Department of the Treasury
Internal Revenue Service
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Rule 1.409A-1
Definitions and Covered Plans
(a) Nonqualified deferred compensation plan--
(1) In general. Except as otherwise provided in
this paragraph (a), the term nonqualified deferred compensation plan
means any plan (within the meaning of paragraph (c) of this section) that
provides for the deferral of compensation (within the meaning of paragraph
(b) of this section). Whether a plan provides for the deferral of compensation
generally is determined at the time the service provider obtains a legally
binding right to the compensation under the plan, and is not affected by
any retroactive change to the plan to characterize the right as one that
does not provide for the deferral of compensation. For example, amounts
deferred under a nonqualified deferred compensation plan do not become an
excluded death benefit if the plan is amended so that the amounts are payable
only upon the death of the service provider. If a principal purpose of a
plan is to achieve a result with respect to a deferral of compensation that
is inconsistent with the purposes of section 409A, the Commissioner may
treat the plan as a nonqualified deferred compensation plan for purposes
of section 409A and the regulations thereunder.
(2) Qualified employer plans. The term nonqualified
deferred compensation plan does not include a qualified employer plan.
The term qualified employer plan means any of the following plans:
(i) Any plan described in section 401(a) and a trust exempt
from tax under section 501(a) or that is described in section 402(d).
(ii) Any annuity plan described in section 403(a).
(iii) Any annuity contract described in section 403(b).
(iv) Any simplified employee pension (within the meaning
of section 408(k)).
(v) Any simple retirement account (within the meaning
of section 408(p)).
(vi) Any plan under which an active participant makes
deductible contributions to a trust described in section 501(c)(18).
(vii) Any eligible deferred compensation plan (within
the meaning of section 457(b)).
(viii) Any plan described in section 415(m).
(ix) Any plan described in §1022(i)(2) of the Employee
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829,
942) (Sept. 2, 1974) (ERISA).
(3) Certain foreign plans--
(i) Participation addressed by treaty. 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 to which the United States is a party.
(ii) Participation by nonresident aliens, certain resident
aliens, and bona fide residents of possessions. With respect to an alien
individual for a taxable year during which such individual is a nonresident
alien, a resident alien classified as a resident alien solely under section
7701(b)(1)(A)(ii) (and not section 7701(b)(1)(A)(i)), or a bona fide resident
of a possession (within the meaning of section 937(a)), the term nonqualified
deferred compensation plan does not include any broad-based foreign
retirement plan (within the meaning of paragraph (a)(3)(v) of this section).
(iii) Participation by U.S. citizens and lawful permanent
residents. With respect to an individual for a given taxable year during
which such individual is a U.S. citizen or a resident alien classified as
a resident alien under section 7701(b)(1)(A)(i), other than an individual
who is also a bona fide resident of a possession (within the meaning of
section 937(a)), the term nonqualified deferred compensation plan
does not include a broad-based foreign retirement plan (within the meaning
of paragraph (a)(3)(v) of this section), but only with respect to a plan,
or a portion of a plan where such portion may be distinguished, providing
for nonelective deferrals of modified foreign earned income, and earnings
with respect to such nonelective deferrals, and only to the extent that
the amounts deferred under all such plans of the service recipient, or all
portions of such plans, in which the service provider participates in such
taxable year, do not exceed the applicable limits under section 415(b) (applied
to nonaccount balance plans as defined in paragraph (c)(2)(i)(C) of this
section) and section 415(c) (applied to account balance plans as defined
in paragraph (c)(2)(i)(A) of this section) that would be applicable if such
plans were plans subject to section 415 and the modified foreign earned
income of such individual were treated as compensation for purposes of applying
section 415(b) and (c). For purposes of this paragraph (a)(3)(iii), the
term modified foreign earned income means foreign earned income as
defined in section 911(b)(1) without regard to section 911(b)(1)(B)(iv)
and without regard to the requirement that the income be attributable to
services performed during the period described in section 911(d)(1)(A) or
(B). The provisions of this paragraph (a)(3)(iii) do not apply to any individual
with respect to any taxable year in which the individual is simultaneously
eligible to participate in a broad-based foreign retirement plan and a qualified
employer plan described in paragraph (a)(2) of this section. For purposes
of this paragraph (a)(3)(iii), an individual is eligible to participate
in a qualified employer plan if under the terms of the plan and without
further amendment or action by the plan sponsor, the individual is eligible
to make or receive contributions or accrue benefits under the plan (regardless
of whether the individual has elected to participate in the plan).
(iv) Plans subject to a totalization agreement and
similar plans. The term nonqualified deferred compensation plan
does not include any social security system of a jurisdiction to the extent
that benefits provided under or contributions made to the system are subject
to an agreement entered into pursuant to section 233 of the Social Security
Act (42 U.S.C. 433) with any foreign jurisdiction. In addition, the term
nonqualified deferred compensation plan does not include a social
security system of a foreign jurisdiction to the extent that benefits are
provided under or contributions are made to a government-mandated plan as
part of that foreign jurisdictions social security system.
(v) Broad-based foreign retirement plan. The term
broad-based foreign retirement plan means a scheme, trust, arrangement,
or plan (regardless of whether sponsored by a U.S. person) that is written
and that, in the case of an employer-maintained plan, satisfies the following
conditions:
(A) The plan is nondiscriminatory insofar as the employees
who, under the terms of the plan (alone or in combination with other comparable
plans) and without further amendment or action by the employer, are eligible
to make or receive contributions or accrue benefits under the plan other
than earnings (regardless of whether the employee has elected to participate
in the plan), are a wide range of employees, substantially all of whom are
nonresident aliens, resident aliens classified as resident aliens solely
under section 7701(b)(1)(A)(ii) (and not section 7701(b)(1)(A)(i)), or bona
fide residents of a possession (within the meaning of section 937(a)), including
rank and file employees.
(B) The plan (alone or in combination with other comparable
plans) actually provides significant benefits for a substantial majority
of such covered employees.
(C) The benefits actually provided under the plan to such
covered employees are nondiscriminatory.
(D) The plan contains provisions or is the subject of
tax law provisions or other legal restrictions that generally discourage
employees from using plan benefits for purposes other than retirement or
restrict access to plan benefits before separation from service, including
(but not limited to), restricting in-service distributions except in events
similar to an unforeseeable emergency (as defined in §1.409A-3(i)(3)(i))
or hardship (as defined for purposes of section 401(k)(2)(B)(i)(IV)), or
for educational purposes or the purchase of a primary residence.
(4) Section 457 plans. A nonqualified deferred
compensation plan under section 457(f) may constitute 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).
In addition, nonelective deferred compensation of non-employees described
in section 457(e)(12) and a grandfathered plan or arrangement described
in §1.457-2(k)(4) may constitute 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). For purposes of the application of section
409A to a plan to which section 457 applies, a payment under the plan generally
means the provision of cash or property to the service provider, provided
that for purposes of the application of the short-term deferral rule set
forth in paragraph (b)(4) of this section, the inclusion in income of an
amount under section 457(f) is treated as a payment of the amount.
(5) Certain welfare benefits. The term nonqualified
deferred compensation plan does not include any bona fide vacation leave,
sick leave, compensatory time, disability pay, or death benefit plan. For
these purposes, the term disability pay has the same meaning as provided
in §31.3121(v)(2)-1(b)(4)(iv)(C) of this chapter, and the term death
benefit plan refers to a plan providing death benefits as defined in
§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. The term
nonqualified deferred compensation plan also does not include any
Archer Medical Savings Account as described in section 220, any Health Savings
Account as described in section 223, or any other medical reimbursement
arrangement, including a health reimbursement arrangement, that satisfies
the requirements of section 105 and section 106 such that the benefits or
reimbursements provided under such arrangement are not includible in income.
