26 U.S.C. § 409A : US Code - Section 409A: Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans

Search 26 U.S.C. § 409A : US Code - Section 409A: Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans

(a) Rules relating to constructive receipt
(1) Plan failures
(A) Gross income inclusion
(i) In general
If at any time during a taxable year a nonqualified
deferred compensation plan -
(I) fails to meet the requirements of paragraphs (2),
(3), and (4), or
(II) is not operated in accordance with such
requirements,
all compensation deferred under the plan for the taxable year
and all preceding taxable years shall be includible in gross
income for the taxable year to the extent not subject to a
substantial risk of forfeiture and not previously included in
gross income.
(ii) Application only to affected participants
Clause (i) shall only apply with respect to all
compensation deferred under the plan for participants with
respect to whom the failure relates.
(B) Interest and additional tax payable with respect to
previously deferred compensation
(i) In general
If compensation is required to be included in gross income
under subparagraph (A) for a taxable year, the tax imposed by
this chapter for the taxable year shall be increased by the
sum of -
(I) the amount of interest determined under clause (ii),
and
(II) an amount equal to 20 percent of the compensation
which is required to be included in gross income.
(ii) Interest
For purposes of clause (i), the interest determined under
this clause for any taxable year is the amount of interest at
the underpayment rate plus 1 percentage point on the
underpayments that would have occurred had the deferred
compensation been includible in gross income for the taxable
year in which first deferred or, if later, the first taxable
year in which such deferred compensation is not subject to a
substantial risk of forfeiture.
(2) Distributions
(A) In general
The requirements of this paragraph are met if the plan
provides that compensation deferred under the plan may not be
distributed earlier than -
(i) separation from service as determined by the Secretary
(except as provided in subparagraph (B)(i)),
(ii) the date the participant becomes disabled (within the
meaning of subparagraph (C)),
(iii) death,
(iv) a specified time (or pursuant to a fixed schedule)
specified under the plan at the date of the deferral of such
compensation,
(v) to the extent provided by the Secretary, a change in
the ownership or effective control of the corporation, or in
the ownership of a substantial portion of the assets of the
corporation, or
(vi) the occurrence of an unforeseeable emergency.
(B) Special rules
(i) Specified employees
In the case of any specified employee, the requirement of
subparagraph (A)(i) is met only if distributions may not be
made before the date which is 6 months after the date of
separation from service (or, if earlier, the date of death of
the employee). For purposes of the preceding sentence, a
specified employee is a key employee (as defined in section
416(i) without regard to paragraph (5) thereof) of a
corporation any stock in which is publicly traded on an
established securities market or otherwise.
(ii) Unforeseeable emergency
For purposes of subparagraph (A)(vi) -
(I) In general
The term "unforeseeable emergency" means a severe
financial hardship to the participant resulting from an
illness or accident of the participant, the participant's
spouse, or a dependent (as defined in section 152(a)) of
the participant, loss of the participant's property due to
casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the
control of the participant.
(II) Limitation on distributions
The requirement of subparagraph (A)(vi) is met only if,
as determined under regulations of the Secretary, the
amounts distributed with respect to an emergency do not
exceed the amounts necessary to satisfy such emergency plus
amounts necessary to pay taxes reasonably anticipated as a
result of the distribution, after taking into account the
extent to which such hardship is or may be relieved through
reimbursement or compensation by insurance or otherwise or
by liquidation of the participant's assets (to the extent
the liquidation of such assets would not itself cause
severe financial hardship).
(C) Disabled
For purposes of subparagraph (A)(ii), a participant shall be
considered disabled if the participant -
(i) is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental
impairment which can be expected to result in death or can be
expected to last for a continuous period of not less than 12
months, or
(ii) is, by reason of any medically determinable physical
or mental impairment which can be expected to result in death
or can be expected to last for a continuous period of not
less than 12 months, receiving income replacement benefits
for a period of not less than 3 months under an accident and
health plan covering employees of the participant's employer.
(3) Acceleration of benefits
The requirements of this paragraph are met if the plan does not
permit the acceleration of the time or schedule of any payment
under the plan, except as provided in regulations by the
Secretary.
(4) Elections
(A) In general
The requirements of this paragraph are met if the
requirements of subparagraphs (B) and (C) are met.
(B) Initial deferral decision
(i) In general
The requirements of this subparagraph are met if the plan
provides that compensation for services performed during a
taxable year may be deferred at the participant's election
only if the election to defer such compensation is made not
later than the close of the preceding taxable year or at such
other time as provided in regulations.
(ii) First year of eligibility
In the case of the first year in which a participant
becomes eligible to participate in the plan, such election
may be made with respect to services to be performed
subsequent to the election within 30 days after the date the
participant becomes eligible to participate in such plan.
(iii) Performance-based compensation
In the case of any performance-based compensation based on
services performed over a period of at least 12 months, such
election may be made no later than 6 months before the end of
the period.
(C) Changes in time and form of distribution
The requirements of this subparagraph are met if, in the case
of a plan which permits under a subsequent election a delay in
a payment or a change in the form of payment -
(i) the plan requires that such election may not take
effect until at least 12 months after the date on which the
election is made,
(ii) in the case of an election related to a payment not
described in clause (ii), (iii), or (vi) of paragraph (2)(A),
the plan requires that the payment with respect to which such
election is made be deferred for a period of not less than 5
years from the date such payment would otherwise have been
made, and
(iii) the plan requires that any election related to a
payment described in paragraph (2)(A)(iv) may not be made
less than 12 months prior to the date of the first scheduled
payment under such paragraph.
(b) Rules relating to funding
(1) Offshore property in a trust
In the case of assets set aside (directly or indirectly) in a
trust (or other arrangement determined by the Secretary) for
purposes of paying deferred compensation under a nonqualified
deferred compensation plan, for purposes of section 83 such
assets shall be treated as property transferred in connection
with the performance of services whether or not such assets are
available to satisfy claims of general creditors -
(A) at the time set aside if such assets (or such trust or
other arrangement) are located outside of the United States, or
(B) at the time transferred if such assets (or such trust or
other arrangement) are subsequently transferred outside of the
United States.
This paragraph shall not apply to assets located in a foreign
jurisdiction if substantially all of the services to which the
nonqualified deferred compensation relates are performed in such
jurisdiction.
(2) Employer's financial health
In the case of compensation deferred under a nonqualified
deferred compensation plan, there is a transfer of property
within the meaning of section 83 with respect to such
compensation as of the earlier of -
(A) the date on which the plan first provides that assets
will become restricted to the provision of benefits under the
plan in connection with a change in the employer's financial
health, or
(B) the date on which assets are so restricted,
whether or not such assets are available to satisfy claims of
general creditors.
(3) Income inclusion for offshore trusts and employer's financial
health
For each taxable year that assets treated as transferred under
this subsection remain set aside in a trust or other arrangement
subject to paragraph (1) or (2), any increase in value in, or
earnings with respect to, such assets shall be treated as an
additional transfer of property under this subsection (to the
extent not previously included in income).
(4) Interest on tax liability payable with respect to transferred
property
(A) In general
If amounts are required to be included in gross income by
reason of paragraph (1) or (2) for a taxable year, the tax
imposed by this chapter for such taxable year shall be
increased by the sum of -
(i) the amount of interest determined under subparagraph
(B), and
(ii) an amount equal to 20 percent of the amounts required
to be included in gross income.
(B) Interest
For purposes of subparagraph (A), the interest determined
under this subparagraph for any taxable year is the amount of
interest at the underpayment rate plus 1 percentage point on
the underpayments that would have occurred had the amounts so
required to be included in gross income by paragraph (1) or (2)
been includible in gross income for the taxable year in which
first deferred or, if later, the first taxable year in which
such amounts are not subject to a substantial risk of
forfeiture.
(c) No inference on earlier income inclusion or requirement of
later inclusion
Nothing in this section shall be construed to prevent the
inclusion of amounts in gross income under any other provision of
this chapter or any other rule of law earlier than the time
provided in this section. Any amount included in gross income under
this section shall not be required to be included in gross income
under any other provision of this chapter or any other rule of law
later than the time provided in this section.
(d) Other definitions and special rules
For purposes of this section:
(1) Nonqualified deferred compensation plan
The term "nonqualified deferred compensation plan" means any
plan that provides for the deferral of compensation, other than -

