[Federal Register Volume 81, Number 120 (Wednesday, June 22, 2016)]
[Proposed Rules]
[Pages 40569-40584]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14331]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-123854-12]
RIN 1545-BL25
Application of Section 409A to Nonqualified Deferred Compensation
Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Partial withdrawal of notice of proposed rulemaking; notice of
proposed rulemaking.
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SUMMARY: This document contains proposed regulations that would clarify
or modify certain specific provisions of the final regulations under
section 409A (TD 9321, 72 FR 19234). This document also withdraws a
specific provision of the notice of proposed rulemaking (REG-148326-05)
published in the Federal Register on December 8, 2008 (73 FR 74380)
regarding the calculation of amounts includible in income under section
409A(a)(1) and replaces that provision with revised proposed
regulations. These proposed regulations would affect participants,
beneficiaries, sponsors, and administrators of nonqualified deferred
compensation plans.
DATES: Comments and requests for a public hearing must be received by
September 20, 2016.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-123854-12), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday, between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
123854-12), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC 20224 or sent electronically, via the
Federal Rulemaking Portal at www.regulations.gov (IRS REG-123854-12).
FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations
under section 409A, Gregory Burns at (202) 927-9639, concerning
submission of comments and/or requests for a hearing, Regina Johnson at
(202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 885 of the American Jobs Creation Act of 2004, Public Law
108-357 (118 Stat. 1418) (AJCA '04) added section 409A to the Internal
Revenue Code (Code). Section 409A(a)(1)(A) generally provides that, if
certain requirements are not met at any time during a taxable year,
amounts deferred under a nonqualified deferred compensation plan for
that year and all previous taxable years are currently includible in
gross income to the extent not subject to a substantial risk of
forfeiture and not previously included in gross income.
On April 17, 2007 (72 FR 19234), the Treasury Department and the
IRS issued final regulations under section 409A (TD 9321), which
include Sec. Sec. 1.409A-1, 1.409A-2, 1.409A-3, and 1.409A-6 (the
final regulations). The final regulations define certain terms used in
section 409A and in the final regulations, set forth the requirements
for deferral elections and for the time and form of payments under
nonqualified deferred compensation plans, and address certain other
issues under section 409A.
On December 8, 2008 (73 FR 74380), the Treasury Department and the
IRS issued additional proposed regulations under section 409A (REG-
148326-05), which include proposed Sec. 1.409A-4 (the proposed income
inclusion regulations). The proposed income inclusion regulations
provide guidance regarding the calculation of amounts includible in
income under section 409A(a)(1) and the additional taxes imposed by
section 409A with respect to service providers participating in certain
nonqualified deferred compensation plans and other arrangements that do
not comply with the requirements of section 409A(a).
Explanation of Provisions
I. Overview
The Treasury Department and the IRS have concluded that certain
clarifications and modifications to the final regulations and the
proposed income inclusion regulations will help taxpayers comply with
the requirements of section 409A. These proposed regulations address
certain specific provisions of the final regulations and the proposed
income inclusion regulations and are not intended to propose a general
revision of, or broad changes to, the final regulations or the proposed
income inclusion regulations. The narrow and specific purpose of these
proposed regulations should be taken into account when submitting
comments on these proposed regulations. As provided in the section of
this preamble titled ``Proposed Effective Dates,'' taxpayers may rely
upon these proposed regulations immediately.
These proposed regulations:
(1) Clarify that the rules under section 409A apply to nonqualified
deferred compensation plans separately and in addition to the rules
under section 457A.
(2) Modify the short-term deferral rule to permit a delay in
payments to avoid violating Federal securities laws or other applicable
law.
(3) Clarify that a stock right that does not otherwise provide for
a deferral of compensation will not be treated as providing for a
deferral of compensation solely because the amount payable under the
stock right upon an involuntary separation from service for cause, or
the occurrence of a condition within the service provider's control, is
based on a measure that is less than fair market value.
(4) Modify the definition of the term ``eligible issuer of service
recipient stock'' to provide that it includes a corporation (or other
entity) for which a person is reasonably expected to begin, and
actually begins, providing services within 12 months after the grant
date of a stock right.
(5) Clarify that certain separation pay plans that do not provide
for a deferral of compensation may apply to a service provider who had
no compensation from the service recipient during the year preceding
the year in which a separation from service occurs.
[[Page 40570]]
(6) Provide that a plan under which a service provider has a right
to payment or reimbursement of reasonable attorneys' fees and other
expenses incurred to pursue a bona fide legal claim against the service
recipient with respect to the service relationship does not provide for
a deferral of compensation.
(7) Modify the rules regarding recurring part-year compensation.
(8) Clarify that a stock purchase treated as a deemed asset sale
under section 338 is not a sale or other disposition of assets for
purposes of determining whether a service provider has a separation
from service.
(9) Clarify that a service provider who ceases providing services
as an employee and begins providing services as an independent
contractor is treated as having a separation from service if, at the
time of the change in employment status, the level of services
reasonably anticipated to be provided after the change would result in
a separation from service under the rules applicable to employees.
(10) Provide a rule that is generally applicable to determine when
a ``payment'' has been made for purposes of section 409A.
(11) Modify the rules applicable to amounts payable following
death.
(12) Clarify that the rules for transaction-based compensation
apply to stock rights that do not provide for a deferral of
compensation and statutory stock options.
(13) Provide that the addition of the death, disability, or
unforeseeable emergency of a beneficiary who has become entitled to a
payment due to a service provider's death as a potentially earlier or
intervening payment event will not violate the prohibition on the
acceleration of payments.
(14) Modify the conflict of interest exception to the prohibition
on the acceleration of payments to permit the payment of all types of
deferred compensation (and not only certain types of foreign earned
income) to comply with bona fide foreign ethics or conflicts of
interest laws.
(15) Clarify the provision permitting payments upon the termination
and liquidation of a plan in connection with bankruptcy.
(16) Clarify other rules permitting payments in connection with the
termination and liquidation of a plan.
(17) Provide that a plan may accelerate the time of payment to
comply with Federal debt collection laws.
(18) Clarify and modify Sec. 1.409A-4(a)(1)(ii)(B) of the proposed
income inclusion regulations regarding the treatment of deferred
amounts subject to a substantial risk of forfeiture for purposes of
calculating the amount includible in income under section 409A(a)(1).
(19) Clarify various provisions of the final regulations to
recognize that a service provider can be an entity as well as an
individual.
II. Deferral of Compensation
A. Section 457(f) and Section 457A Plans
Section 457(f) generally provides that compensation deferred under
a plan of an eligible employer (as that term is defined under section
457) is included in gross income in the first taxable year in which
there is no substantial risk of forfeiture of the rights to the
compensation. The final regulations provide that a deferred
compensation plan subject to section 457(f) may be a nonqualified
deferred compensation plan for purposes of section 409A and that the
rules of section 409A apply to deferred compensation plans separately
and in addition to any requirements applicable to such plans under
section 457(f).
Similarly, section 457A, which was enacted more than a year after
publication of the final regulations, generally provides that any
compensation deferred under a nonqualified deferred compensation plan
of a nonqualified entity (as these terms are defined under section
457A) is includible in gross income when there is no substantial risk
of forfeiture of the rights to the compensation. These proposed
regulations clarify that a nonqualified deferred compensation plan
under section 457A, like a deferred compensation plan under section
457(f), may be a nonqualified deferred compensation plan for purposes
of section 409A and that the rules of section 409A apply to such a plan
separately and in addition to any requirements applicable to the plan
under section 457A.
B. Short-Term Deferral Rule
The final regulations provide that a deferral of compensation does
not occur for purposes of section 409A under a plan with respect to any
payment that is not a deferred payment \1\ provided that the service
provider actually or constructively receives the payment on or before
the later of: (1) The 15th day of the third month following the end of
the service provider's first taxable year in which the right to the
payment is no longer subject to a substantial risk of forfeiture, or
(2) the 15th day of the third month following the end of the service
recipient's first taxable year in which the right to the payment is no
longer subject to a substantial risk of forfeiture (the applicable 2\1/
2\ month period). A payment that meets these requirements of the short-
term deferral rule (described more fully in Sec. 1.409A-1(b)(4)) is
referred to as a short-term deferral and is generally exempt from the
requirements applicable to plans that provide for a deferral of
compensation.
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\1\ Under Sec. 1.409A-1(b)(4)(i)(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 the occurrence of any event, that will or may occur
later than the end of the applicable 2\1/2\ month period.
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The final regulations provide that a payment that otherwise
qualifies as a short-term deferral, but is made after the applicable
2\1/2\ month period, may continue to qualify as a short-term deferral
if the payment is delayed for one of three reasons: (1) The taxpayer
establishes that it was administratively impracticable for the service
recipient to make the payment by the end of the applicable 2\1/2\ month
period; (2) making the payment by the end of the applicable 2\1/2\
month period would have jeopardized the service recipient's ability to
continue as a going concern; or (3) the service recipient reasonably
anticipates that a deduction for the payment would not be permitted
under section 162(m).
Similar exceptions apply under the general time and form of payment
rules of section 409A. Under Sec. 1.409A-3(d), a payment is treated as
made on the date specified under the plan if the payment is delayed due
to administrative impracticability or because making the payment would
jeopardize the ability of the service recipient to continue as a going
concern. Under Sec. 1.409A-2(b)(7), a payment may be delayed to a date
after the payment date designated in a plan without failing to meet the
requirements of section 409A(a) if the service recipient reasonably
anticipates that a deduction for the payment would not be permitted
under section 162(m) or if making the payment would violate Federal
securities laws or other applicable law. Together, these rules
generally permit payments under section 409A to be delayed due to
administrative impracticability or because making the payment would
jeopardize the ability of the service recipient to continue as a going
concern, the payment would not be deductible under section 162(m), or
making the payment would violate Federal securities laws or other
applicable law.
Some commenters have suggested that the exception for payments that
would
[[Page 40571]]
violate Federal securities laws or other applicable law should also
apply to payments that are intended to be short-term deferrals. These
commenters have noted that the policy reasons for excusing a timely
payment when the payment would violate Federal securities laws or other
applicable law apply equally to the general time and form of payment
rules under section 409A and the short-term deferral rule. In response
to these comments, the Treasury Department and the IRS have determined
that it is appropriate to extend this exception to the short-term
deferral rule. Accordingly, these proposed regulations provide that a
payment that otherwise qualifies as a short-term deferral, but is made
after the end of the applicable 2\1/2\ month period, may still qualify
as a short-term deferral if the service recipient reasonably
anticipates that making the payment during the applicable 2\1/2\ month
period will violate Federal securities laws or other applicable law and
the payment is made as soon as reasonably practicable following the
first date on which the service recipient anticipates or reasonably
should anticipate that making the payment would not cause a violation.