(b) Deferral of compensation--
(1) In general. Except as otherwise provided in
paragraphs (b)(3) through (b)(12) 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. Such compensation is deferred compensation for purposes
of section 409A, this section and §§1.409A-2 through 1.409A-6. A legally
binding right to an amount that will be excluded from income when and if
received does not constitute a deferral of compensation, unless the service
provider has received the right in exchange for, or has the right to exchange
the right for, an amount that will be includible in income (other than due
to participation in a cafeteria plan described in section 125). A service
provider does not have a legally binding right to compensation to the extent
that compensation may be reduced unilaterally or eliminated by the service
recipient or other person after the services creating the right to the compensation
have been performed. However, if the facts and circumstances indicate that
the discretion to reduce or eliminate the compensation is available or exercisable
only upon a condition, or the discretion to reduce or eliminate the compensation
lacks substantive significance, a service provider will be considered to
have a legally binding right to the compensation. Whether the discretion
to reduce or eliminate the compensation lacks substantive significance depends
on all the relevant facts and circumstances. However, where the service
provider to whom the compensation may be paid has effective control of the
person retaining the discretion to reduce or eliminate the compensation,
or has effective control over any portion of the compensation of the person
retaining the discretion to reduce or eliminate the compensation, or is
a member of the family (as defined in section 267(c)(4) applied as if the
family of an individual includes the spouse of any member of the family)
of the person retaining the discretion to reduce or eliminate the compensation,
the discretion to reduce or eliminate the compensation will not be treated
as having substantive significance. For this purpose, compensation is not
considered subject to unilateral reduction or elimination merely because
it may be reduced or eliminated by operation of the objective terms of the
plan, such as the application of a nondiscretionary, objective provision
creating a substantial risk of forfeiture. Similarly, a service provider
does not fail to have a legally binding right to compensation merely because
the amount of compensation is determined under a formula that provides for
benefits to be offset by benefits provided under another plan (including
a plan that is qualified under section 401(a)), or because benefits are
reduced due to actual or notional investment losses, or, in a final average
pay plan, subsequent decreases in compensation.
(2) Earnings. References to the deferral of compensation
or deferred compensation include references to earnings. When the right
to earnings is specified under the terms of the plan, the legally binding
right to earnings arises at the time of the deferral of the compensation
to which the earnings relate. A plan may provide that the time and form
of payment of earnings is treated separately from the time and form of payment
of the underlying compensation, so that, provided that the rules of section
409A are otherwise met, a plan may provide that earnings will be paid at
a separate time or in a separate form from the payment of the underlying
compensation. For the application of the deferral election rules to current
payments of earnings and dividend equivalents, see §1.409A-3(e).
(3) Compensation payable pursuant to the service recipients
customary payment timing arrangement. A deferral of compensation does
not occur solely because compensation is paid after the last day of the
service providers 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 provider normally compensates non-employee service
providers or 30 days after the end of the service providers taxable year.
(4) Short-term deferrals--
(i) In general. A deferral of compensation does
not occur if the plan under which a payment (as defined in §1.409A-2(b)(2))
is made does not provide for a deferred payment and the service provider
actually or constructively receives such payment on or before the last day
of the applicable 2 month period. The following rules apply for purposes
of this paragraph (b)(4)(i):
(A) The applicable 2 month period is the period ending
on the later of the 15th day of the third month following the
end of the service providers first taxable year in which the right to the
payment is no longer subject to a substantial risk of forfeiture or the
15th day of the third month following the end of the service
recipients first taxable year in which the right to the payment is no longer
subject to a substantial risk of forfeiture.
(B) A payment is treated as actually or constructively
received if the payment is includible in income, including if the payment
is includible in income under section 83, the economic benefit doctrine,
section 402(b), or section 457(f).
(C) A right to a payment that is never subject to a substantial
risk of forfeiture is considered to be no longer subject to a substantial
risk of forfeiture on the first date the service provider has a legally
binding right to the payment.
(D) A plan provides for a deferred payment if the plan
provides that any payment will 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 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 month period. If a plan provides that the
service provider or service recipient may make an election under the plan
(including an election under §1.409A-2(a)(4)) of a different payment date,
schedule, or event, such right is disregarded for this purpose. In such
cases, whether a plan provides for a deferred payment is determined based
on the payment date, schedule, or event that would apply if no such election
were made, except that if the plan would not provide for a deferred payment
absent such an election, and the service provider or service recipient makes
such an election, whether the plan provides for a deferred payment is determined
based upon the payment date, schedule, or event that the service provider
or service recipient in fact elected.
(E) A stock right provides for a deferred payment if such
right includes any provision pursuant to which the holder of the stock right
will or may have the right to exercise the stock right after the applicable
2 month period.
(F) This paragraph (b)(4)(i) is applied separately to
each payment (as defined in §1.409A-2(b)(2)) required to be made under a
plan.
(G) If a plan provides for a deferred payment with respect
to part of a payment (for example a life annuity or a series of installment
amounts treated as a single payment), the plan provides for a deferred payment
with respect to the entire payment.
(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 month period may continue to qualify
as a short-term deferral if the taxpayer establishes that it was administratively
impracticable to make the payment by the end of the applicable 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 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 providers 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 month period may continue to qualify as a short-term
deferral if the taxpayer establishes that the service recipient reasonably
anticipated that the service recipients 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 recipients deduction with respect to
such payment would no longer be restricted due to the application of section
162(m). For additional rules applicable to certain transaction-based compensation,
see §1.409A-3(i)(5)(iv)(A).
(iii) Examples. The following examples illustrate
the provisions of this paragraph (b)(4). In these examples, except as otherwise
noted, each employee and each employer has a calendar year taxable year
and each employee is an individual who is employed by the specified employer.
Example 1. On November 1, 2008, Employer Z awards
a bonus to Employee A such that Employee A has a legally binding right to
the payment as of November 1, 2008, that is not subject to a substantial
risk of forfeiture. The bonus plan does not provide for a payment date or
a deferred payment. 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 A on or before March 15, 2009.
Example 2. Employer Y has a taxable year ending
August 31. On November 1, 2008, Employer Y awards a bonus to Employee B
so that Employee B has a legally binding right to the payment as of November
1, 2008, that is not subject to a substantial risk of forfeiture. The bonus
plan does not provide for a payment date or a deferred payment. 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 B on or before November
15, 2009.
Example 3. On November 1, 2008, Employer X awards
a bonus to Employee C such that Employee C has a legally binding right to
the payment as of November 1, 2008. Under the bonus plan, Employee C will
forfeit the bonus unless Employee C continues performing services through
December 31, 2010. The right to the payment is subject to a substantial
risk of forfeiture through December 31, 2010. Employee C has the right to
make a written election not later than December 31, 2009, to receive the
bonus on or after December 31, 2015, but Employee C does not make such election.
The bonus plan does not provide for a default payment date or a deferred
payment in the absence of an election by Employee C. 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
(and generally any payment before June 1, 2011 would constitute an impermissible
acceleration of a payment).
Example 4. On November 1, 2008, Employer W awards
a bonus to Employee D such that Employee D has a legally binding right to
the payment as of November 1, 2008. Under the bonus plan, the bonus will
be determined based on services performed during the period from January
1, 2009 through December 31, 2010. The bonus is scheduled to be paid as
a lump sum payment on February 15, 2011. Under the bonus plan, Employee
D will forfeit the bonus unless Employee D continues performing services
through the scheduled payment date (February 15, 2011). Provided that at
all times before the scheduled payment date Employee D is required to continue
to perform services to retain the right to the bonus, and the bonus is paid
on or before March 15, 2012, the bonus plan will not be considered to have
provided for a deferral of compensation.
Example 5. On November 1, 2008, Employer V awards
a bonus to Employee E such that Employee E has a legally binding right to
the payment as of November 1, 2008. Under the bonus plan, Employee E will
forfeit the bonus unless Employee E continues performing services through
December 31, 2010. Under the bonus plan, the bonus is scheduled to be paid
as a lump sum payment on July 1, 2011. By specifying a payment date after
the applicable 2 month period, the bonus plan provides for a deferred
payment. 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.
Example 6. On November 1, 2008, Employer U awards
a bonus to Employee F such that Employee F has a legally binding right to
the payment as of November 1, 2008, that is not subject to a substantial
risk of forfeiture. The bonus plan provides for a lump sum payment upon
Employee Fs separation from service. Because the separation from service
is an event that may occur after the applicable 2 month period, the bonus
plan provides for a deferred payment and therefore provides for a deferral
of compensation. Accordingly, the bonus plan will not qualify as a short-term
deferral regardless of whether Employee F separates from service and the
bonus is paid or made available on or before March 15, 2009.
Example 7. On November 1, 2008, Employer T grants
Employee G a legally binding right to the payment of a life annuity with
the first annuity payment on November 1, 2013, provided that Employee G
continues performing services for Employer T continuously through November
1, 2013. Because the life annuity is treated as a single payment, and because
all payments of the life annuity may not occur during the applicable 2
month period, the plan provides for a deferred payment and none of the amounts
payable under the annuity will qualify as a short-term deferral, so that
section 409A applies to all amounts that are payable under the plan.
Example 8. On November 1, 2008, Employer S grants
Employee H a stock right providing for an exercise price less than the fair
market value of the underlying stock on November 1, 2008. The stock right
is subject to a substantial risk of forfeiture requiring services through
November 1, 2010. The stock right becomes exercisable when the substantial
risk of forfeiture lapses and expires on November 1, 2013. Employee H continues
providing services through November 1, 2010, at which time the substantial
risk of forfeiture lapses. The stock right provides for a deferred payment
and will not qualify as a short-term deferral regardless of whether Employee
H exercises the stock right on or before March 15, 2011.
