By Joseph S. Adams, Andrew C. Liazos, David G. Noren, Stephen Pavlick, William R. Pomierski, David E. Rogers, Thomas Ward McDermott Will & Emery LLP, Chicago, IL, Washington, DC
On January 8, 2009, the IRS released its initial guidance interpreting new §457A, which became effective on January 1, 2009. Section 457A generally provides that amounts deferred under a nonqualified deferred compensation plan sponsored by certain foreign and other “nonqualified” entities is taxable upon vesting. Special transitional rules are provided for deferrals attributable to services provided prior to the start of 2009. While enacted largely in response to the deferred compensation practices of offshore hedge funds, Notice 2009-8 confirms that deferral arrangements maintained by a wide range of foreign corporations and partnerships (foreign or domestic) are potentially subject to the new rules.
Notice 2009-8 addresses several important issues under §457A, including the following:
• What types of arrangements will be considered nonqualified deferred compensation subject to §457A, including exceptions for certain profits interest and compensatory options to acquire partnership capital interests
• How to identify the plan sponsor and whether the sponsor is a “nonqualified entity” subject to §457A - in addition to evaluating applicable income tax treaties and foreign tax systems, complex income sourcing rules (in the case of a foreign corporation), partnership allocation rules (in the case of a domestic or foreign partnership) and U.S. tax deduction rules must be applied in many cases
• What qualifies as a substantial risk of forfeiture for purposes of determining the year of “vesting” and the potential availability of a short-term deferral exception for amounts paid within one year of vesting
• How to determine whether deferred compensation is attributable to pre-2009 services - a special transition rule provides for the taxation of this compensation to be deferred until the later of vesting or the 2017 taxable year (unless included in income before then under another tax provision)
Notice 2009-8 also provides employers limited yet important transition relief, including the following:
A one-time opportunity to elect in writing no later than July 1, 2009, to accelerate the vesting of deferred compensation benefits retroactive to December 31, 2008, in order to avoid immediate income taxes for U.S. employees
The ability to change the time and form of payment with respect to deferred compensation that is attributable to services prior to 2009 without violating §409A or losing grandfathering from §409A at any time prior to December 31, 2011
The Treasury Department and the IRS anticipate issuing additional guidance under §457A and have requested comments regarding Notice 2009-8 and §457A. Until further guidance is issued, taxpayers may rely on this guidance for purposes of §457A. Any further guidance that would expand the coverage of §457A will be prospective.
For more information, in the Tax Management Portfolios, see Brisendine and Drigotas, 385 T.M., Deferred Compensation Arrangements, and in Tax Practice Series, see ¶5710, Nonqualified Deferred Compensation.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)