For this purpose, making a payment that would cause inclusion in gross
income or the application of any penalty provision or other provision
of the Code is not treated as a violation of applicable law.
C. Stock Rights
1. Service Recipient Stock
The final regulations provide that certain stock options and stock
appreciation rights (collectively, stock rights) granted with respect
to service recipient stock do not provide for the deferral of
compensation. The term ``service recipient stock'' means a class of
stock that, as of the date of grant, is common stock for purposes of
section 305 and the regulations thereunder of a corporation that is an
eligible issuer of service recipient stock. For this purpose, service
recipient stock does not include any stock that is subject to a
mandatory repurchase obligation (other than a right of first refusal),
or a permanent put or call right, if the stock price under such right
or obligation is based on a measure other than the fair market value
(disregarding lapse restrictions) of the equity interest in the
corporation represented by the stock.
Commenters have noted that employers often want to deter employees
from engaging in behavior that could be detrimental to the employer and
have customarily reduced the amount that an employee receives under a
stock rights arrangement if the employee is dismissed for cause or
violates a noncompetition or nondisclosure agreement. These commenters
have observed that this type of reduction is generally prohibited under
the definition of service recipient stock in the final regulations but
have argued that neither the statutory language nor the underlying
policies of section 409A should prohibit a reduction under these
circumstances. The Treasury Department and the IRS agree with these
conclusions. Accordingly, these proposed regulations provide that a
stock price will not be treated as based on a measure other than fair
market value if the amount payable upon a service provider's
involuntary separation from service for cause, or the occurrence of a
condition that is within the control of the service provider, such as
the violation of a covenant not to compete or a covenant not to
disclose certain information, is based on a measure that is less than
fair market value.
2. Eligible Issuer of Service Recipient Stock
Under the final regulations, the term ``eligible issuer of service
recipient stock'' means the corporation or other entity for which the
service provider provides direct services on the date of grant of the
stock right and certain affiliated corporations or entities. Some
commenters have asserted that this definition of ``eligible issuer of
service recipient stock'' hinders employment negotiations because it
prevents service recipients from granting stock rights to service
providers before they are employed by the service recipient. In
response to these comments, these proposed regulations provide that, if
it is reasonably anticipated that a person will begin providing
services to a corporation or other entity within 12 months after the
date of grant of a stock right, and the person actually begins
providing services to the corporation or other entity within 12 months
after the date of grant (or, if services do not begin within that
period, the stock right is forfeited), the corporation or other entity
will be an eligible issuer of service recipient stock.
D. Separation Pay Plans
Under the final regulations, separation pay plans that provide for
payment only upon an involuntary separation from service or pursuant to
a window program do not provide for a deferral of compensation to the
extent that they meet certain requirements. One of these requirements
is that the separation pay generally not exceed two times the lesser of
(1) the service provider's annualized compensation based upon the
annual rate of pay for the service provider's taxable year preceding
the service provider's taxable year in which the separation from
service occurs, or (2) the limit under section 401(a)(17) for the year
in which the service provider separates from service.
Some commenters have questioned whether this exception for
separation pay plans is available for a service provider whose
employment begins and ends during the same taxable year because the
service provider was not employed by, and did not receive any
compensation from, the service recipient for the taxable year preceding
the taxable year in which the separation from service occurs. These
proposed regulations clarify that the separation pay plan exception is
available for service providers whose employment begins and ends in the
same taxable year. In that circumstance, these proposed regulations
provide that the service provider's annualized compensation for the
taxable year in which the service provider separates from service may
be used for purposes of this separation pay plan exception if the
service provider had no compensation from the service recipient in the
taxable year preceding the year in which the service provider separates
from service.
E. Employment-Related Legal Fees and Expenses
Under the final regulations, an arrangement does not provide for a
deferral of compensation to the extent that it provides for amounts to
be paid as settlements or awards resolving bona fide legal claims based
on wrongful termination, employment discrimination, the Fair Labor
Standards Act, or workers' compensation statutes, including claims
under applicable Federal, state, local, or foreign laws, or for
reimbursements or payments of reasonable attorneys' fees or other
reasonable expenses incurred by the service provider related to such
bona fide legal claims.
Commenters have requested guidance on the application of section
409A(a) to provisions commonly included in employment agreements that
provide for the reimbursement of attorneys' fees in connection with
employment-related disputes and have asserted that there is no reason
to distinguish between arrangements that provide for payment of
reasonable attorneys' fees and expenses for the types of legal claims
currently specified in the final regulations and any other bona fide
[[Page 40572]]
legal claim with respect to the service relationship between a service
provider and a service recipient. In response to these comments, these
proposed regulations provide that an arrangement does not provide for a
deferral of compensation to the extent that it provides for the payment
or reimbursement of a service provider's reasonable attorneys' fees and
other expenses incurred to enforce a claim by the service provider
against the service recipient with respect to the service relationship.
F. Recurring Part-Year Compensation
After publication of the final regulations, commenters have
expressed concerns about the application of section 409A to recurring
part-year compensation. The final regulations define recurring part-
year compensation as compensation paid for services rendered in a
position that the service recipient and service provider reasonably
anticipate will continue on similar terms and conditions in subsequent
years, and will require services to be provided during successive
service periods each of which comprises less than 12 months and each of
which begins in one taxable year of the service provider and ends in
the next taxable year. For example, a teacher providing services during
school years comprised of 10 consecutive months would have recurring
part-year compensation. See Sec. 1.409A-2(a)(14). In general,
commenters have asserted that section 409A should not apply to this
situation because the amount being deferred from one taxable year to a
subsequent taxable year is typically only a small amount and because
most service providers who receive recurring part-year compensation
(typically teachers and other educational workers) view an election to
annualize this compensation as a cash flow decision, rather than a tax-
deferral opportunity.
In response, the Treasury Department and the IRS issued Notice
2008-62 (2008-29 IRB 130), which provides that arrangements involving
recurring part-year compensation do not provide for a deferral of
compensation for purposes of section 409A or section 457(f) if: (1) The
arrangement does not defer payment of any of the recurring part-year
compensation beyond the last day of the 13th month following the
beginning of the service period, and (2) the arrangement does not defer
from one taxable year to the next taxable year the payment of more than
the applicable dollar amount under section 402(g)(1)(B) in effect for
the calendar year in which the service period begins ($18,000 for
2016). Notice 2008-62 also states that a conforming change is intended
be made to the final regulations to reflect these rules.
Commenters have expressed concerns that Notice 2008-62 would not
adequately address some teaching positions, such as college and
university faculty members. They have noted that, depending on several
variables (such as the calendar month in which a service provider
commences service or the length of the service period), the dollar
limitation in the notice may result in adverse tax consequences to
service providers with annual compensation as low as $80,000.
Commenters have further observed that some of these arrangements are
nonelective, and therefore some service providers cannot opt out of a
recurring part-year compensation arrangement. In recognition that
service recipients in the field of education frequently structure their
pay plans to include recurring part-year compensation and that the main
purpose of this design is to provide uninterrupted cash flow for
service providers who do not work for a portion of the year, these
proposed regulations modify the recurring part-year compensation rule.
These proposed regulations provide that a plan or arrangement under
which a service provider receives recurring part-year compensation that
is earned over a period of service does not provide for the deferral of
compensation if the plan does not defer payment of any of the recurring
part-year compensation to a date beyond the last day of the 13th month
following the first day of the service period for which the recurring
part-year compensation is paid, and the amount of the service
provider's recurring part-year compensation (not merely the amount
deferred) does not exceed the annual compensation limit under section
401(a)(17) ($265,000 for 2016) for the calendar year in which the
service period commences. A conforming change is being made for
purposes of section 457(f) under proposed section 457(f) regulations
(REG-147196-07) that are also published in the Proposed Rules section
of this issue of the Federal Register.
III. Separation From Service Definition
A. Asset Purchase Transactions
The final regulations permit the seller and an unrelated buyer in
an asset purchase transaction to specify whether a person who is a
service provider of the seller immediately before the transaction is
treated as separating from service if the service provider provides
services to the buyer after and as a result of the transaction.
Commenters have asked whether this rule may be used with respect to a
transaction that is treated as a deemed asset sale under section 338.
The provision of the final regulations giving buyers and sellers in
asset transactions the discretion to treat employees as separating from
service is based on the recognition that, while employees formally
terminate employment with the seller and immediately recommence
employment with the buyer in a typical asset transaction, the employees
often experience no change in the type or level of services they
provide. In a deemed asset sale under section 338, however, employees
do not experience a termination of employment, formal or otherwise.
Accordingly, the Treasury Department and the IRS have determined that
it would be inconsistent with section 409A to permit the parties to a
deemed asset sale to treat service providers as having separated from
service upon the occurrence of the transaction. These proposed
regulations affirm and make explicit that a stock purchase transaction
that is treated as a deemed asset sale under section 338 is not a sale
or other disposition of assets for purposes of this rule under section
409A.
B. Dual Status as Employee and Independent Contractor and Changes in
Status From Employee to Independent Contractor (or Vice Versa)
The final regulations provide that an employee separates from
service with an employer if the employee dies, retires, or otherwise
has a termination of employment with the employer. Under the final
regulations, a termination of employment generally occurs if the facts
and circumstances indicate that the employer and employee reasonably
anticipate that no further services would be performed after a certain
date or that the level of bona fide services the employee would perform
after that date (whether as an employee or as an independent
contractor) would permanently decrease to no more than 20 percent of
the average level of bona fide services performed (whether as an
employee or an independent contractor) over the immediately preceding
36-month period (or if the employee has been providing services to the
employer for less than 36 months, the full period of services). The
final regulations provide that an independent contractor separates from
service with a service recipient upon the expiration of the contract
(or, if applicable, all contracts) under which services are performed
for the service recipient if the expiration is
[[Page 40573]]
a good-faith and complete termination of the contractual relationship.
The final regulations also provide that if a service provider
provides services both as an employee and an independent contractor of
a service recipient, the service provider must separate from service
both as an employee and as an independent contractor to be treated as
having separated from service. The final regulations further provide
that ``[i]f a service provider ceases providing services as an
independent contractor and begins providing services as an employee, or
ceases providing services as an employee and begins providing services
as an independent contractor, the service provider will not be
considered to have a separation from service until the service provider
has ceased providing services in both capacities.''
Some commenters have observed that the quoted sentence could be
read to provide that a service provider who performs services for a
service recipient as an employee, but who becomes an independent
contractor for the same service recipient and whose anticipated level
of services upon becoming an independent contractor are 20 percent or
less than the average level of services performed during the
immediately preceding 36-month period, would not have a separation from
service because a complete termination of the contractual relationship
with the service recipient has not occurred and, therefore, there is no
separation from service as an independent contractor. Such a reading,
however, would be inconsistent with the more specific rule that a
service provider who is an employee separates from service if the
employer and employee reasonably anticipate that the level of services
to be performed after a certain date (whether as an employee or as an
independent contractor) would permanently decrease to no more than 20
percent of the average level of services performed (whether as an
employee or an independent contractor) over the immediately preceding
36-month period. To avoid potential confusion, these proposed
regulations delete the quoted sentence from the regulations.