(5) Stock options, stock appreciation rights, and other
equity-based compensation--
(i) Stock rights--
(A) Nonstatutory stock options not providing for the
deferral of compensation. An option to purchase service recipient stock
does not provide for a deferral of compensation if--
(1) The exercise price may never be less than the
fair market value of the underlying stock (disregarding lapse restrictions
as defined in §1.83-3(i)) on the date the option is granted and the number
of shares subject to the option is fixed on the original date of grant of
the option;
(2) The transfer or exercise of the option is subject
to taxation under section 83 and §1.83-7; and
(3) The option does not include any feature for
the deferral of compensation other than the deferral of recognition of income
until the later of the following:
(i) The exercise or disposition of the option under §1.83-7.
(ii) The time the stock acquired pursuant to the
exercise of the option first becomes substantially vested (as defined in
§1.83-3(b)).
(B) Stock appreciation rights not providing for the
deferral of compensation. A right to compensation based on the appreciation
in value of a specified number of shares of service recipient stock occurring
between the date of grant and the date of exercise of such right (a stock
appreciation right) does not provide for a deferral of compensation if--
(1) Compensation payable under the stock appreciation
right cannot be greater than the excess of the fair market value of the
stock (disregarding lapse restrictions as defined in §1.83-3(i)) on the
date the stock appreciation right is exercised over an amount specified
on the date of grant of the stock appreciation right (the stock appreciation
right exercise price), with respect to a number of shares fixed on or before
the date of grant of the right;
(2) The stock appreciation right exercise price
may never be less than the fair market value of the underlying stock (disregarding
lapse restrictions as defined in §1.83-3(i)) on the date the right is granted;
and
(3) The stock appreciation right does not include
any feature for the deferral of compensation other than the deferral of
recognition of income until the exercise of the stock appreciation right.
(C) Stock rights that may provide for the deferral
of compensation. An option to purchase stock other than service recipient
stock, or a stock appreciation right with respect to stock other than service
recipient stock, generally will provide for the deferral of compensation
within the meaning of this paragraph (b). If under the terms of an option
to purchase service recipient stock (other than an incentive stock option
described in section 422 or a stock option granted under an employee stock
purchase plan described in section 423), the exercise price is or could
become less than the fair market value of the stock (disregarding lapse
restrictions as defined in §1.83-3(i)) on the date of grant, the grant of
the option generally will provide for the deferral of compensation within
the meaning of this paragraph (b). If under the terms of a stock appreciation
right with respect to service recipient stock, the compensation payable
under the stock appreciation right is or could be any amount greater than,
with respect to a predetermined number of shares, the excess of the fair
market value of the stock (disregarding lapse restrictions as defined in
§1.83-3(i)) on the date the stock appreciation right is exercised over the
fair market value of the stock (disregarding lapse restrictions as defined
in §1.83-3(i)) on the date of grant of the stock appreciation right, the
grant of the stock appreciation right generally will provide for a deferral
of compensation within the meaning of this paragraph (b).
(D) Feature for the deferral of compensation. To
the extent a stock right provides a right other than the right to receive
cash or stock on the date of exercise and such additional right would otherwise
allow compensation to be deferred beyond the date of exercise, the entire
arrangement (including the underlying stock right) provides for the deferral
of compensation. For purposes of this paragraph (b)(5)(i), neither the right
to receive substantially nonvested stock (as defined in §1.83-3(b)) upon
the exercise of a stock right, nor the right to pay the exercise price with
previously acquired shares, constitutes a feature for the deferral of compensation.
(E) Rights to dividends. For purposes of this paragraph
(b)(5)(i), the right, directly or indirectly contingent upon the exercise
of a stock right, to receive an amount equal to all or part of the dividends
or other distributions (other than stock dividends described in paragraph
(b)(5)(v)(H) of this section) declared and paid on the number of shares
underlying the stock right between the date of grant and the date of exercise
of the stock right constitutes an offset to the exercise price of the stock
option or an increase in the amount payable under the stock appreciation
right (generally causing such stock right to be subject to section 409A).
A plan providing a right to dividends or other distributions declared and
paid on the number of shares underlying a stock right, the payment of which
is not contingent upon, or otherwise payable on, the exercise of the stock
right, may provide for a deferral of compensation, but the existence of
the right to receive such an amount will not be treated as a reduction to
the exercise price of (or an increase to the compensation payable under)
the stock right. Thus, a right to such dividends or distributions that is
not contingent, directly or indirectly, upon the exercise of a stock right
will not cause the related stock right to fail to satisfy the requirements
of the exclusion from the definition of a deferral of compensation provided
in paragraphs (b)(5)(i)(A) and (B) of this section.
(ii) Statutory stock options. The grant of an incentive
stock option as described in section 422, or the grant of an option under
an employee stock purchase plan described in section 423 (including the
grant of an option with an exercise price discounted in accordance with
section 423(b)(6) and the accompanying regulations), does not constitute
a deferral of compensation. However, the exclusion for statutory stock options
under this paragraph (b)(5)(ii) does not apply to a modification, extension,
or renewal of a statutory option that is treated as the grant of a new option
that is not a statutory option. See §1.4241(e). In such event, the option
is treated for purposes of this paragraph (b) as if it had been a nonstatutory
stock option from the date of the original grant. Accordingly, if such modification,
extension, or renewal of the stock option would have been treated as the
grant of a new option or as causing the option to have had a deferral feature
from the date of grant under paragraph (b)(5)(v) of this section, the modification,
extension, or renewal of the stock option is treated as the grant of a new
option or as causing the option to have had a deferral feature from the
date of grant for purposes of this paragraph (b)(5).
(iii) Service recipient stock--
(A) In general. Except as otherwise provided in
paragraphs (b)(5)(iii)(B), (C), and (D) of this section, 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 (as
defined in paragraph (b)(5)(iii)(E) of this section). Notwithstanding the
foregoing, the term service recipient stock does not include a class
of stock that has any preference as to distributions other than distributions
of service recipient stock and distributions in liquidation of the issuer.
The term service recipient stock also does not include any stock
that is subject to a mandatory repurchase obligation (other than a right
of first refusal), or a put or call right that is not a lapse restriction
as defined in §1.83-3(i), if the stock price under such right or obligation
is based on a measure other than the fair market value (disregarding lapse
restrictions as defined in §1.83-3(i)) of the equity interest in the corporation
represented by the stock.
(B) American depositary receipts. An American depositary
receipt or American depositary share may constitute service recipient stock,
to the extent that the stock traded on a foreign securities market to which
the American depositary receipt or American depositary share relates qualifies
as service recipient stock.
(C) Mutual company units. Mutual company units
may constitute service recipient stock. For this purpose, the term mutual
company unit means a fixed percentage of the overall value of a non-stock
mutual company or association. For purposes of determining the value of
the mutual company unit, the unit may be valued in accordance with the rules
set forth in paragraph (b)(5)(iv)(B) of this section governing valuation
of service recipient stock the shares of which are not traded on an established
securities market, applied as if the mutual company were a stock corporation
with one class of common stock and the number of shares of such stock determined
according to such fixed percentage. For example, an appreciation right based
on the appreciation of 10 mutual company units, where each unit is defined
as one percent of the overall value of the mutual company, would be valued
as if the appreciation right were based upon 10 shares of a corporation,
with 100 shares of common stock (and no other class of stock), the shares
of which are not readily tradable on an established securities market.
(D) Other entities. An interest in an entity other
than a corporation or non-stock mutual company or association may constitute
service recipient stock to the extent designated by the Commissioner in
revenue procedures, notices, or other guidance published in the Internal
Revenue Bulletin (see §601.601(d)(2) of this chapter).
(E) Eligible issuer of service recipient stock--
(1) In general. The term eligible issuer
of service recipient stock means only the corporation for which the
service provider provides direct services on the date of grant of the stock
right (if the entity receiving such services is a corporation), and any
corporation 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. For this purpose, the term controlling interest has the same
meaning as provided in §1.414(c)-2(b)(2)(i), provided that the language
at least 50 percent is used instead of at least 80 percent each place
it appears in §1.414(c)-2(b)(2)(i). In addition, where the use of such stock
with respect to the grant of a stock right to such service provider is based
upon legitimate business criteria, the term controlling interest
has the same meaning as provided in §1.414(c)-2(b)(2)(i), provided that
the language at least 20 percent is used instead of at least 80 percent
each place it appears in §1.414(c)-2(b)(2)(i). For purposes of determining
ownership of an interest in an organization, the rules of §§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,
stock of a corporation that owns an interest in a joint venture involving
an operating business, used with respect to stock rights granted to service
providers of the joint venture who are former service providers of such
corporation, generally will constitute use of service recipient stock based
upon legitimate business criteria, and therefore could constitute 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 an employee of the joint venture who it reasonably expected
would in the future become an employee of the corporate venturer. However,
where 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 that employee
on the investor corporations stock generally would not be based upon legitimate
business criteria. Similarly, where 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 corporations stock to the service provider.