(A) a qualified employer plan, and
(B) any bona fide vacation leave, sick leave, compensatory
time, disability pay, or death benefit plan.
(2) Qualified employer plan
The term "qualified employer plan" means -
(A) any plan, contract, pension, account, or trust described
in subparagraph (A) or (B) of section 219(g)(5) (without regard
to subparagraph (A)(iii)),
(B) any eligible deferred compensation plan (within the
meaning of section 457(b)), and
(C) any plan described in section 415(m).
(3) Plan includes arrangements, etc.
The term "plan" includes any agreement or arrangement,
including an agreement or arrangement that includes one person.
(4) Substantial risk of forfeiture
The rights of a person to compensation are subject to a
substantial risk of forfeiture if such person's rights to such
compensation are conditioned upon the future performance of
substantial services by any individual.
(5) Treatment of earnings
References to deferred compensation shall be treated as
including references to income (whether actual or notional)
attributable to such compensation or such income.
(6) Aggregation rules
Except as provided by the Secretary, rules similar to the rules
of subsections (b) and (c) of section 414 shall apply.
(e) Regulations
The Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out the purposes of this section,
including regulations -
(1) providing for the determination of amounts of deferral in
the case of a nonqualified deferred compensation plan which is a
defined benefit plan,
(2) relating to changes in the ownership and control of a
corporation or assets of a corporation for purposes of subsection
(a)(2)(A)(v),
(3) exempting arrangements from the application of subsection
(b) if such arrangements will not result in an improper deferral
of United States tax and will not result in assets being
effectively beyond the reach of creditors,
(4) defining financial health for purposes of subsection
(b)(2), and
(5) disregarding a substantial risk of forfeiture in cases
where necessary to carry out the purposes of this section.