However, if a service provider, who performs services for a service
recipient as an employee, becomes an independent contractor for the
same service recipient but does not have a separation from service when
he or she becomes an independent contractor (because at that time it is
not reasonably anticipated that the level of services that would be
provided by the service provider in the future would decrease to no
more than 20 percent of the average level of services performed over
the immediately preceding 36-month period), the service provider will
have a separation from service in the future when the service provider
has a separation from service based on the rules that apply to
independent contractors.
IV. References to a Payment Being Made
As discussed in section II.B of this preamble entitled ``Short-term
Deferral Rule,'' the final regulations provide that a deferral of
compensation does not occur under a plan if the service provider
actually or constructively receives a payment that is not a deferred
payment on or before the last day of the applicable 2\1/2\ month
period. The final regulations further provide that, for this purpose, a
payment is treated as actually or constructively received if the
payment is includible in income, including if the payment is includible
under the economic benefit doctrine, section 83, section 402(b), or
section 457(f). Further, Sec. 1.409A-2(b)(2) of the final regulations
provides that, for purposes of subsequent changes in the time or form
of payment, the term ``payment'' generally refers to each separately
identified amount to which a service provider is entitled to payment
under a plan on a determinable date. This section of the final
regulations provides that a payment includes the provision of any
taxable benefit, including cash or property. It also provides that a
payment includes, but is not limited to, the transfer, cancellation, or
reduction of an amount of deferred compensation in exchange for
benefits under a welfare plan, a fringe benefit excludible from income,
or any other benefit excludible from income. The final regulations,
however, do not include a rule that is generally applicable for all
purposes under section 409A to determine when a payment is made.
These proposed regulations add a generally applicable rule to
determine when a payment has been made for all provisions of the
regulations under section 409A. Under these proposed regulations, a
payment is made, or the payment of an amount occurs, when any taxable
benefit is actually or constructively received. Consistent with the
final regulations, these proposed regulations provide that a payment
includes a transfer of cash, any event that results in the inclusion of
an amount in income under the economic benefit doctrine, a transfer of
property includible in income under section 83, a contribution to a
trust described in section 402(b) at the time includible in income
under section 402(b), and the transfer or creation of a beneficial
interest in a section 402(b) trust at the time includible in income
under section 402(b). In addition, a payment is made upon the transfer,
cancellation, or reduction of an amount of deferred compensation in
exchange for benefits under a welfare plan, a non-taxable fringe
benefit, or any other nontaxable benefit.
The final regulations generally provide that the inclusion of an
amount in income under section 457(f)(1)(A) is treated as a payment
under section 409A for purposes of the short-term deferral rule under
Sec. 1.409A-1(b)(4), but is generally not treated as a payment for
other purposes under section 409A. Commenters, however, have observed
that this treatment of income inclusion under section 457(f)(1)(A) is
inconsistent with the rules under section 409A that generally treat the
inclusion of any amount in income as a payment for all purposes under
section 409A. These commenters have also noted that a primary purpose
of section 409A is to limit the ability of a service provider or
service recipient to change the time at which deferred compensation is
included in income after the time of payment is established and that
the failure to treat income inclusion under section 457(f)(1)(A) as a
payment would be inconsistent with this purpose. In response to these
observations, these proposed regulations provide that the inclusion of
an amount in income under section 457(f)(1)(A) is treated a payment for
all purposes under section 409A.
Under this rule, if the plan provides for a deferral of
compensation under section 409A: (1) Plan terms that specify the
conditions to which the payment is subject and thus when a substantial
risk of forfeiture lapses for purposes of section 457(f)(1)(A) (and,
consequently, determine when an amount is includible in income) would
be treated as plan terms providing for the payment of the amount
includible in income, and (2) all rules under section 409A applicable
to the payment of an amount would apply to the inclusion of an amount
under section 457(f)(1)(A). A plan would not be a deferred compensation
plan within the meaning of section 409A to the extent that the amounts
payable under the plan are short-term deferrals under Sec. 1.409A-
1(b)(4). However, in certain limited circumstances, amounts includible
in income under section 457(f)(1)(A) may not be short-term deferrals
under Sec. 1.409A-1(b)(4). For example, under the proposed section
457(f) regulations
[[Page 40574]]
(REG-147196-07), which are also published in the Proposed Rules section
of this issue of the Federal Register, in certain circumstances
conditioning a payment upon compliance with a noncompetition agreement
will result in the payment being subject to a substantial risk of
forfeiture for purposes of section 457(f)(1)(A), but that payment would
not be treated as subject to a substantial risk of forfeiture for
purposes of section 409A. In such cases, the amount payable at the end
of the term of the noncompetition agreement upon compliance with the
noncompete will be includible in income under section 457(f)(1)(A) only
at the end of the term of the agreement under the section 457(f)
regulations as proposed, but for purposes of section 409A will be
deferred compensation (and not a short-term deferral), the payment of
which is subject to the rules of section 409A.\2\ See proposed Sec.
1.457-12(e) (REG-147196-07); see also proposed Sec. 1.457-12(a)(4)
(REG-147196-07).
---------------------------------------------------------------------------
\2\ There may also be instances in which a portion of an amount
payable under an arrangement that is subject to section 457(f) is a
short-term deferral for purposes of both section 409A and section
457(f)(1)(A), while another portion of the amount is a deferral of
compensation for purposes of section 409A. For example, assume an
arrangement subject to section 457(f) provides for payment of a
specified dollar amount plus earnings upon separation from service,
with vesting to occur when the service provider has completed three
years of service. The specified dollar amount plus earnings to date
is includible in income under section 457(f)(1)(A) when the service
provider completes three years of service, and that amount will be a
short-term deferral under section 409A if the service provider
includes it in income at that time. The service provider's right to
receive a payment of additional earnings accruing after the vesting
date is a deferred compensation plan under section 409A.
---------------------------------------------------------------------------
The Treasury Department and the IRS request comments on whether
rules similar to those applicable to amounts included in income under
section 457(f) should be adopted for amounts included in income under
section 457A.
These proposed regulations also clarify that a transfer of property
that is substantially nonvested (as defined under Sec. 1.83-3(b)) to
satisfy an obligation under a nonqualified deferred compensation plan
is not a payment for purposes of section 409A unless the recipient
makes an election under section 83(b) to include in income the fair
market value of the property (disregarding lapse restrictions), less
any amount paid for the property. These proposed regulations also make
conforming clarifications to rules under Sec. 1.409A-1(a)(4) regarding
nonqualified deferred compensation plans subject to sections 457(f) and
457A, Sec. 1.409A-1(b)(4) regarding the short-term deferral rule, and
Sec. 1.409A-2(b)(2) regarding the separate payment rule.
V. Permissible Payments
A. Death
The final regulations provide that an amount deferred under a
nonqualified deferred compensation plan may be paid only at a specified
time or upon an event set forth under the regulations. One of the
permissible events upon which an amount may be paid is the service
provider's death. The final regulations also provide that a payment is
treated as made upon a date specified under the plan (including at the
time a specified event occurs) if the payment is made on that date or
on a later date within the same taxable year of the service provider
or, if later, by the 15th day of the third calendar month following the
date specified under the plan, provided that the service provider is
not permitted, directly or indirectly, to designate the taxable year of
the payment.
Some commenters have questioned whether these and other rules in
the final regulations applicable to amounts payable upon the death of a
service provider also apply in the case of the death of a beneficiary
who has become entitled to the payment of an amount due to a service
provider's death. These proposed regulations clarify that the rules
applicable to amounts payable upon the death of a service provider also
apply to amounts payable upon the death of a beneficiary.
Also, some commenters have indicated that the time periods for the
payment of amounts following death often are not long enough to resolve
certain issues related to the death (for example, confirming the death
and completing probate). In view of the practical issues that often
arise following a death, these proposed regulations provide that an
amount payable following the death of a service provider, or following
the death of a beneficiary who has become entitled to payment due to
the service provider's death, that is to be paid at any time during the
period beginning on the date of death and ending on December 31 of the
first calendar year following the calendar year during which the death
occurs is treated as timely paid if it is paid at any time during this
period. A plan is not required to specify any particular date within
this period as the payment date and may rely on this rule if the plan
provides that an amount will be paid at some time during this period,
including if the plan provides that payment will be made upon death
without defining the period for payment following death in any other
manner, and including if the plan provides that payment will be made on
a date within this period determined in the discretion of the
beneficiary. These proposed regulations further provide that a plan
providing for the payment of an amount at any time during this
specified period may be amended to provide for the payment of that
amount (or the payment of that amount may be made without amending the
plan) at any other time during this period (including a time determined
in the discretion of a beneficiary) without failing to meet the
requirements of the deferral election provisions of Sec. 1.409A-2 or
the permissible payment provisions of Sec. 1.409A-3, including the
prohibition on the acceleration of payments under Sec. 1.409A-3(j).
For example, a plan that provides for a payment to be made during the
first calendar year beginning after the death of a service provider may
be amended to provide for the payment of the amount (or the payment may
be made under the plan without such amendment) at any time during the
period beginning on the date of death and ending on December 31 of the
first calendar year following the calendar year during which the death
occurs. For additional rules concerning payments due upon a
beneficiary's death, see section VI.A of this preamble.
B. Certain Transaction-Based Compensation
The final regulations provide special rules for payments of
transaction-based compensation. Transaction-based compensation payments
are payments related to certain types of changes in control that (1)
occur because a service recipient purchases its stock held by a service
provider or because the service recipient or a third party purchases a
stock right held by a service provider, or (2) are calculated by
reference to the value of service recipient stock. Under the final
regulations, transaction-based compensation may be treated as paid at a
designated date or pursuant to a payment schedule that complies with
the requirements of section 409A(a) if it is paid on the same schedule
and under the same terms and conditions as apply to payments to
shareholders generally with respect to stock of the service recipient
pursuant to the change in control. Likewise, transaction-based
compensation meeting these requirements will not fail to meet the
requirements of the initial or subsequent deferral election rules under
section 409A if it is paid not later than five years after the change
in control event. These proposed regulations clarify that the special
payment rules for transaction-based compensation apply to a statutory
stock option or a stock right that did not otherwise provide for
[[Page 40575]]
deferred compensation before the purchase or agreement to purchase the
stock right. Accordingly, the purchase (or agreement to purchase) such
a statutory stock option or stock right in a manner consistent with
these rules does not result in the statutory stock option or stock
right being treated as having provided for the deferral of compensation
from the original grant date.
