[Federal Register: July 31, 2007 (Volume 72, Number 146)]
[Rules and Regulations]
[Page 41620-41623]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31jy07-8]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9321]
RIN 1545-BE79


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendments.

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

DATES: This correction is effective July 31, 2007.

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

SUPPLEMENTARY INFORMATION:

Background

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

Need for Correction

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.


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

PART 1--INCOME TAXES

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

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


Sec.  1.409A-1  [Corrected]

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


Sec.  1.409A-1  Definitions and covered plans.

    (a) * * *
    (3) * * *
    (i) * * * With respect to an individual for a taxable year, the
term nonqualified deferred compensation plan does not include any
scheme, trust, arrangement, or plan maintained with respect to such
individual, to the extent contributions made by or on behalf of such
individual to such scheme, trust, arrangement, or plan, or credited
allocations, accrued benefits, earnings, or other amounts constituting
income, of such individual under such scheme, trust, arrangement, or
plan, are excludable by such individual for Federal income tax purposes
pursuant to any bilateral income tax convention, or other bilateral or
multilateral agreement, to which the United States is a party.
* * * * *
    (5) * * * The term nonqualified deferred compensation plan does not
include a plan, or a portion of a plan, to the extent that the plan
provides bona fide vacation leave, sick leave, compensatory time,
disability pay, or death benefits. For these purposes, the terms
``disability pay'' and ``death benefits'' have the same meanings as
provided in Sec.  31.3121(v)(2)-1(b)(4)(iv)(C) of this chapter,
provided that for purposes of this paragraph, such disability pay and
death benefits may be provided through insurance and the lifetime
benefits payable under the plan are not treated as including the value
of any taxable term life insurance coverage or taxable disability
insurance coverage provided under the plan. * * *
    (b) * * *
    (4) * * * (i) In general. A deferral of compensation does not occur
under a plan with respect to any payment (as defined in Sec.  1.409A-
2(b)(2)) that is not a deferred payment, provided that the service
provider actually or constructively receives such payment on or before
the last day of the applicable 2\1/2\ month period. * * *
* * * * *
    (D) A payment is a deferred payment if it is made pursuant to a
provision of a plan that provides for the payment to be made or
completed on or after any date, or upon or after the occurrence of any
event, that will or may occur later than the end of the applicable 2\1/
2\ month period, such as a separation from service, death, disability,
change in control event, specified time or schedule of payment, or
unforeseeable emergency, regardless of whether an amount is actually
paid as a result of the occurrence of such a payment date or event
during the applicable 2\1/2\ month period. * * *
* * * * *
    (iii) * * *
    Example 3. * * * The bonus plan will not be considered to have
provided for a deferral of compensation if the bonus is paid or made
available to Employee C on or before March 15, 2011.
* * * * *
    Example 5. * * * The bonus plan provides for a deferral of
compensation, and will not qualify as a short-term deferral regardless
of whether the bonus is paid or made available on or before March 15,
2011 (and generally any payment before June 1, 2011 would constitute an
impermissible acceleration of a payment).
* * * * *
    (5) * * *
    (iv) * * *
    (B) * * *

[[Page 41621]]

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


Sec.  1.409A-2  [Corrected]

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


Sec.  1.409A-2  Deferral elections.

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

[[Page 41622]]

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


Sec.  1.409A-3  [Corrected]

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


Sec.  1.409A-3  Permissible payments.

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

[[Page 41623]]

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


Sec.  1.409A-6  [Corrected]

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


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

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

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

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