(2) Investment vehicles. Notwithstanding
the provisions of paragraph (b)(5)(iii)(E)(1) of this section, except
as to a service provider providing services directly to such corporation,
for purposes of this paragraph (b)(5), an eligible issuer of service recipient
stock does not include any corporation whose primary purpose is to serve
as an investment vehicle with respect to the corporations minority ownership
interests in entities other than the service recipient.
(3) Corporate structures established or transactions
undertaken for purposes of avoiding coverage under section 409A. Notwithstanding
the provisions of paragraph (b)(5)(iii)(E)(1) of this section, an
eligible issuer of service recipient stock does not include any corporation
within a group of entities treated as a single service recipient if a purpose
of the establishment of the structure of the ownership, or a purpose of
a significant transaction between or among two or more entities comprising
a single service recipient, is to provide deferred compensation not subject
to the application of section 409A. If an entity becomes a member of a group
of corporations or other entities treated as a single service recipient,
and the primary source of income or value of such entity arises from the
provision of management services to other members of the service recipient
group, it is presumed that such structure was established for purposes of
avoiding the application of section 409A if any stock rights are issued
with respect to such entity.
(4) Substitutions and assumptions by reason
of a corporate transaction. If the requirements of paragraph (b)(5)(v)(D)
of this section are met such that the substitution of a new stock right
pursuant to a corporate transaction for an outstanding stock right, or the
assumption of an outstanding stock right pursuant to a corporate transaction,
would not be treated as the grant of a new stock right or a change in the
form of payment for purposes of this section and §§1.409A-2 through 1.409A-6,
the stock underlying the stock right that replaced the stock right that
is substituted or assumed will be treated as service recipient stock for
purposes of applying this paragraph (b)(5) to the replacement stock rights
if such underlying stock otherwise satisfies the requirements of paragraph
(b)(5)(iii)(A) of this section. For example, if by reason of a spinoff transaction
(under which the stock of a subsidiary corporation is distributed to the
stockholders of a distributing corporation), a stock option to purchase
distributing corporation stock is replaced with a stock option to purchase
distributing corporation stock and a stock option to purchase the spun off
subsidiary corporations stock (each otherwise satisfying the requirements
of paragraph (b)(5)(iii)(A) of this section), and where such substitution
is not treated as a modification of the original stock option pursuant to
paragraph (b)(5)(v)(D) of this section, both the distributing corporation
stock and the subsidiary corporation stock are treated as service recipient
stock for purposes of applying this paragraph (b)(5) to the replacement
stock options.
(iv) Determination of the fair market value of service
recipient stock--
(A) Stock readily tradable on an established securities
market. For purposes of paragraph (b)(5)(i) of this section, in the
case of service recipient stock that is readily tradable on an established
securities market, the fair market value of the stock may be determined
based upon the last sale before or the first sale after the grant, the closing
price on the trading day before or the trading day of the grant, the arithmetic
mean of the high and low prices on the trading day before or the trading
day of the grant, or any other reasonable method using actual transactions
in such stock as reported by such market. The determination of fair market
value also may be determined using an average selling price during a specified
period that is within 30 days before or 30 days after the applicable valuation
date, provided that the program under which the stock right is granted,
including a program with a single participant, must irrevocably specify
the commitment to grant the stock right with an exercise price set using
such an average selling price before the beginning of the specified period.
For this purpose, the term average selling price refers to the arithmetic
mean of such selling prices on all trading days during the specified period,
or the average of such prices over the specified period weighted based on
the volume of trading of such stock on each trading day during such specified
period. To satisfy this requirement, the service recipient must designate
the recipient of the stock right, the number and class of shares of stock
that are subject to the stock right, and the method for determining the
exercise price including the period over which the averaging will occur,
before the beginning of the specified averaging period. Notwithstanding
the forgoing provisions of this paragraph (b)(5)(iv)(A), where applicable
foreign law requires that a compensatory stock right be priced based upon
a specific price averaging method and period, a stock right granted in accordance
with such applicable foreign law will be treated as meeting the requirements
of this paragraph (b)(5)(iv)(A), provided that the averaging period does
not exceed 30 days.
(B) Stock not readily tradable on an established securities
market--
(1) In general. For purposes of paragraph
(b)(5)(i) of this section, in the case of service recipient stock that is
not readily tradable on an established securities market, the fair market
value of the stock as of a valuation date means a value determined by the
reasonable application of a reasonable valuation method. The determination
whether a valuation method is reasonable, or whether an application of a
valuation method is reasonable, is made based on the facts and circumstances
as of the valuation date. Factors to be considered under a reasonable valuation
method include, as applicable, the value of tangible and intangible assets
of the corporation, the present value of anticipated future cash-flows of
the corporation, the market value of stock or equity interests in similar
corporations and other entities engaged in trades or businesses substantially
similar to those engaged in by the corporation the stock of which is to
be valued, the value of which can be readily determined through nondiscretionary,
objective means (such as through trading prices on an established securities
market or an amount paid in an arms length private transaction), recent
arms length transactions involving the sale or transfer of such stock or
equity interests, and other relevant factors such as control premiums or
discounts for lack of marketability and whether the valuation method is
used for other purposes that have a material economic effect on the service
recipient, its stockholders, or its creditors. The use of a valuation method
is not reasonable if such valuation method does not take into consideration
in applying its methodology all available information material to the value
of the corporation. Similarly, the use of a value previously calculated
under a valuation method is not reasonable as of a later date if such calculation
fails to reflect information available after the date of the calculation
that may materially affect the value of the corporation (for example, the
resolution of material litigation or the issuance of a patent) or the value
was calculated with respect to a date that is more than 12 months earlier
than the date for which the valuation is being used. The service recipients
consistent use of a valuation method to determine the value of its stock
or assets for other purposes, including for purposes unrelated to compensation
of service providers, is also a factor supporting the reasonableness of
such valuation method.
(2) Presumption of reasonableness. For purposes
of this paragraph (b)(5)(iv)(B), the use of any of the following methods
of valuation is presumed to result in a reasonable valuation, provided that
the Commissioner may rebut such a presumption upon a showing that either
the valuation method or the application of such method was grossly unreasonable:
(i) A valuation of a class of stock determined by an independent
appraisal that meets the requirements of section 401(a)(28)(C) and the regulations
as of a date that is no more than 12 months before the relevant transaction
to which the valuation is applied (for example, the date of grant of a stock
option).
(ii) A valuation based upon a formula that, if
used as part of a nonlapse restriction (as defined in §1.83-3(h)) with respect
to the stock, would be considered to be the fair market value of the stock
pursuant to §1.83-5, provided that such stock is valued in the same manner
for purposes of any nonlapse restriction applicable to the 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 §1.424-1(d)), other than an arms
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.
(iii) A valuation, made reasonably and in good
faith and evidenced by a written report that takes into account the relevant
factors described in paragraph (b)(5)(iv)(B)(1) of this section,
of illiquid stock of a start-up corporation. For this purpose, illiquid
stock of a start-up corporation means service recipient stock of a corporation
that has no material trade or business that it or any predecessor to it
has conducted for a period of 10 years or more and has no class of equity
securities that are traded on an established securities market (as defined
in paragraph (k) of this section), where such stock is not subject to any
put, call, or other right or obligation of the service recipient or other
person to purchase such stock (other than a right of first refusal upon
an offer to purchase by a third party that is unrelated to the service recipient
or service provider and other than a right or obligation that constitutes
a lapse restriction as defined in §1.83-3(i)), and provided that this paragraph
(b)(5)(iv)(B)(2)(iii) does not apply to the valuation of any
stock if the service recipient or service provider may reasonably anticipate,
as of the time the valuation is applied, that the service recipient will
undergo a change in control event as described in §1.409A-3(i)(5)(v) or
§1.409A-3(i)(5)(vii) within the 90 days following the action to which the
valuation is applied, or make a public offering of securities within the
180 days following the action to which the valuation is applied. For purposes
of this paragraph (b)(5)(iv)(B)(2)(iii), a valuation will
not be treated as made reasonably and in good faith unless the valuation
is performed by a person or persons that the corporation reasonably determines
is qualified to perform such a valuation based on the persons or persons
significant knowledge, experience, education, or training. Generally, a
person will be qualified to perform such a valuation if a reasonable individual,
upon being apprised of such knowledge, experience, education, and training,
would reasonably rely on the advice of such person with respect to valuation
in deciding whether to accept an offer to purchase or sell the stock being
valued. For this purpose, significant experience generally means at least
five years of relevant experience in business valuation or appraisal, financial
accounting, investment banking, private equity, secured lending, or other
comparable experience in the line of business or industry in which the service
recipient operates.