VI. Prohibition on Acceleration of Payments
A. Payments to Beneficiaries Upon Death, Disability, or Unforeseeable
Emergency
Under the final regulations, a prohibited acceleration of a payment
does not result from the addition of death, disability, or
unforeseeable emergency as a potentially earlier alternative payment
event for an amount previously deferred. However, under the final
regulations, this exception applies only with respect to a service
provider's death, disability, or unforeseeable emergency and does not
apply with respect to the death, disability, or unforeseeable emergency
of a beneficiary who has become entitled to a payment due to the
service provider's death. These proposed regulations provide that this
exception also applies to the payment of deferred amounts upon the
death, disability, or unforeseeable emergency of a beneficiary who has
become entitled to payment due to a service provider's death. These
proposed regulations also clarify that a schedule of payments
(including payments treated as a single payment) that has already
commenced prior to a service provider's or a beneficiary's death,
disability, or unforeseeable emergency may be accelerated upon the
death, disability, or unforeseeable emergency.
B. Compliance With Bona Fide Foreign Ethics Laws or Conflicts of
Interest Laws
Under the final regulations, a plan may provide for acceleration of
the time or schedule of a payment, or a payment may be made under a
plan, to the extent reasonably necessary to avoid the violation of a
Federal, state, local, or foreign ethics or conflicts of interest law.
However, with respect to a foreign ethics or conflicts of interest law,
this exception applies only to foreign earned income from sources
within the foreign country that promulgated the law. Commenters have
suggested that this provision should not be limited to foreign earned
income because the requirements of foreign ethics or conflicts of
interest laws may affect both the payment of foreign and United States
earned income. These proposed regulations expand the scope of this
provision to permit the acceleration of any nonqualified deferred
compensation if the acceleration is reasonably necessary to comply with
a bona fide foreign ethics or conflicts of interest law.
C. Plan Terminations and Liquidations
Under the final regulations, a plan may provide for the
acceleration of a payment made pursuant to the termination and
liquidation of a plan under certain circumstances. Specifically, a plan
may provide for the acceleration of a payment if the plan is terminated
and liquidated within 12 months of a corporate dissolution taxed under
section 331, or with the approval of a bankruptcy court pursuant to 11
U.S.C. 503(b)(1)(A) if certain other conditions are satisfied. The
citation to 11 U.S.C. 503(b)(1)(A) is erroneous. These proposed
regulations correct this provision by retaining the operative rule but
deleting the section reference.
The final regulations also provide that a payment may be
accelerated pursuant to a change in control event as described under
Sec. 1.409A-3(j)(4)(ix)(B) or in other circumstances provided certain
requirements are satisfied, as described under Sec. 1.409A-
3(j)(4)(ix)(C). To terminate a plan pursuant to Sec. 1.409A-
3(j)(4)(ix)(C), the final regulations provide that the service
recipient must terminate and liquidate all plans sponsored by the
service recipient that would be aggregated with the terminated plan
under the plan aggregation rules under Sec. 1.409A-1(c) of the final
regulations if the same service provider had deferrals of compensation
under all such plans. The final regulations also provide that for three
years following the date on which the service recipient took all
necessary action to irrevocably terminate and liquidate the plan the
service recipient cannot adopt a new plan that would be aggregated with
the terminated and liquidated plan if the same service provider
participated in both plans. Some commenters have asked whether these
rules mean that only the plans of a particular category in which a
particular service provider actually participates must be terminated if
a plan in which that service provider participates is terminated.
The plan aggregation rules under Sec. 1.409A-1(c)(2) of the final
regulations identify nine different types of nonqualified deferred
compensation plans--account balance plans providing for elective
deferrals, account balance plans that do not provide for elective
deferrals, nonaccount balance plans, separation pay plans, plans
providing for in-kind benefits or reimbursements, split-dollar plans,
foreign earned income plans, stock right plans, and plans that are not
any of the foregoing. All plans of the same type in which the same
service provider participates are treated as a single plan. The rule
set forth under Sec. 1.409A-3(j)(4)(ix)(C) that requires the
termination and liquidation of all plans sponsored by the service
recipient that would be aggregated with the terminated plan ``if the
same service provider had deferrals of compensation'' under all of
those plans is intended to require the termination of all plans in the
same plan category sponsored by the service recipient. The reference to
the ``same service provider'' having deferrals of compensation under
all of those plans refers to participation of a hypothetical service
provider in all such plans, which would be required to aggregate all of
the plans under the section 409A plan aggregation rules.
The Treasury Department and the IRS have concluded that the meaning
of the plan termination rule under Sec. 1.409A-3(j)(4)(ix)(C) is not
ambiguous. However, to address the questions raised by commenters,
these proposed regulations further clarify that the acceleration of a
payment pursuant to this rule is permitted only if the service
recipient terminates and liquidates all plans of the same category that
the service recipient sponsors, and not merely all plans of the same
category in which a particular service provider actually participates.
These proposed regulations also clarify that under this rule, for a
period of three years following the termination and liquidation of a
plan, the service recipient cannot adopt a new plan of the same
category as the terminated and liquidated plan, regardless of which
service providers participate in the plan.
D. Offset Provisions
The final regulations provide that the payment of an amount as a
substitute for a payment of deferred compensation is generally treated
as a payment of the deferred compensation. They also provide that when
the payment of an amount results in an actual or potential reduction
of, or current or future offset to, an amount of deferred compensation,
the payment is a substitute for the deferred compensation. Further, the
final regulations provide that if a service provider's right to
deferred compensation is made subject to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by the service provider's creditors, the deferred
[[Page 40576]]
compensation is treated as having been paid. Under certain
circumstances, these provisions may result in an amount being paid (or
treated as paid) before the payment date or event specified in the plan
in violation of the prohibition on the acceleration of payments under
section 409A. The final regulations, however, include a de minimis
exception to these rules pursuant to which a plan may provide for the
acceleration of the time or schedule of a payment, or a payment may be
made under a plan, in satisfaction of a debt of the service provider if
the debt is incurred in the ordinary course of the service
relationship, the entire offset in any taxable year does not exceed
$5,000, and the offset is taken at the same time and in the same amount
as the debt otherwise would have been due from the service provider.
Stakeholders have observed that the prohibition on offsets may
conflict with certain laws regarding debt collection by the Federal
government (for example, 31 U.S.C. 3711, et. seq.), and that the
exception for small debts is insufficient to permit the enforcement of
these laws. Because these laws would effectively prevent certain
government entities from providing nonqualified deferred compensation
in a manner that complies with the requirements of section 409A(a) and
because of the limited applicability of Federal debt collection laws,
the Treasury Department and the IRS have determined that it is
appropriate to expand the current exception to the prohibition on
accelerated payments for certain offsets to permit a plan to provide
for the acceleration of the time or schedule of a payment, or to make a
payment, to the extent reasonably necessary to comply with Federal laws
regarding debt collection.
VII. Amount Includible in Income Under Section 409A
The proposed income inclusion regulations provide that the amount
includible in income for a taxable year if a nonqualified deferred
compensation plan fails to meet the requirements of section 409A(a) at
any time during that taxable year equals the excess of (1) the total
amount deferred under the plan for that taxable year, including any
payments under the plan during that taxable year, over (2) the portion
of that amount, if any, that is either subject to a substantial risk of
forfeiture or has been previously included in income. The proposed
income inclusion regulations, however, include an anti-abuse provision
under Sec. 1.409A-4(a)(1)(ii)(B), which provides that an amount
otherwise subject to a substantial risk of forfeiture for purposes of
determining the amount includible in income under a plan will be
treated as not subject to a substantial risk of forfeiture for these
purposes if the facts and circumstances indicate that a service
recipient has a pattern or practice of permitting impermissible changes
in the time or form of payment with respect to nonvested deferred
amounts under one or more nonqualified deferred compensation plans and
either (i) an impermissible change in the time or form of payment
applies to the amount or (ii) the facts and circumstances indicate that
the amount would be affected by the pattern or practice.
Although these rules permit the correction of certain plan
provisions that fail to comply with the requirements of section 409A(a)
while amounts are nonvested without including the amounts in income or
incurring an additional tax, they were not intended to allow service
recipients to change time or form of payment provisions that otherwise
meet the requirements of section 409A(a) in a manner that fails to
comply with section 409A(a), and they were not intended to permit
service recipients to create errors in nonqualified deferred
compensation plans with respect to nonvested amounts with the intention
of using those errors as a pretext for establishing or changing a time
or form of payment in a manner that fails to comply with section
409A(a). Accordingly, these proposed regulations clarify and modify the
anti-abuse rule under Sec. 1.409A-4(a)(1)(ii)(B) of the proposed
income inclusion regulations to preclude changes of this nature.
First, these proposed regulations clarify that a deferred amount
that is otherwise subject to a substantial risk of forfeiture is
treated as not subject to a substantial risk of forfeiture for a
service provider's taxable year during which there is a change in a
plan provision (including an initial deferral election provision) that
is not otherwise permitted under section 409A and the final regulations
and that affects the time or form of payment of the amount if there is
no reasonable, good faith basis for concluding that the original
provision failed to meet the requirements of section 409A(a) and that
the change is necessary to bring the plan into compliance with the
requirements of section 409A(a).
Second, these proposed regulations provide examples of the types of
facts and circumstances that indicate whether a service recipient has a
pattern or practice of permitting impermissible changes in the time or
form of payment with respect to nonvested deferred amounts under one or
more plans. If the service recipient has such a pattern or practice
that would affect a nonvested deferred amount, that amount is treated
as not subject to a substantial risk of forfeiture. The facts and
circumstances include: Whether a service recipient has taken
commercially reasonable measures to identify and correct substantially
similar failures promptly upon discovery; whether substantially similar
failures have occurred with respect to nonvested deferred amounts to a
greater extent than with respect to vested deferred amounts; whether
substantially similar failures occur more frequently with respect to
newly adopted plans; and whether substantially similar failures appear
intentional, are numerous, or repeat common past failures that have
since been corrected.
Third, these proposed regulations provide that, to the extent
generally applicable guidance regarding the correction of section 409A
failures prescribes a particular correction method (or methods) for a
type of plan failure, that correction method (or one of the permissible
correction methods) must be used if a service recipient chooses to
correct that type of a failure with respect to a nonvested deferred
amount. In addition, these proposed regulations provide that
substantially similar failures affecting nonvested deferred amounts
must be corrected in substantially the same manner.
