Nonqualified Plan for a Non-Service Provider.

We have a situation where a client has won a judgment against a defendant.  Instead of taking the settlement money directly, the client would like the defendant to fund a NQDC Plan.

Because the client is not a service provider to the defendant, I don't think 409A applies.  Is that accurate?

If so, what, then, governs the NQDC Plan?  Is this based entirely on the "constructive receipt" doctrine?  Do we still have to follow the 409A restrictions regarding distribution events, or can we be a bit more creative (e.g. if the client has a "down year" where their profits are below $____ it would trigger a payment)?

I appreciate any advice, even if it is just spit-balling.

Is the judgment taxable?

Without knowing the facts - and the many variations they could take - this recent IRS GLAM provides some discussion of related topics from a compensation standpoint (assuming there is some compensatory aspect here). Not sure how close your situation is to the facts in the GLAM, or whether the arrangement would be similar to product marketed therein, but may be worth a read:

AM 2022-007 (irs.gov)

Without knowing all the facts, every objection I could think of (in theory) is contained in the GLAM @EBECatty posted.  

2 hours ago, david rigby said:

Is the judgment taxable?

Yes.  Without asking the client, I assume they wouldn't be looking at NQDC arrangements as a potential vehicle if the amounts were not taxable.

2 hours ago, EBECatty said:

Without knowing the facts - and the many variations they could take - this recent IRS GLAM provides some discussion of related topics from a compensation standpoint (assuming there is some compensatory aspect here). Not sure how close your situation is to the facts in the GLAM, or whether the arrangement would be similar to product marketed therein, but may be worth a read:

AM 2022-007 (irs.gov)

@EBECatty and @XTitan -

I believe this situation is different.  In the GLAM, the law firm is being paid fees from the client -- I see that as a service recipient (client) paying fees to a service provider (law firm).  In our case, the law firm is being paid legal fees by the opposing party.  The law firm did not provide any services to the opposing party.  In the GLAM it provides that if the arrangement is a nonqualified deferred compensation (NQDC) plan, it fails 409A.  In our case, since it is not a service provider/service recipient relationship, I don't think it would constitute NQDC under 409A.

Please let me know if you think I'm mistaken.

Assuming I'm right, can it be a NQDC arrangement that isn't governed by 409A?  If so, can we include alternate payment triggers that are not 409A compliant (so long as we satisfy, say, the "constructive receipt" doctrine)?

There may well be more direct guidance, but I'm not confident enough of any answer to hazard a guess. 

It's not a nqdc plan because it's not compensation.