(3) Use of alternative methods. For purposes
of this paragraph (b)(5), a different valuation method may be used for each
separate action for which a valuation is relevant, provided that a single
valuation method is used for each separate action and, once used, may not
retroactively be altered. For example, one valuation method may be used
to establish the exercise price of a stock option, and a different valuation
method may be used to determine the value at the date of the repurchase
of stock pursuant to a put or call right. However, once an exercise price
or amount to be paid has been established, the exercise price or amount
to be paid may not be changed through the retroactive use of another valuation
method. In addition, notwithstanding the foregoing, where after the date
of grant, but before the date of exercise or transfer, of the stock right,
the service recipient stock to which the stock right relates becomes readily
tradable on an established securities market, the service recipient must
use the valuation method set forth in paragraph (b)(5)(iv)(A) of this section
for purposes of determining the payment at the date of exercise or the purchase
of the stock, as applicable.
(v) Modifications, extensions, substitutions, and assumptions
of stock rights
(A) Treatment of modified and extended stock rights.
A modification of the terms of a stock right within the meaning of paragraph
(b)(5)(v)(B) of this section is considered to be the grant of a new stock
right. The new stock right may or may not constitute a deferral of compensation
under paragraph (b)(5)(i) of this section, determined at the date of grant
of the new stock right. If there is an extension of a stock right (within
the meaning of paragraph (b)(5)(v)(C) of this section), the stock right
is treated as having had an additional deferral feature from the original
date of grant of the stock right, and therefore will be treated as a plan
providing for the deferral of compensation from the original grant date
for purposes of this paragraph (b).
(B) Modification in general. Except as otherwise
provided in paragraph (b)(5)(v) of this section, the term modification
means any change in the terms of the stock right (or change in the terms
of the plan pursuant to which the stock right was granted or in the terms
of any other agreement governing the stock right) that may provide the holder
of the stock right with a direct or indirect reduction in the exercise price
of the stock right regardless of whether the holder in fact benefits from
the change in terms. A change in the terms of the stock right shortening
the period during which the stock right is exercisable is not a modification.
It is not a modification to add a feature providing the ability to tender
previously acquired stock for the stock purchasable under the stock right,
or to withhold or have withheld shares of stock to facilitate the payment
of the exercise price or the employment taxes or required withholding taxes
resulting from the exercise of the stock right. In addition, it is not a
modification for the grantor to exercise discretion specifically reserved
under a stock right with respect to the transferability of the stock right.
(C) Extensions
(1) In general. An extension of a stock
right refers to the provision to the holder of an additional period of time
within which to exercise the stock right beyond the time originally prescribed
under the terms of the stock right, the conversion or exchange of a stock
right for a legally binding right to compensation in a future taxable year,
or the addition of any feature for the deferral of compensation not permitted
in paragraph (b)(5)(i)(A)(3) of this section (in the case of a stock
option) or not permitted in paragraph (b)(5)(i)(B)(3) of this section
(in the case of a stock appreciation right) to the terms of the stock right,
other than at a time when the exercise price of the stock right equals or
exceeds the fair market value of the service recipient stock that could
be purchased (in the case of an option) or the fair market value of the
service recipient stock used to determine the payment to the service provider
(in the case of a stock appreciation right), and includes a renewal of such
right that has such effect. It is not an extension if the exercise period
of a stock right is extended to a date no later than the earlier of the
latest date upon which the stock right could have expired by its original
terms under any circumstances or the 10th anniversary of the
original date of grant of the stock right. If the exercise period of a stock
right is extended at a time when the exercise price of the stock right equals
or exceeds the fair market value of the service recipient stock that could
be purchased (in the case of an option) or the fair market value of the
service recipient stock used to determine the payment to the service provider
(in the case of a stock appreciation right), it is not an extension of the
original stock right. Instead, in such a case, the original stock right
is treated as modified rather than extended and a new stock right is treated
as having been granted for purposes of this section. In addition, it is
not an extension of a stock right if the expiration of the stock right is
tolled while the holder cannot exercise the stock right because such an
exercise would violate an applicable Federal, state, local, or foreign law,
or would jeopardize the ability of the service recipient to continue as
a going concern, provided that the period during which the stock right may
be exercised is not extended more than 30 days after the exercise of the
stock right first would no longer violate an applicable Federal, state,
local, and foreign laws or would first no longer jeopardize the ability
of the service recipient to continue as a going concern. For this purpose,
a provision of foreign law shall be considered applicable only to foreign
earned income (as defined under section 911(b)(1) without regard to section
911(b)(1)(B)(iv) and without regard to the requirement that the income be
attributable to services performed during the period described in section
911(d)(1)(A) or (B)) from sources within the foreign country that promulgated
such law.
(2) Certain extensions before April 10, 2007.
An extension of a stock right before April 10, 2007, solely in order to
provide the holder of such stock right an additional period of time beyond
the time originally prescribed under the terms of such stock right within
which to exercise the stock right is disregarded for purposes of applying
the rules contained in paragraph (b)(5)(v)(C)(1) of this section.
For purposes of applying the rules contained in paragraph (b)(5)(v)(C)(1)
of this section on and after April 10, 2007, such a stock right is treated
as having specified at the date of grant the time within which to exercise
such stock right that was prescribed under the terms of such stock right
in effect on April 9, 2007. Nothing in this paragraph (b)(5)(v)(C)(2)
affects any other action treated as the extension of a stock right, including
the addition of a deferral feature.
(3) Examples. The following examples illustrate
the provisions of this paragraph (b)(5)(v)(C). In the examples, each employee
is an individual employed by the specified employer, and each employee and
each employer has a calendar year taxable year.
Example 1. On July 1, 2009, Employer Z grants Employee
A a nonstatutory stock option that does not provide for the deferral of
compensation in accordance with paragraph (b)(5)(i)(A) of this section.
The terms of the nonstatutory stock option provide that the exercise period
of the stock option expires on the earlier of July 1, 2019, or 3 months
after Employee As separation from service. On July 1, 2011, Employee A
separates from service. On the same day, Employee A and Employer Z change
the exercise period of the option so that it expires on July 1, 2013. Because
the exercise period of the stock right is not extended beyond July 1, 2019,
the change is not an extension for purposes of this paragraph (b)(5)(v)(C).
Example 2. The facts are the same as in Example
1 except that Employee A separates from service on July 1, 2018, and
on the same day, Employee A and Employer Z change the exercise period of
the option so that it expires on July 1, 2020. As of July 1, 2018, the fair
market value of the underlying stock exceeds the exercise price. Because
the exercise period of the stock right is extended beyond July 1, 2019,
the change is an extension for purposes of this paragraph (b)(5)(v)(C).
Example 3. The facts are the same as in Example
2 except that as of July 1, 2018, the fair market value of the underlying
stock is less than the exercise price of the option. Because the exercise
period of the stock right is extended at a time when the fair market value
of the underlying stock is less than the exercise price, the change is not
an extension for purposes of this paragraph (b)(5)(v)(C) and the change
is treated as a modification of the option, resulting in the extension of
the exercise period being treated as the grant of a new option on July 1,
2018.
Example 4. On July 1, 2009, Employer Y grants to
Employee B a stock appreciation right with respect to 200 shares of Employer
Y common stock that does not provide for the deferral of compensation in
accordance with paragraph (b)(5)(i)(B) of this section. Upon exercise of
the stock appreciation right, Employee B is entitled to receive the excess
of the fair market value of a share of Employer Y common stock on the date
of exercise over $100 (the fair market value of a share of Employer Y common
stock on July 1, 2009), multiplied by the number of shares with respect
to which Employee B is exercising the right. The exercise period of the
right expires on the earlier of July 1, 2019, or 3 months after Employee
B separates from service. Employee B cannot exercise the stock appreciation
right with respect to more than 100 shares unless Employee B continues to
be employed by Employer Y through June 30, 2014. On July 1, 2011, when the
fair market value of a share of Employer Y common stock is $200, Employee
B and Employer Y amend the stock appreciation right to provide that the
right will be exercisable only during calendar year 2018, except that before
January 1, 2017, Employee B may elect to designate calendar year 2023 or
any subsequent calendar year before 2033 as the year in which the right
will be exercisable. The amendment constitutes an extension of the stock
appreciation right under paragraph (b)(5)(v)(C)(1) of this section.