A service recipient correcting a plan failure affecting a nonvested
deferred amount is not required, solely with respect to the nonvested
deferred amount, to comply with any requirement under generally
applicable guidance regarding the correction of section 409A failures
that is unrelated to the method for correcting the failure, such as
general eligibility requirements, income inclusion, additional taxes,
premium interest, or information reporting by the service recipient or
service provider. Accordingly, a service recipient may amend a
noncompliant plan term in a manner permitted under applicable
correction guidance even though the failure may not have been eligible
for correction under that guidance (for example, due to applicable
timing requirements). In addition, the portion of the nonvested
deferred amount that is affected by the correction is not subject to
income inclusion, additional taxes, or applicable premium interest
under section 409A(a)(1), and neither the service recipient nor the
service provider is required to notify the IRS of
[[Page 40577]]
the correction. For a description of the currently available
corrections methods, see Notice 2008-113 (2008-51 IRB 1305), Notice
2010-6 (2010-3 IRB 275), and Notice 2010-80 (2010-51 IRB 853).
VIII. Individual and Entity Service Providers
Under the final regulations, the term service provider includes an
individual, corporation, subchapter S corporation, partnership,
personal service corporation, noncorporate entity that would be a
personal service corporation if it were a corporation, qualified
personal service corporation, and noncorporate entity that would be a
qualified personal service corporation if it were a corporation. These
proposed regulations clarify Sec. Sec. 1.409A-1(b)(5)(vi)(A), 1.409A-
1(b)(5)(vi)(E), 1.409A-1(b)(5)(vi)(F), and 1.409A-3(i)(5)(iii) of the
final regulations to reflect that a service provider can be an entity
as well as an individual. These proposed regulations also clarify Sec.
1.409A-1(b)(3) of the final regulations to correct an erroneous
reference to ``service provider'' that should be ``service recipient.''
Proposed Effective Dates
General Applicability Date for Amendments to Final Regulations
The provisions of these proposed regulations amending the final
regulations are proposed to be applicable on or after the date on which
they are published as final regulations in the Federal Register. For
periods before this date, the existing final regulations and other
applicable guidance apply (without regard to these proposed
regulations). The applicability date for the existing final regulations
in Sec. 1.409A-6(b) is accordingly amended to reflect extension of
certain transition relief through 2008 under Notice 2007-86, 2007-46
IRB 990. Taxpayers may, however, rely on these proposed regulations
before they are published as final regulations, and until final
regulations are published the IRS will not assert positions that are
contrary to the positions set forth in these proposed regulations.
Certain provisions of these proposed amendments to the final
regulations are not intended as substantive changes to the current
requirements under section 409A. Accordingly, the Treasury Department
and the IRS have concluded that the following positions may not
properly be taken under the existing final regulations: (1) That the
transfer of restricted stock for which no section 83(b) election is
made or the transfer of a stock option that does not have a readily
ascertainable fair market value would result in a payment under a plan;
(2) that a contribution to a section 402(b) trust includible in income
under section 402(b) to fund an obligation under a plan would not
result in a payment under a plan; (3) that a stock purchase treated as
a deemed asset sale under section 338 is a sale or other disposition of
assets for purposes of determining when a service provider separates
from service as a result of an asset purchase transaction; or (4) that
the exception to the prohibition on acceleration of a payment upon a
termination and liquidation of a plan pursuant to Sec. 1.409A-
3(j)(4)(ix)(C) applies if the service recipient terminates and
liquidates only the plans of the same category in which a particular
service provider participates, rather than all plans of the same
category that the service recipient sponsors.
General Applicability Date for Amendments to Proposed Income Inclusion
Regulations
The proposed income inclusion regulations are proposed to be
applicable on or after the date on which they are published as final
regulations in the Federal Register. Notice 2008-115 provides that,
until the Treasury Department and the IRS issue further guidance,
compliance with the provisions of the proposed income inclusion
regulations with respect to the calculation of the amount includible in
income under section 409A(a)(1) and the calculation of the additional
taxes under section 409A(a)(1) will be treated as compliance with the
requirements of section 409A(a), provided that the taxpayer complies
with all of the provisions of the proposed regulations. Until the
Treasury Department and the IRS issue further guidance, taxpayers may
rely on the proposed income inclusion regulations, as modified by the
amendment of Sec. 1.409A-4(a)(1)(ii)(B) in these proposed regulations,
for purposes of calculating the amount includible in income under
section 409A(a)(1) (including the identification and treatment of
deferred amounts subject to a substantial risk of forfeiture) and the
calculation of the additional taxes under section 409A(a)(1), and the
IRS will not assert positions with respect to periods before the date
final regulations are published in the Federal Register that are
contrary to the positions set forth in the proposed income inclusion
regulations as amended by these proposed regulations.
Special Applicability Dates for Amendments to Recurring Part-Year
Compensation Rules
The rules set forth in these proposed regulations regarding
recurring part-year compensation are proposed to be applicable on and
after the date on which these proposed regulations are published as
final regulations in the Federal Register. However, taxpayers may rely
on either the rules in these proposed regulations or the rules in
Notice 2008-62 relating to recurring part-year compensation for the
taxable year in which these proposed regulations are published as final
regulations and all prior taxable years.
Effect on Other Documents
These proposed regulations do not affect the applicability of other
guidance issued with respect to section 409A, including Notice 2008-
115, except that, for the permitted reliance on the proposed income
inclusion regulations, these proposed regulations withdraw Sec.
1.409A-4(a)(1)(ii)(B) of the proposed income inclusion regulations and
replace it with a new Sec. 1.409A-4(a)(1)(ii)(B).
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings notices, and other guidance
cited in this document are published in the Internal Revenue Bulletin
(or Cumulative Bulletin) and are available from the Superintendent of
Documents, U.S. Government Printing Office, Washington, DC 20402, or by
visiting the IRS Web site at http://www.irs.gov. (See Sec.
601.601(d)(2)(ii)(b) of this chapter.)
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory impact assessment is
not required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these proposed regulations. It is hereby certified that the collection
of information in these proposed regulations would not have a
significant impact on a substantial number of small entities. This
certification is based on the fact that these proposed regulations only
provide guidance on how to satisfy existing collection of information
requirements. Accordingly, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of the Code, these proposed
regulations have been submitted to the Chief Counsel for
[[Page 40578]]
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
The Treasury Department and the IRS request comments on all aspects of
the rules proposed by these proposed regulations. All comments will be
available at www.regulations.gov or upon request. A public hearing may
be scheduled if requested by any person who timely submits comments. If
a public hearing is scheduled, notice of the date, time and place for
the hearing will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Gregory
Burns, Office of Division Counsel/Associate Chief Counsel (Tax Exempt
and Government Entities). However, other personnel from the Treasury
Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Partial Withdrawal of Notice of Proposed Rulemaking
Accordingly, under the authority of 26 U.S.C. 7805, Sec. 1.409A-
4(a)(1)(ii)(B) of the notice of proposed rulemaking (REG-148326-05)
that was published in the Federal Register on December 8, 2008 (73 FR
74380) is withdrawn.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.409A-0 is amended by:
0
1. Revising the entry for Sec. 1.409A-1 by adding paragraph (b)(13).
0
2. Redesignating paragraph (q) as paragraph (r), and revising paragraph
(q) in Sec. 1.409A-1.
0
3. Revising the entry to paragraph (d) in Sec. 1.409A-3.
0
4. Revising the entry to (j)(4)(xiii) in Sec. 1.409A-3.
The revisions and addition read as follows:
Sec. 1.409A-0 Table of contents.
* * * * *
Sec. 1.409A-1 Definitions and covered plans.
* * * * *
(b) * * *
(13) Recurring part-year compensation.
* * * * *
(q) References to a payment being made.
(r) Application of definitions and rules.
* * * * *
Sec. 1.409A-3 Permissible Payments.
* * * * *
(d) * * *
(1) In general.
(2) Payments due following death.
* * * * *
(j) * * *
(4) * * *
(xiii) Certain offsets.
(A) De minimis offset.
(B) Compliance with Federal debt collection laws.
* * * * *
0
Par. 3. Section 1.409A-1 is amended by:
0
1. Revising paragraph (a)(4).
0
2. Revising the first sentence of paragraph (b)(1).
0
3. Revising paragraphs (b)(3) and (b)(4)(i)(B).
0
4. Revising paragraph (b)(4)(ii).
0
5. Adding a last sentence to paragraph (b)(5)(iii)(A).
0
6. Revising paragraph (b)(5)(iii)(E)(1).
0
7. Revising the first sentence of paragraph (b)(5)(vi)(A).
0
8. Revising paragraphs (b)(5)(vi)(E) and (b)(5)(vi)(F).
0
9. Revising paragraph (b)(9)(iii)(A).
0
10. Adding a last sentence to paragraph (b)(11).
0
11. Adding paragraph (b)(13).
0
12. Revising paragraphs (h)(4) and (h)(5).
0
13. Redesignating paragraph (q) as paragraph (r) and revising
paragraphs (q) and (r).
The revisions and additions read as follows:
Sec. 1.409A-1 Definitions and covered plans.
* * * * *
(a) * * *
(4) Section 457(f) and section 457A plans. A deferred compensation
plan under section 457(f) or a nonqualified deferred compensation plan
under section 457A may be a nonqualified deferred compensation plan for
purposes of this paragraph (a). The rules of section 409A apply to
nonqualified deferred compensation plans separately and in addition to
any requirements applicable to such plans under section 457(f) or
section 457A. In addition, nonelective deferred compensation of non-
employees described in section 457(e)(12) and a grandfathered plan or
arrangement described in Sec. 1.457-2(k)(4) may be a nonqualified
deferred compensation plan for purposes of this paragraph (a). The term
nonqualified deferred compensation plan does not include a length of
service award to a bona fide volunteer under section 457(e)(11)(A)(ii).
* * * * *
(b) * * *
(1) * * Except as otherwise provided in paragraphs (b)(3) through
(b)(13) of this section, a plan provides for the deferral of
compensation if, under the terms of the plan and the relevant facts and
circumstances, the service provider has a legally binding right during
a taxable year to compensation that, pursuant to the terms of the plan,
is or may be payable to (or on behalf of) the service provider in a
later taxable year. * * *
* * * * *
(3) Compensation payable pursuant to the service recipient's
customary payment timing arrangement. A deferral of compensation does
not occur solely because compensation is paid after the last day of the
service provider's taxable year pursuant to the timing arrangement
under which the service recipient normally compensates service
providers for services performed during a payroll period described in
section 3401(b), or with respect to a non-employee service provider, a
period not longer than the payroll period described in section 3401(b)
or if no such payroll period exists, a period not longer than the
earlier of the normal timing arrangement under which the service
recipient normally compensates non-employee service providers or 30
days after the end of the service provider's taxable year.
(4) * * *
(i) * * *
(B) A payment is treated as actually or constructively received for
purposes of this paragraph (b)(4) if it is made in accordance with the
rules in Sec. 1.409A-1(q).
