * *
    (iv) A service provider's action or inaction under a qualified 
employer plan with respect to elective deferrals and other employee 
pre-tax contributions subject to the contributions restrictions under 
section 401(a)(30) or section 402(g), and after-tax contributions by 
the service provider to a qualified employer plan that provides for 
such contributions, that affects the amounts that are credited

[[Page 41623]]

under one or more nonqualified deferred compensation plans as matching 
amounts or other similar amounts contingent on such elective deferrals, 
pre-tax contributions, or after-tax contributions, provided that the 
total of such matching or contingent amounts, as applicable, never 
exceeds 100 percent of the matching or contingent amounts that would be 
provided under the qualified employer plan absent any plan-based 
restrictions that reflect limits on qualified plan contributions under 
the Internal Revenue Code.
* * * * *


Sec.  1.409A-6  [Corrected]

0
Par. 5. Section 1.409A-6 is amended by revising paragraphs (a)(3)(i) 
and (ii) and (a)(4)(iv) to read as follows:


Sec.  1.409A-6  Application of section 409A and effective dates.

* * * * *
    (a) * * *
    (3) * * *
    (i) * * * The amount of compensation deferred before January 1, 
2005, under a nonqualified deferred compensation plan that is a 
nonaccount balance plan (as defined in Sec.  1.409A-1(c)(2)(i)(C)), 
equals the present value of the amount to which the service provider 
would have been entitled under the plan if the service provider 
voluntarily terminated services without cause on December 31, 2004, and 
received a payment of the benefits available from the plan on the 
earliest possible date allowed under the plan to receive a payment of 
benefits following the termination of services, and received the 
benefits in the form with the maximum value. * * *
    (ii) * * * The amount of compensation deferred before January 1, 
2005, under a nonqualified deferred compensation plan that is an 
account balance plan (as defined in Sec.  1.409A-1(c)(2)(i)(A)), equals 
the portion of the service provider's account balance as of December 
31, 2004, the right to which was earned and vested (as defined in 
paragraph (a)(2) of this section) as of December 31, 2004, plus any 
future contributions to the account, the right to which was earned and 
vested (as defined in paragraph (a)(2) of this section) as of December 
31, 2004, to the extent such contributions are actually made.
* * * * *
    (4) * * *
    (iv) * * * With respect to an account balance plan (as defined in 
Sec.  1.409A-1(c)(2)(i)(A)), it is not a material modification to 
change a notional investment measure to, or to add to an existing 
investment measure, an investment measure that qualifies as a 
predetermined actual investment within the meaning of Sec.  
31.3121(v)(2)-1(d)(2) of this chapter or, for any given taxable year, 
reflects a reasonable rate of interest (determined in accordance with 
Sec.  31.3121(v)(2)-1(d)(2)(i)(C) of this chapter). * * *
* * * * *

Guy R. Traynor,
Federal Register Liaison, Legal Processing Division, Publication & 
Regulations Branch, Associate Chief Counsel (Procedure & 
Administration).
 [FR Doc. E7-14624 Filed 7-30-07; 8:45 am]
BILLING CODE 4830-01-P