Under paragraph (b)(5)(v)(A) of this section, the stock appreciation right
is treated as having had an additional deferral feature from the original
date of grant (July 1, 2009) of the right, and therefore is treated as a
plan providing for the deferral of compensation from that date. During the
period from July 1, 2009, through June 30, 2011, the provisions of the stock
appreciation right relating to the time and form of payment did not satisfy
the requirements of §1.409A-3(a). Therefore, the stock appreciation right
provides for a deferral of compensation that does not comply with section
409A.
(D) Substitutions and assumptions of stock rights by
reason of a corporate transaction. If the requirements of §1.424-1 (without
regard to the requirement described in §1.424-1(a)(2) that an eligible corporation
be the employer of the optionee) would be met if the stock right were a
statutory option, the substitution of a new stock right pursuant to a corporate
transaction (as defined in §1.4241(a)(3)) for an outstanding stock right
or the assumption of an outstanding stock right pursuant to a corporate
transaction will not be treated as the grant of a new stock right or a change
in the form of payment for purposes of this section and §§1.409A-2 through
1.409A-6. For purposes of the preceding sentence, the requirement of §1.424-1(a)(5)(iii)
will be deemed to be satisfied if the ratio of the exercise price to the
fair market value of the shares subject to the stock right immediately after
the substitution or assumption is not greater than the ratio of the exercise
price to the fair market value of the shares subject to the stock right
immediately before the substitution or assumption. In the case of a transaction
described in section 355 in which the stock of the distributing corporation
and the stock distributed in the transaction are both readily tradable on
an established securities market immediately after the transaction, for
purposes of this paragraph (b)(5)(v), the requirements of §1.424-1(a)(5)
related to the fair market value of the stock may be satisfied by--
(1) Using the last sale before or the first sale
after the specified date as of which such valuation is being made, the closing
price on the last trading day before or the trading day of a specified date,
the arithmetic mean of the high and low prices on the last trading day before
or the trading day of such specified date, or any other reasonable method
using actual transactions in such stock as reported by such market on a
specified date, for the stock of the distributing corporation and the stock
distributed in the transaction, provided the specified date is designated
before such specified date, and such specified date is not more than 60
days after the transaction;
(2) Using the arithmetic mean of such market prices
on trading days during a specified period designated before the beginning
of such specified period, where such specified period is not longer than
30 days and ends no later than 60 days after the transaction; or
(3) Using an average of such prices during such
prespecified period weighted based on the volume of trading of such stock
on each trading day during such prespecified period.
(E) Acceleration of date when exercisable. Although
with respect to a stock right not immediately exercisable in full, a change
in the terms of the right solely to accelerate or delay, within the original
term of the stock right, the time at which the stock right (or any portion
of such stock right) may be exercised is not a modification for purposes
of this section, with respect to a stock right subject to section 409A,
such an acceleration may constitute an impermissible acceleration of a payment
date under §1.409A-3(j) or a subsequent deferral under §1.409A2(b).
(F) Discretionary added benefits. If a change to
a stock right provides, either by its terms or in substance, that the holder
may receive an additional benefit under the stock right at the future discretion
of the grantor, and the addition of such benefit would constitute a modification
or extension, then the addition of such discretion is a modification or
extension at the time that the stock right is changed to provide such discretion.
(G) Change in underlying stock increasing value.
A change in the terms of the stock subject to a stock right that increases
the value of the stock is a modification of such stock right, except to
the extent that a new stock right is substituted for such stock right by
reason of the change in the terms of the stock in accordance with paragraph
(b)(5)(v)(D) of this section.
(H) Change in the number of shares purchasable.
If a stock right is amended solely to increase the number of shares subject
to the stock right, the increase is not considered a modification of the
stock right but is treated as the grant of a new additional stock right
to which the additional shares are subject. Notwithstanding the previous
sentence, if the exercise price and number of shares subject to a stock
right are proportionally adjusted to reflect a stock split (including a
reverse stock split) or stock dividend, and the only effect of the stock
split or stock dividend is to increase (or decrease) on a pro rata basis
the number of shares owned by each shareholder of the class of stock subject
to the stock right, then there is no modification of the stock right if
it is proportionally adjusted to reflect the stock split or stock dividend
and the aggregate exercise price of the stock right is not less than the
aggregate exercise price before the stock split or stock dividend.
(I) Rescission of changes. A change to the terms
of a stock right (or change in the terms of the plan pursuant to which the
stock right was granted or in the terms of any other agreement governing
the right) is not considered a modification or extension of the stock right
to the extent the change in the terms of the stock right is rescinded by
the earlier of the date the stock right is exercised or the last day of
the service providers taxable year during which such change occurred. Thus,
for example, if the terms of a stock right granted to an individual employee
with a calendar year taxable year are changed on March 1 in a manner that
would result in an extension of the stock right, and the change is rescinded
on November 1 of the same year, and the stock right is not exercised before
the change is rescinded, the stock right is not considered extended under
this paragraph (b)(5)(v).
(J) Successive modifications and extensions. The
rules of this paragraph (b)(5)(v) apply as well to successive modifications
and extensions.
(K) Modifications and extensions in effect on October
23, 2004. For purposes of the application of section 409A and these
regulations to a stock right, if a legally binding right to a modification
or extension of such stock right existed on October 23, 2004, such modification
or extension is disregarded, and the stock right is treated as if granted
with the terms and conditions in effect on October 23, 2004.
(vi) Meaning and use of certain terms
(A) Option. The term option means the right
or privilege of an individual 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 individual being under no obligation
to purchase. While no particular form of words is necessary, the option
must express an offer to sell at the option price, the maximum number of
shares purchasable under the option, and the period of time during which
the offer remains open. The term option includes a warrant that meets
the requirements of this paragraph (b)(5)(vi)(A). An option may be granted
as part of or in conjunction with an employee stock purchase plan or subscription
contract. An option must be in writing (in paper or electronic form) provided
that such writing is adequate to establish an option right or privilege
that is enforceable under applicable law.
(B) Date of grant of option.
(1) The language the date of grant of the option,
and similar phrases, refer to the date when the granting corporation completes
the corporate action necessary to create the legally binding right constituting
the option. A corporate action creating the legally binding right constituting
the option is not considered complete until the date on which the maximum
number of shares that can be purchased under the option and the minimum
exercise price are fixed or determinable, and the class of underlying stock
and the identity of the service provider is designated. Ordinarily, if the
corporate action provides for an immediate offer of stock for sale to a
service provider, or provides for a particular date on which such offer
is to be made, the date of the granting of the option is the date of such
corporate action if the offer is to be made immediately, or the date provided
as the date of the offer, as the case may be. However, an unreasonable delay
in the giving of notice of such offer to the service provider will be taken
into account as indicating that the corporation provided that the offer
was to be made at the subsequent date on which such notice is given.
(2) If the corporation imposes a condition on the
granting of an option (as distinguished from a condition governing the exercise
of the option), such condition generally will be given effect in accordance
with the intent of the corporation. However, if the grant of an option is
subject to approval by stockholders, the date of grant of the option will
be determined as if the option had not been subject to such approval. A
condition that does not require corporate action, such as the approval of,
or registration with, some regulatory or government agency, for example,
a stock exchange or the Securities and Exchange Commission, is ordinarily
considered a condition upon the exercise of the option unless the corporate
action clearly indicates that the option is not to be granted until such
condition has been satisfied.
(3) In general, a condition imposed upon the exercise
of an option will not operate to make ineffective the granting of the option.
For example, on June 1, 2008, Corporation A grants to X, an employee, an
option to purchase 5,000 shares of the corporations common stock, exercisable
by X on or after June 1, 2009, provided X is employed by the corporation
on June 1, 2009, and provided that As profits during the fiscal year preceding
the year of exercise exceed $200,000. Such an option is granted to X on
June 1, 2008, and will be treated as outstanding as of such date.
(C) Stock. The term stock means capital
stock of any class, including voting or nonvoting common or preferred stock.
Except as otherwise provided, the term stock includes both treasury stock
and stock of original issue. Special classes of stock authorized to be issued
to and held by employees are within the scope of the term stock for this
purpose, provided such stock otherwise possesses the rights and characteristics
of capital stock.
(D) Exercise price. The term exercise price
means the consideration in cash or property that, pursuant to the terms
of the option, is the price at which the stock subject to the option is
purchased. The term exercise price does not include any amounts paid
as interest under a deferred payment plan or treated as interest.