* * * * *
(ii) Certain delayed payments. A payment that otherwise qualifies
as a short-term deferral under paragraph (b)(4)(i) of this section but
is made after the applicable 2\1/2\ month period may continue to
qualify as a short-term
[[Page 40579]]
deferral if the taxpayer establishes that it was administratively
impracticable for the service recipient to make the payment by the end
of the applicable 2\1/2\ month period and, as of the date upon which
the legally binding right to the compensation arose, such
impracticability was unforeseeable, or the taxpayer establishes that
making the payment by the end of the applicable 2\1/2\ month period
would have jeopardized the ability of the service recipient to continue
as a going concern, and provided further that the payment is made as
soon as administratively practicable or as soon as the payment would no
longer have such effect. For purposes of this paragraph (b)(4)(ii), an
action or failure to act of the service provider or a person under the
service provider's control, such as a failure to provide necessary
information or documentation, is not an unforeseeable event. In
addition, a payment that otherwise qualifies as a short-term deferral
under paragraph (b)(4)(i) of this section but is made after the
applicable 2\1/2\ month period may continue to qualify as a short-term
deferral if the taxpayer establishes that the service recipient
reasonably anticipated that the service recipient's deduction with
respect to such payment otherwise would not be permitted by application
of section 162(m), and, as of the date the legally binding right to the
payment arose, a reasonable person would not have anticipated the
application of section 162(m) at the time of the payment, and provided
further that the payment is made as soon as reasonably practicable
following the first date on which the service recipient anticipates or
reasonably should anticipate that, if the payment were made on such
date, the service recipient's deduction with respect to such payment
would no longer be restricted due to the application of section 162(m).
Further, a payment that otherwise qualifies as a short-term deferral
under paragraph (b)(4)(i) of this section but is made after the
applicable 2\1/2\ month period may continue to qualify as a short-term
deferral if the taxpayer establishes that the service recipient
reasonably anticipated that making the payment by the end of the
applicable 2\1/2\ month period would have violated Federal securities
laws or other applicable law, provided that the payment is made as soon
as reasonably practicable following the first date on which the service
recipient anticipates or reasonably should anticipate that making the
payment would not cause such violation. The making of a payment that
would cause inclusion in gross income or the application of any penalty
provision or other provision of the Internal Revenue Code is not
treated as a violation of applicable law. For additional rules
applicable to certain transaction-based compensation, see Sec. 1.409A-
3(i)(5)(iv)(A).
* * * * *
(5) * * *
(iii) * * *
(A) * * * The stock price will not be treated as based on a measure
other than the fair market value to the extent that the amount payable
upon the service provider's involuntary separation from service for
cause, or the occurrence of a condition within the service provider's
control such as noncompliance with a noncompetition or nondisclosure
agreement (whether or not the condition is specified at the time the
stock right is granted), is based on a measure that results in a
payment of less than fair market value.
* * * * *
(E) Eligible issuer of service recipient stock--(1) In general. The
term eligible issuer of service recipient stock means the corporation
or other entity for which the service provider provides direct services
on the date of grant of the stock right or a corporation or other
entity for which it is reasonably anticipated that the service provider
will begin providing direct services within 12 months after the date of
grant, and any corporation or other entity (a related corporation or
other entity) in a chain of corporations or other entities in which
each corporation or other entity has a controlling interest in another
corporation or other entity in the chain, ending with the corporation
or other entity that has a controlling interest in the corporation or
other entity for which the service provider provides direct services on
the date of grant of the stock right or the corporation or other entity
for which it is reasonably anticipated that the service provider will
begin providing direct services within 12 months after the date of
grant. If it is reasonably anticipated that a service provider will
begin providing services for a corporation or other entity within 12
months after the date of grant, that corporation or other entity (or a
related corporation or other entity) will be an eligible issuer of
service recipient stock only if the services in fact commence within 12
months after the date of grant and the stock otherwise is service
recipient stock at the time the services begin or, if services do not
commence within that 12 month period, the right is forfeited. For this
purpose, the term controlling interest has the same meaning as provided
in Sec. 1.414(c)-2(b)(2)(i), substituting the language ``at least 50
percent'' for ``at least 80 percent'' each place it appears in Sec.
1.414(c)-2(b)(2)(i). In addition, if the use of such stock with respect
to the grant of a stock right to a service provider is based upon
legitimate business criteria, the term controlling interest has the
same meaning as provided in Sec. 1.414(c)-2(b)(2)(i), substituting the
language ``at least 20 percent'' for ``at least 80 percent'' each place
it appears in Sec. 1.414(c)-2(b)(2)(i). For purposes of determining
ownership of an interest in an organization, the rules of Sec. Sec.
1.414(c)-3 and 1.414(c)-4 apply. The determination of whether a grant
is based on legitimate business criteria is based on the facts and
circumstances, focusing primarily on whether there is a sufficient
nexus between the service provider and the issuer of the stock right so
that the grant serves a legitimate non-tax business purpose other than
simply providing compensation to the service provider that is excluded
from the requirements of section 409A. For example, when stock of a
corporation that owns an interest in a joint venture involving an
operating business is granted to service providers of the joint venture
who are former service providers of such corporation, that use is
generally based upon legitimate business criteria, and therefore could
be service recipient stock with respect to such service providers if
the corporation owns at least 20 percent of the joint venture and the
other requirements of this paragraph (b)(5)(iii) are met. Similarly,
the legitimate business criteria requirement generally would be met if
the corporate venturer issued such a right to a service provider of the
joint venture who it reasonably expected would become a service
provider of the corporate venturer. However, if a service provider has
no real nexus with a corporate venturer, such as generally happens when
the corporate venturer is a passive investor in the service recipient
joint venture, a stock right issued to the service provider on the
investor corporation's stock generally would not be based upon
legitimate business criteria. Similarly, if a corporation holds only a
minority interest in an entity that in turn holds a minority interest
in the entity for which the service provider performs services, such
that the corporation holds only an insubstantial indirect interest in
the entity receiving the services, legitimate business criteria
generally would not exist for issuing a stock right on the
corporation's stock to the service provider.
* * * * *
[[Page 40580]]
(vi) * * *
(A) * * * The term option means the right or privilege of a person
to purchase stock from a corporation by virtue of an offer of the
corporation continuing for a stated period of time, whether or not
irrevocable, to sell such stock at a price determined under paragraph
(b)(5)(vi)(D) of this section, such person being under no obligation to
purchase.
* * * * *
(E) Exercise. The term exercise, when used in reference to an
option, means the act of acceptance by the holder of the option of the
offer to sell contained in the option. In general, the time of exercise
is the time when there is a sale or a contract to sell between the
corporation and the holder. A promise to pay the exercise price is not
an exercise of the option unless the holder of the option is subject to
personal liability on such promise. An agreement or undertaking by the
service provider to make payments under a stock purchase plan is not
the exercise of an option to the extent the payments made remain
subject to the withdrawal by or refund to the service provider.
(F) Transfer. The term transfer, when used in reference to the
transfer to a person of a share of stock pursuant to the exercise of an
option, means the transfer of ownership of such share, or the transfer
of substantially all the rights of ownership. Such transfer must,
within a reasonable time, be evidenced on the books of the corporation.
A transfer may occur even if a share of stock is subject to a
substantial risk of forfeiture or is not otherwise transferable
immediately after the date of exercise. A transfer does not fail to
occur merely because, under the terms of the arrangement, the person
may not dispose of the share for a specified period of time, or the
share is subject to a right of first refusal or a right to acquire the
share at the share's fair market value at the time of the sale.
* * * * *
(9) * * *
(iii) * * *
(A) The separation pay (other than amounts described in paragraphs
(b)(9)(iv) and (v) of this section) does not exceed two times the
lesser of--
(1) The service provider's annualized compensation based upon the
annual rate of pay for services provided to the service recipient for
the service provider's taxable year preceding the taxable year in which
the service provider has a separation from service with such service
recipient (or for the taxable year in which the service provider has a
separation from service if the service provider had no compensation
from the service recipient in the preceding taxable year), adjusted for
any increase during that year that was expected to continue
indefinitely if the service provider had not separated from service; or
(2) The maximum amount that may be taken into account under a
qualified retirement plan pursuant to section 401(a)(17) for the
calendar year in which the service provider has a separation from
service.
* * * * *
(11) * * * In addition, a plan does not provide for a deferral of
compensation for purposes of this paragraph (b) to the extent it
provides for a payment of reasonable attorneys' fees or other
reasonable expenses incurred by the service provider to enforce any
bona fide legal claim against the service recipient with respect to the
service relationship between the service provider and the service
recipient.
* * * * *
(13) Recurring part-year compensation. A plan in which a service
provider participates that provides for the payment of recurring part-
year compensation (as defined in Sec. 1.409A-2(a)(14)), whether or not
at the service provider's election, does not provide for a deferral of
compensation for purposes of this paragraph (b) if the plan does not
defer payment of any of the recurring part-year compensation to a date
beyond the last day of the 13th month following the first day of the
service period for which the recurring part-year compensation is paid,
and the amount of the service provider's recurring part-year
compensation does not exceed the annual compensation limit under
section 401(a)(17) for the calendar year in which the service period
commences.
* * * * *
(h) * * *
(4) Asset purchase transactions. If as part of a sale or other
disposition of assets by one service recipient (seller) to an unrelated
service recipient (buyer), a service provider of the seller would
otherwise experience a separation from service with the seller, the
seller and the buyer may retain the discretion to specify, and may
specify, whether a service provider providing services to the seller
immediately before the asset purchase transaction and providing
services to the buyer after and as a result of the asset purchase
transaction has experienced a separation from service for purposes of
this paragraph (h), provided that the asset purchase transaction
results from bona fide, arm's length negotiations, all service
providers providing services to the seller immediately before the asset
purchase transaction and providing services to the buyer after and as a
result of the asset purchase transaction are treated consistently
(regardless of position at the seller) for purposes of applying the
provisions of any nonqualified deferred compensation plan, and such
treatment is specified in writing no later than the closing date of the
asset purchase transaction. For purposes of this paragraph (h)(4),
references to a sale or other disposition of assets, or an asset
purchase transaction, refer only to a transfer of substantial assets,
such as a plant or division or substantially all of the assets of a
trade or business, and do not refer to a stock purchase treated as a
deemed asset sale under section 338. For purposes of this paragraph
(h)(4), whether a service recipient is related to another service
recipient is determined under the rules provided in paragraph
(f)(2)(ii) of this section.
(5) Dual status. If a service provider provides services both as an
employee of a service recipient and as an independent contractor of the
service recipient, the service provider must separate from service both
as an employee and as an independent contractor to be treated as having
separated from service. Notwithstanding the foregoing, if a service
provider provides services both as an employee of a service recipient
and as a member of the board of directors of a corporate service
recipient (or an analogous position with respect to a non-corporate
service recipient), the services provided as a director are not taken
into account in determining whether the service provider has a
separation from service as an employee for purposes of a nonqualified
deferred compensation plan in which the service provider participates
as an employee that is not aggregated with any plan in which the
service provider participates as a director under paragraph (c)(2)(ii)
of this section. In addition, if a service provider provides services
both as an employee of a service recipient and as a member of the board
of directors of a corporate service recipient (or an analogous position
with respect to a non-corporate service recipient), the services
provided as an employee are not taken into account in determining
whether the service provider has a separation from service as a
director for purposes of a nonqualified deferred compensation plan in
which the service provider participates as a director that is not
aggregated with any plan in which the service provider participates as
an
[[Page 40581]]
employee under paragraph (c)(2)(ii) of this section.
* * * * *
(q) References to a payment being made. A payment is made or an
amount is paid or received when any taxable benefit is actually or
constructively received, which includes a transfer of cash, a transfer
of property includible in income under section 83, any other event that
results in the inclusion in income under the economic benefit doctrine,
a contribution to a trust described in section 402(b) at the time
includible in income under section 402(b), a transfer or creation of a
beneficial interest in a section 402(b) trust at the time includible in
income under section 402(b), and the inclusion of an amount in income
under 457(f)(1)(A). In addition, a payment is made or an amount is paid
or received upon the transfer, cancellation, or reduction of an amount
of deferred compensation in exchange for benefits under a welfare
benefit plan, a fringe benefit excludible under section 119 or section
132, or any other benefit that is excludible from gross income.
Notwithstanding the foregoing, the occurrence of any of the following
events is not a payment:
(1) a grant of an option that does not have a readily ascertainable
fair market value (as defined under Sec. 1.83-7(b));
(2) a transfer of property (including an option that has a readily
ascertainable fair market value) that is substantially nonvested (as
defined under Sec. 1.83-3(b)) with respect to which the service
provider does not make a valid election under section 83(b); or
(3) a contribution to a trust described in section 402(b) or a
transfer or creation of a beneficial interest in a section 402(b) trust
unless and until the amount is includible in income under section
402(b).
(r) Application of definitions and rules. The definitions and rules
set forth in paragraphs (a) through (q) of this section apply for
purposes of section 409A, this section, and Sec. Sec. 1.409A-2 through
1.409A-6.
0
Par. 4. Section 1.409A-2 is amended by revising paragraph (b)(2)(i) to
read as follows:
Sec. 1.409A-2 Deferral elections.
* * * * *
(b) * * *
(2) Definitions of payments for purposes of subsequent changes in
the time or form of payment--(i) In general. Except as provided in
paragraphs (b)(2)(ii) and (iii) of this section, the term payment
refers to each separately identified amount to which a service provider
is entitled to payment under a plan on a determinable date, and
includes amounts applied for the benefit of the service provider. An
amount is separately identified only if the amount may be objectively
determined under a nondiscretionary formula. For example, an amount
identified as 10 percent of the account balance as of a specified
payment date would be a separately identified amount. The determination
of whether a payment is or has been made for purposes of this paragraph
(b) is made in accordance with the rules in Sec. 1.409A-1(q). For
additional rules relating to the application of this paragraph (b) to
amounts payable at a fixed time or pursuant to a fixed schedule, see
Sec. 1.409A-3(i)(1).
* * * * *
0
Par. 5. Section 1.409A-3 is amended by:
0
1. Revising paragraph (b).
0
2. Redesignating paragraph (d) as paragraph (d)(1) and revising the
heading of paragraph (d)(1).
0
3. Adding paragraph (d)(2).
0
4. Revising paragraphs (i)(5)(iii) and (i)(5)(iv)(A).
0
5. Revising paragraphs (j)(1) and (j)(2).
0
6. Revising paragraph (j)(4)(iii)(B).
0
7. Revising paragraphs (j)(4)(ix)(A) and (j)(4)(ix)(C).
0
8. Revising paragraph (j)(4)(xiii).
The revisions and additions read as follows:
Sec. 1.409A-3 Permissible payments.
* * * * *
(b) Designation of payment upon a permissible payment event. Except
as otherwise specified in this section, a plan provides for the payment
upon an event described in paragraph (a)(1), (2), (3), (5), or (6) of
this section if the plan provides the date of the event is the payment
date, or specifies another payment date that is objectively
determinable and nondiscretionary at the time the event occurs. A plan
may also provide that a payment upon an event described in paragraph
(a)(1), (2), (3), (5), or (6) of this section is to be made in
accordance with a schedule that is objectively determinable and
nondiscretionary based on the date the event occurs and that would
qualify as a fixed schedule under paragraph (i)(1) of this section if
the payment event were instead a fixed date, provided that the schedule
must be fixed at the time the permissible payment event is designated.
In addition, a plan may provide that a payment, including a payment
that is part of a schedule, is to be made during a designated taxable
year of the service provider that is objectively determinable and
nondiscretionary at the time the payment event occurs such as, for
example, a schedule of three substantially equal payments payable
during the first three taxable years following the taxable year in
which a separation from service occurs. A plan may also provide that a
payment, including a payment that is part of a schedule, is to be made
during a designated period objectively determinable and
nondiscretionary at the time the payment event occurs, but only if the
designated period both begins and ends within one taxable year of the
service provider or the designated period is not more than 90 days and
the service provider does not have a right to designate the taxable
year of the payment (other than an election that complies with the
subsequent deferral election rules of Sec. 1.409A-2(b)). However, in
the case of a payment to be made following the death of the service
provider or a beneficiary who has become entitled to payment due to the
service provider's death, in addition to the permitted designated
periods described in the previous sentence, the designated period may
begin on the date of death and end on December 31 of the first calendar
year following the calendar year during which the death occurs, and the
payment recipient may have the right to designate the taxable year of
payment. If a plan provides for a period of more than one day following
a payment event during which a payment may be made, such as permitting
payment within 90 days following the date of the event, the payment
date for purposes of the subsequent deferral rules under Sec. 1.409A-
2(b) is treated as the first possible date upon which a payment could
be made under the terms of the plan. A plan may provide for payment
upon the earliest or latest of more than one event or time, provided
that each event or time is described in paragraphs (a)(1) through (6)
of this section. For examples illustrating the provisions of this
paragraph, see paragraph (i)(1)(vi) of this section.
* * * * *
(d) When a payment is treated as made upon the designated payment
date--(1) In general. * * *
(2) Payments due following death. A payment specified to be made
under the plan on any date within the period beginning on the date of
the death of the service provider, or of a beneficiary who has become
entitled to payment due to the service provider's death, and ending on
December 31 of the first calendar year following the calendar year
during which the death occurs (including a payment specified to be made
upon death) is treated as made on the date
[[Page 40582]]
specified under the plan if the payment is made on any date during this
period, regardless of whether the payment recipient designates the
taxable year of payment. Further, any change to the time or form of a
payment that is specified to be made under the plan during this period
to provide that the payment will be made on any other date during this
period will not be treated as a subsequent deferral election for
purposes of Sec. 1.409A-2(b)(1) or an impermissible acceleration for
purposes of Sec. 1.409A-3(j)(1).
* * * * *
(i) * * *
(5) * * *
(iii) Attribution of stock ownership. For purposes of paragraph
(i)(5) of this section, section 318(a) applies to determine stock
ownership. Stock underlying a vested option is considered owned by the
person who holds the vested option (and the stock underlying a
nonvested option is not considered owned by the person who holds the
nonvested option). For purposes of the preceding sentence, however, if
a vested option is exercisable for stock that is not substantially
vested (as defined by Sec. 1.83-3(b) and (j)), the stock underlying
the option is not treated as owned by the person who holds the option.
* * * * *
(iv) Special rules for certain delayed payments pursuant to a
change in control event--(A) Certain transaction-based compensation.
Payments of compensation related to a change in control event described
in paragraph (i)(5)(v) of this section (change in the ownership of a
corporation) or paragraph (i)(5)(vii) of this section (change in the
ownership of a substantial portion of a corporation's assets) that
occur because a service recipient purchases its stock held by the
service provider or because the service recipient or a third party
purchases a stock right or a statutory stock option described in Sec.
1.409A-(1)(b)(5)(ii) held by a service provider, or that are calculated
by reference to the value of stock of the service recipient
(collectively, transaction-based compensation), may be treated as paid
on a designated date or pursuant to a payment schedule that complies
with the requirements of section 409A if the transaction-based
compensation is paid on the same schedule and under the same terms and
conditions as apply to payments to shareholders generally with respect
to stock of the service recipient pursuant to a change in control event
described in paragraph (i)(5)(v) of this section (change in the
ownership of a corporation) or as apply to payments to the service
recipient pursuant to a change in control event described in paragraph
(i)(5)(vii) of this section (change in the ownership of a substantial
portion of a corporation's assets). In addition, to the extent that the
transaction-based compensation is paid not later than five years after
the change in control event, the payment of such compensation will not
violate the initial or subsequent deferral election rules set out in
Sec. 1.409A-2(a) and (b) solely as a result of such transaction-based
compensation being paid pursuant to such schedule and terms and
conditions. The payment or agreement to pay transaction-based
compensation payable with respect to a stock right described in Sec.
1.409A-(1)(b)(5)(i)(A) or (B) or a statutory stock option described in
Sec. 1.409A-(1)(b)(5)(ii) also will not cause the stock right or
statutory stock option to be treated as having provided for the
deferral of compensation from the original grant date solely as a
result of the transaction-based compensation being paid on the same
schedule and under the same terms and conditions as apply to payments
to shareholders generally with respect to stock of the service
recipient pursuant to the change in control event described in
paragraph (i)(5)(v) of this section (change in the ownership of a
corporation) or as apply to payments to the service recipient pursuant
to the change in control event described in paragraph (i)(5)(vii) of
this section (change in the ownership of a substantial portion of a
corporation's assets) and the transaction-based compensation is paid
not later than five years after the change in control event. If before
and in connection with a change in control event described in paragraph
(i)(5)(v) or (i)(5)(vii) of this section, transaction-based
compensation that would otherwise be payable as a result of such event
is made subject to a condition on payment that is a substantial risk of
forfeiture (as defined in Sec. 1.409A-1(d), without regard to the
provisions of that section under which additions or extensions of
forfeiture conditions are disregarded) and the transaction-based
compensation is payable under the same terms and conditions as apply to
payments made to shareholders generally with respect to stock of the
service recipient pursuant to a change in control event described in
paragraph (i)(5)(v) of this section or to payments to the service
recipient pursuant to a change in control event described in paragraph
(i)(5)(vii) of this section, for purposes of determining whether such
transaction-based compensation is a short-term deferral the
requirements of Sec. 1.409A-1(b)(4) are applied as if the legally
binding right to such transaction-based compensation arose on the date
that it became subject to such substantial risk of forfeiture.