(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 individual. A promise to pay the exercise
price does not constitute 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 does not constitute the exercise of an option to the extent the payments
made remain subject to withdrawal by or refund to the service provider.
(F) Transfer. The term transfer, when used
in reference to the transfer to an individual 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 individual 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 shares fair market value
at the time of the sale.
(G) Readily tradable. For purposes of this section
and §§1.409A-2 through 1.409A-6, stock is treated as readily tradable if
it is regularly quoted by brokers or dealers making a market in such stock.
(H) Application to stock appreciation rights. For
purposes of this section and §§1.409A-2 through 1.409A-6, the definitions
provided in paragraphs (b)(5)(vi)(A) through (G) of this section may be
applied by analogy to the issuance of, exercise of, or payment upon the
exercise of, a stock appreciation right.
(6) Restricted property, section 402(b) trusts, and
section 403(c) annuities-
(i) In general. If a service provider receives
property from, or pursuant to, a plan maintained by a service recipient,
there is no deferral of compensation merely because the value of the property
is not includible in income by reason of the property being substantially
nonvested (as defined in §1.83-3(b)), or is includible in income solely
due to a valid election under section 83(b). For purposes of this paragraph
(b)(6)(i), a transfer of property includes the transfer of a beneficial
interest in a trust or annuity plan, or a transfer to or from a trust or
under an annuity plan, to the extent such a transfer is subject to section
83, section 402(b) or section 403(c). In addition, for purposes of this
paragraph (b), a right to compensation income that will be required to be
included in income under section 402(b)(4)(A) is not a deferral of compensation.
(ii) Promises to transfer property. A plan under
which a service provider obtains a legally binding right to receive property
in a future taxable year where the property will be substantially vested
(as defined in §1.83-3(b)) at the time of transfer of the property may provide
for the deferral of compensation and, accordingly, may constitute a nonqualified
deferred compensation plan. A legally binding right to receive property
in a future taxable year where the property will be substantially nonvested
(as defined in §1.83-3(b)) at the time of transfer of the property will
not provide for the deferral of compensation and, accordingly, will not
constitute a nonqualified deferred compensation plan unless offered in conjunction
with another legally binding right that constitutes a deferral of compensation.
(7) Arrangements between partnerships and partners.
[Reserved.]
(8) Certain foreign plans--
(i) Plans with respect to compensation covered by treaty
or other international agreement. A plan in which a service provider
participates does not provide for a deferral of compensation for purposes
of this paragraph (b) to the extent that the compensation under the plan
would have been excluded from gross income for Federal income tax purposes
under the provisions of any bilateral income tax convention or other bilateral
or multilateral agreement to which the United States is a party if the compensation
had been paid to the service provider at the time that the legally binding
right to the compensation first arose or, if later, the time that the legally
binding right was no longer subject to a substantial risk of forfeiture.
(ii) Plans with respect to certain other compensation.
A plan in which a service provider participates does not provide for a deferral
of compensation for purposes of this paragraph (b) to the extent that compensation
under the plan would not have been includible in gross income for Federal
tax purposes if it had been paid to the service provider at the time that
the legally binding right to the compensation first arose or, if later,
the time that the legally binding right was no longer subject to a substantial
risk of forfeiture, due to one of the following:
(A) The service provider was a nonresident alien at such
time and the compensation would not have been includible in gross income
under section 872.
(B) The service provider was a qualified individual (as
defined in section 911(d)(1)) at such time, the compensation would have
been foreign earned income within the meaning of section 911(b)(1) (without
regard to section 911(b)(1)(B)(iv)) if paid at such time, and the amount
of such compensation was equal to or less than the excess (if any) of the
maximum exclusion amount under section 911(b)(2)(D) for such taxable year
over the amount of foreign earned income actually excluded from gross income
by such qualified individual for such taxable year under section 911(a)(1).
(C) The compensation would have been excludible from gross
income under section 893.
(D) The compensation would have been excludible from gross
income under section 931 or section 933.
(iii) Tax equalization agreements. Compensation
paid under 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
providers 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 providers 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. Where such payments arise due to an audit, litigation or
similar proceeding, the right to the payments will not be treated as resulting
in a deferral of compensation if the payments are scheduled and made in
accordance with the provisions of §1.409A-3(i)(1)(v) (timing of tax gross-up
payments). For purposes of this paragraph (b)(8)(iii), the term tax equalization
agreement refers to an agreement, method, program, or other arrangement
that provides payments intended to compensate the service provider for some
or all of the excess of the taxes actually imposed by a foreign jurisdiction
on the compensation paid by the service recipient to the service provider
over the taxes that would be imposed if the compensation were subject solely
to United States Federal, state, and local income tax, or some or all of
the excess of the United States Federal, state, and local income tax actually
imposed on the compensation paid by the service to the service provider
over the taxes that would be imposed if the compensation were subject solely
to taxes in the foreign jurisdiction, provided that the payment made under
such agreement, method, program, or other arrangement may not exceed such
excess and the amount necessary to compensate for the additional taxes on
the amount paid under the agreement, method, program, or other arrangement.
(iv) Certain limited deferrals of a nonresident alien.
With respect to a nonresident alien, a foreign plan does not provide for
a deferral of compensation if the amounts deferred under the foreign plan
based upon services performed by the nonresident alien in the United States
(including amounts deferred based upon service credits or compensation received
due to services performed in the United States) do not exceed the applicable
dollar amount under section 402(g)(1)(B) for the taxable year. If the amounts
deferred under the foreign plan based upon the services performed by the
nonresident alien in the United States exceed the applicable dollar amount,
an amount of such deferrals equal to such amount is treated as not deferred
under a nonqualified deferred compensation plan. For purposes of this paragraph
(b)(8)(iv), the term foreign plan means a plan that, together with
all substantially similar plans, is maintained by a service recipient for
a substantial number of participants, substantially all of whom are nonresident
aliens or resident aliens classified as resident aliens solely under section
7701(b)(1)(A)(ii) (and not section 7701(b)(1)(A)(i)).
(v) Additional foreign plans. A plan in which a
service provider participates does not provide for a deferral of compensation
for purposes of this paragraph (b) to the extent designated by the Commissioner
in revenue procedures, notices, or other guidance published in the Internal
Revenue Bulletin (see §601.601(d)(2) of this chapter).
(vi) Earnings. Earnings on compensation excluded
from the definition of deferral of compensation pursuant to this paragraph
(b)(8) are also not treated as a deferral of compensation.
(9) Separation pay plans--
(i) In general. A plan that otherwise provides
for a deferral of compensation under this paragraph (b) does not fail to
provide a deferral of compensation merely because the right to payment of
the compensation is conditioned upon a separation from service. However,
paragraphs (b)(9)(ii), (iii), (iv), and (v) of this section provide rules
concerning the extent to which certain separation pay plans do not provide
for the deferral of compensation. The exceptions contained in paragraphs
(b)(9)(ii), (iii), (iv), and (v) of this section may be used in combination,
such that compensation under a plan that would be excepted under one of
those paragraphs may be treated as excepted under another of those paragraphs,
so that other compensation under a plan may be treated as excepted under
the first of such paragraphs. Notwithstanding any other provision of this
paragraph (b)(9), any payment or benefit, or entitlement to a payment or
benefit, that acts as a substitute for, or replacement of, amounts deferred
by the service recipient under a separate nonqualified deferred compensation
plan constitutes a payment or a deferral of compensation under the separate
nonqualified deferred compensation plan, and does not constitute a payment
or deferral of compensation under a separation pay plan. If a service provider
receives a payment at separation from service and also has a legally binding
right to an amount of deferred compensation that would be forfeited upon
the separation from service, whether the payment acts as an acceleration
of vesting and substitute payment for the amount of deferred compensation
forfeited, or whether the deferred compensation is treated as forfeited
and the amount paid is treated as a separate payment of current compensation,
is determined based on the facts and circumstances, provided that, where
the separation from service is voluntary, it is presumed that the payment
results from an acceleration of vesting followed by a payment of the deferred
compensation that is subject to section 409A. Accordingly, any change in
the payment schedule to accelerate or defer the payments would be subject
to the rules of section 409A. The presumption that a right to a payment
is not a new right, but is instead a right substituted for a pre-existing
forfeited right, may be rebutted by demonstrating that the service provider
would have obtained the right to the payment regardless of the forfeiture
of the nonvested right. A factor indicating that the service provider would
have obtained a right to a payment regardless of the forfeiture of the nonvested
right is that the amount to which the service provider obtains a right is
materially less than an amount equal to the present value of the forfeited
amount multiplied by a fraction, the numerator of which is the period of
service the service provider actually completed, and the denominator of
which is the full period of service the service provider would have been
required to complete to receive the full amount of the payment. For example,
where a service provider is entitled to a future payment only if the service
provider completes three years of service and at the time of termination
the service provider has completed one year of service, the presumption
could be rebutted if the payment to the service provider is materially less
than the present value of one-third of the nonvested amount. Another such
factor is that the payment to the service provider is of a type customarily
made to service providers who separate from service with the service recipient
and do not forfeit nonvested rights to deferred compensation (for example,
a payment of accrued but unused leave or a payment for a release of actual
or potential claims).