* * * * *
(j) Prohibition on acceleration of payments--(1) In general--Except
as provided in paragraph (j)(4) of this section, a nonqualified
deferred compensation plan may not permit the acceleration of the time
or schedule of any payment or amount scheduled to be paid pursuant to
the terms of the plan, and no such accelerated payment may be made
whether or not provided for under the terms of such plan. For purposes
of determining whether a payment of deferred compensation has been
made, the rules of paragraph (f) of this section (on substituted
payments) apply. For purposes of this paragraph (j), an impermissible
acceleration does not occur if payment is made in accordance with plan
provisions or an election as to the time and form of payment in effect
at the time of initial deferral (or added in accordance with the rules
applicable to subsequent deferral elections under Sec. 1.409A-2(b))
pursuant to which payment is required to be made on an accelerated
schedule as a result of an intervening payment event that is an event
described in paragraph (a)(1), (2), (3), (5) or (6) of this section.
For such purpose, the intervening payment event may apply with respect
to either the service provider or, following the service provider's
death, a beneficiary who becomes entitled to payment due to the service
provider's death (substituting such beneficiary for the service
provider in the definitions of disability in paragraph (i)(4) of this
section and unforeseeable emergency in paragraph (i)(3) of this
section, as applicable). For example, a plan may provide that a
participant will receive six installment payments commencing at
separation from service, and also provide that if the participant dies
after such payments commence but before all payments have been made,
all remaining amounts will be paid in a lump sum payment. Additionally,
it is not an acceleration of the time or schedule of payment of a
deferral of compensation if a service recipient waives or accelerates
the satisfaction of a condition constituting a substantial risk of
forfeiture applicable to such deferral of compensation, provided that
the requirements of section 409A (including the requirement that the
payment be made upon a permissible payment event) are otherwise
satisfied with respect to such
[[Page 40583]]
deferral of compensation. For example, if a nonqualified deferred
compensation plan provides for a lump sum payment of the vested benefit
upon separation from service, and the benefit vests under the plan only
after 10 years of service, it is not a violation of the requirements of
section 409A if the service recipient reduces the vesting requirement
to five years of service, even if a service provider becomes vested as
a result and receives a payment in connection with a separation from
service before the service provider would have completed 10 years of
service. However, if the plan in this example had provided for a
payment on a fixed date, rather than at separation from service, the
date of payment could not be accelerated due to the accelerated
vesting. For the definition of a payment for purposes of this paragraph
(j), see Sec. 1.409A-2(b)(5) (coordination of the subsequent deferral
election rules with the prohibition on acceleration of payments). For
other permissible payments, see Sec. 1.409A-2(b)(2)(iii) (certain
immediate payments of remaining installments) and paragraph (d) of this
section (certain payments made no more than 30 days before the
designated payment date).
(2) Application to multiple payment events. The addition of a
permissible payment event, the deletion of a permissible payment event,
or the substitution of one permissible payment event for another
permissible payment event, results in an acceleration of a payment if
the addition, deletion, or substitution could result in the payment
being made on an earlier date than such payment would have been made
absent such addition, deletion, or substitution. Notwithstanding the
previous sentence, the addition of death, disability (as defined in
paragraph (i)(4) of this section), or an unforeseeable emergency (as
defined in paragraph (i)(3) of this section), as a potentially earlier
alternative or intervening payment event to an amount previously
deferred will not be treated as resulting in an acceleration of a
payment, even if such addition results in the payment being paid at an
earlier time than such payment would have been made absent the addition
of the payment event. For such purpose, the earlier alternative or
intervening payment event may apply with respect to either the service
provider or, following the service provider's death, a beneficiary who
becomes entitled to payment due to the service provider's death
(substituting such beneficiary for the service provider in the
definitions of disability in paragraph (i)(4) of this section and
unforeseeable emergency in paragraph (i)(3) of this section, as
applicable). However, the addition of such a payment event as a
potentially later alternative payment event generally is subject to the
rules governing changes in the time and form of payment (see Sec.
1.409A-2(b)).
* * * * *
(4) * * *
(iii) * * *
(B) Compliance with ethics laws or conflicts of interest laws. A
plan may provide for acceleration of the time or schedule of a payment
under the plan, or a payment may be made under a plan, to the extent
reasonably necessary to avoid the violation of an applicable Federal,
state, local, or bona fide foreign ethics law or conflicts of interest
law (including under circumstances in which such payment is reasonably
necessary to permit the service provider to participate in activities
in the normal course of his or her position in which the service
provider would otherwise not be able to participate under an applicable
rule). A payment is reasonably necessary to avoid the violation of a
Federal, state, local, or bona fide foreign ethics law or conflicts of
interest law if the payment is a necessary part of a course of action
that results in compliance with a Federal, state, local, or bona fide
foreign ethics law or conflicts of interest law that would be violated
absent such course of action, regardless of whether other actions would
also result in compliance with the Federal, state, local, or bona fide
foreign ethics law or conflicts of interest law.
* * * * *
(ix) * * *
(A) The service recipient's termination and liquidation of the plan
within 12 months of a corporate dissolution taxed under section 331, or
with the approval of a U.S. bankruptcy court, provided that the amounts
deferred under the plan are included in the participants' gross incomes
in the latest of the following years (or, if earlier, the taxable year
in which the amount is actually or constructively received).
(1) The calendar year in which the plan termination and liquidation
occurs;
(2) The first calendar year in which the amount is no longer
subject to a substantial risk of forfeiture; or
(3) The first calendar year in which the payment is
administratively practicable.
* * * * *
(C) The service recipient's termination and liquidation of the
plan, provided that--
(1) The termination and liquidation does not occur proximate to a
downturn in the financial health of the service recipient;
(2) The service recipient terminates and liquidates all agreements,
methods, programs, and other arrangements sponsored by the service
recipient that would be aggregated with any terminated and liquidated
agreements, methods, programs, and other arrangements under Sec.
1.409A-1(c) as if there were one service provider that had deferrals of
compensation under every such agreement, method, program, and other
arrangement sponsored by the service recipient (for example, all
elective account balance plans that the service recipient sponsors);
(3) No payments in liquidation of the plan are made within 12
months of the date the service recipient takes all necessary action to
irrevocably terminate and liquidate the plan other than payments that
would be payable under the terms of the plan if the action to terminate
and liquidate the plan had not occurred;
(4) All payments are made within 24 months of the date the service
recipient takes all necessary action to irrevocably terminate and
liquidate the plan; and
(5) The service recipient does not adopt any new agreement, method,
program, or other arrangement described in paragraph (C)(2) of this
subsection, at any time within three years following the date the
service recipient takes all necessary action to irrevocably terminate
and liquidate the plan.
* * * * *
(xiii) Certain offsets--(A) De minimis offset. A plan may provide
for the acceleration of the time or schedule of a payment, or a payment
may be made under such plan, as satisfaction of a debt of the service
provider to the service recipient, if such debt is incurred in the
ordinary course of the service relationship between the service
recipient and the service provider, the entire amount of reduction in
any of the service recipient's taxable years does not exceed $5,000,
and the reduction is made at the same time and in the same amount as
the debt otherwise would have been due and collected from the service
provider.
(B) Compliance with Federal debt collection laws. A plan may
provide for the acceleration of the time or schedule of a payment, or a
payment may be made under such plan, as satisfaction of a debt of the
service provider to the service recipient, to the extent reasonably
necessary to comply with 31 U.S.C. 3711 et. seq. or similar Federal
nontax law regarding debt collection relating to claims of the Federal
[[Page 40584]]
government. A payment is reasonably necessary to comply with such a
Federal debt collection law if the payment is a necessary part of a
course of action that results in compliance with the Federal debt
collection law that would be violated absent such course of action,
regardless of whether other actions would also result in compliance
with the Federal debt collection law.
* * * * *
0
Par. 6. Section 1.409A-4 (REG-148326-05), as proposed at 73 FR 74380
(December 8, 2008), is proposed to be amended by revising paragraph
(a)(1)(ii)(B) to read as follows:
Sec. 1.409A-4 Calculation of amount includible in income and
additional income taxes.
* * * * *
(B) Treatment of certain deferred amounts otherwise subject to a
substantial risk of forfeiture--(1) Risk of forfeiture disregarded. For
purposes of determining the amount includible in income under section
409A(a)(1) and paragraph (a)(1)(i) of this section, an amount deferred
under a plan that is otherwise subject to a substantial risk of
forfeiture for a taxable year is treated as not subject to a
substantial risk of forfeiture for the taxable year, if during the
taxable year any of the following occur:
(i) A change (including an initial deferral election) that is not
authorized under Sec. 1.409A-1, Sec. 1.409A-2, or Sec. 1.409A-3 is
made to a provision of the plan providing for the time or form of
payment of the deferred amount, if the service recipient has not made a
reasonable, good faith determination that, absent the change, the
provision fails to comply with the requirements of section 409A(a).
(ii) The service recipient has engaged in a pattern or practice of
permitting substantially similar failures to comply with section
409A(a) under one or more nonqualified deferred compensation plans
while amounts deferred under the plans are nonvested, and the facts and
circumstances indicate that the deferred amount would be affected by
the pattern or practice. Whether such a pattern or practice exists will
depend on the facts and circumstances, including, but not limited to,
whether the service recipient has taken commercially reasonable
measures to identify and correct the substantially similar failures
promptly upon discovery, whether the failures have affected nonvested
deferred amounts with greater frequency than vested deferred amounts,
whether the failures have occurred more frequently under newly adopted
plans, and whether the failures appear intentional, are numerous, or
repeat one or more similar past failures that were previously
identified and corrected.
(iii) The correction of a failure to comply with section 409A(a)
affecting the deferred amount is not consistent with an applicable
correction method (if one exists) set forth in applicable guidance
issued by the Treasury Department and the IRS for correcting failures
under section 409A(a), or the failure is not corrected in substantially
the same manner as a substantially similar failure affecting a
nonvested deferred amount under another plan sponsored by the service
recipient. Solely with respect to the deferred amount, the requirements
under applicable correction guidance with respect to eligibility,
income inclusion, additional taxes, premium interest, and information
reporting by the service recipient or service provider do not apply.
0
Par. 7. Section 1.409A-6 is amended by revising paragraph (b) to read
as follows:
Sec. 1.409A-6 Application of section 409A and effective dates.
* * * * *
(b) Regulatory applicability date. Section 1.409A-0, Sec. 1.409A-
1, Sec. 1.409A-2, Sec. 1.409A-3 and this section, as amended, apply
for taxable years beginning on or after publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register. Section 1.409A-0, Sec. 1.409A-1, Sec. 1.409A-2, Sec.
1.409A-3 and this section as they appeared in the April 2009 edition of
26 CFR part 1 apply for taxable years beginning on or after January 1,
2009 and before publication of the Treasury decision adopting these
rules as final regulations in the Federal Register.
John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-14331 Filed 6-21-16; 8:45 am]
BILLING CODE 4830-01-P