(ii) Collectively bargained separation pay plans.
A separation pay plan does not provide for a deferral of compensation to
the extent the plan is a collectively bargained separation pay plan that
provides for separation pay only upon an involuntary separation from service
or pursuant to a window program. Only the portion of the separation pay
plan attributable to employees covered by a bona fide collective bargaining
agreement is considered to be provided under a collectively bargained separation
pay plan. A collectively bargained separation pay plan is a separation pay
plan that meets the following conditions:
(A) The separation pay plan is contained within an agreement
that the Secretary of Labor determines to be a collective bargaining agreement.
(B) The separation pay provided by the collective bargaining
agreement was the subject of arms length negotiations between employee
representatives and one or more employers, and the agreement between employee
representatives and one or more employers satisfies section 7701(a)(46).
(C) The circumstances surrounding the agreement evidence
good faith bargaining between adverse parties over the separation pay to
be provided under the agreement.
(iii) Separation pay due to involuntary separation
from service or participation in a window program. A separation pay
plan that is not described in paragraph (b)(9)(ii) of this section and that
provides for separation pay only upon an involuntary separation from service
(as defined in paragraph (n) of this section) or pursuant to a window program
does not provide for a deferral of compensation to the extent that the separation
pay, or portion of the separation pay, provided under the plan meets the
following requirements:
(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 sum of the service providers annualized
compensation based upon the annual rate of pay for services provided to
the service recipient for the taxable year of the service provider preceding
the taxable year of the service provider in which the service provider has
a separation from service with such service recipient (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 plan pursuant to section 401(a)(17) for the year in which
the service provider has a separation from service.
(B) The plan provides that the separation pay described
in paragraph (b)(9)(iii)(A) of this section must be paid no later than the
last day of the second taxable year of the service provider following the
taxable year of the service provider in which occurs the separation from
service.
(iv) Foreign separation pay plans. A separation
pay plan (including a plan providing payments upon a voluntary separation
from service) does not provide for deferred compensation to the extent the
plan provides for amounts of separation pay required to be provided under
the applicable law of a foreign jurisdiction. For this purpose, a provision
of foreign law shall be considered applicable only to foreign earned income
(as defined under section 911(b)(1) without regard to section 911(b)(1)(B)(iv)
and without regard to the requirement that the income be attributable to
services performed during the period described in section 911(d)(1)(A) or
(B)) from sources within the foreign country that promulgated such law.
(v) Reimbursements and certain other separation payments
(A) In general. 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). For purposes of this paragraph (b)(9)(v)(A),
the reimbursement of reasonable moving expenses includes the reimbursement
of all or part of any loss the service provider actually incurs due to the
sale of a primary residence in connection with a separation from service.
(B) Medical benefits. To the extent a separation
pay plan (including a plan providing payments due to a voluntary separation
from service) entitles a service provider to reimbursement by the service
recipient of payments of medical expenses incurred and paid by the service
provider but not reimbursed by a person other than the service recipient
and allowable as a deduction under section 213 (disregarding the requirement
of section 213(a) that the deduction is available only to the extent that
such expenses exceed 7.5 percent of adjusted gross income), such plan does
not provide for a deferral of compensation to the extent such rights apply
during the period of time during which the service provider would be entitled
(or would, but for such plan, be entitled) to continuation coverage under
a group health plan of the service recipient under section 4980B (COBRA)
if the service provider elected such coverage and paid the applicable premiums.
(C) In-kind benefits and direct service recipient payments.
A service providers entitlement to in-kind benefits from the service recipient,
or a payment by the service recipient directly to the person providing the
goods or services to the service provider, is treated as not providing for
a deferral of compensation for purposes of this paragraph (b), if a right
to reimbursement by the service recipient for a payment for such benefits,
goods, or services by the service provider would not be treated as providing
for a deferral of compensation under this paragraph (b)(9)(v).
(D) Limited payments. If not otherwise excluded,
a taxpayer may treat a right or rights under a separation pay plan to a
payment or payments as not providing for a deferral of compensation to the
extent such payments in the aggregate do not exceed the applicable dollar
amount under section 402(g)(1)(B) for the year of the separation from service.
(E) Limited period of time. For purposes of paragraphs
(b)(9)(v)(A) and (C) of this section, a limited period of time in which
expenses may be incurred, or in-which in-kind benefits may be provided by
the service recipient or a third party that the service recipient will pay,
does not include periods beyond the last day of the second taxable year
of the service provider following the taxable year of the service provider
in which the separation from service occurred, provided that the period
during which the reimbursements for such expenses must be paid may not extend
beyond the third taxable year of the service provider following the taxable
year of the service provider in which the separation from service occurred.
(vi) Window programs -- definition. The term
window program refers to a program established by a service recipient
in connection with an impending separation from service to provide separation
pay, where such program is made available by the service recipient for a
limited period of time (no longer than 12 months) to service providers who
separate from service during that period or to service providers who separate
from service during that period under specified circumstances. A program
will not be considered a window program if a service recipient establishes
a pattern of repeatedly providing for similar separation pay in similar
situations for substantially consecutive, limited periods of time. Whether
the recurrence of these programs constitutes a pattern is determined based
on the facts and circumstances. Although no one factor is determinative,
relevant factors include whether the benefits are on account of a specific
business event or condition, the degree to which the separation pay relates
to the event or condition, and whether the event or condition is temporary
or discrete or is a permanent aspect of the employers business.
(10) Certain indemnification and liability insurance
plans. A plan in which a service provider participates does not provide
for a deferral of compensation for purposes of this paragraph (b) to the
extent that the plan provides (to the extent permissible under applicable
law), for the indemnification of, or the purchase of an insurance policy
providing for payments of, all or part of the expenses incurred or damages
paid or payable by a service provider with respect to a bona fide claim
against the service provider or service recipient, including amounts paid
or payable by the service provider upon the settlement of a bona fide claim
against the service provider or service recipient, where such claim is based
on actions or failures to act by the service provider in his or her capacity
as a service provider of the service recipient.
(11) Legal settlements. An agreement to which a
service provider is a party does not provide for a deferral of compensation
for purposes of this paragraph (b) to the extent that the agreement provides
for amounts 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, regardless
of whether such settlements, awards, or reimbursement or payment of expenses
pursuant to such claims are treated as compensation or wages for Federal
tax purposes. Whether the execution of a waiver of any or all of such types
of claims indicates that the amounts are paid as an award or settlement
of an actual bona fide claim for damages under applicable law is determined
based on the facts and circumstances. This paragraph (b)(11) does not apply
to any deferred amounts that did not arise as a result of an actual bona
fide claim for damages under applicable law, such as amounts that would
have been deferred or paid regardless of the existence of such claim, even
if such amounts are paid or modified as part of a settlement or award resolving
an actual bona fide claim. For this purpose, a provision of foreign law
shall be considered applicable only to foreign earned income (as defined
under section 911(b)(1) without regard to section 911(b)(1)(B)(iv) and without
regard to the requirement that the income be attributable to services performed
during the period described in section 911(d)(1)(A) or (B)) from sources
within the foreign country that promulgated such law.
(12) Certain educational benefits. A plan in which
a service provider participates does not provide for a deferral of compensation
to the extent the plan provides for taxable educational benefits. For purposes
of this paragraph (b)(12), the term educational benefits refers solely
to benefits provided to a service provider, consisting solely of educational
assistance for the education of the service provider, as defined in section
127(c) and the accompanying regulations, and does not refer to any benefits
provided for the education of any other person, including any spouse, child,
or other family member of the service provider.
(c) Plan--
(1) In general. The term plan includes any
agreement, method, program, or other arrangement, including an agreement,
method, program, or other arrangement that applies to one person or individual.
A plan may be adopted unilaterally by the service recipient or may be negotiated
or agreed to by the service recipient and one or more service providers
or service provider representatives. An agreement, method, program, or other
arrangement may constitute a plan regardless of whether it is an employee
benefit plan under section 3(3) of ERISA, as amended (29 U.S.C. 1002(3)).
The requirements of section 409A are applied as if a separate plan or plans
is maintained for each service provider. For purposes of determining the
terms of a plan, general provisions of the plan that purport to nullify
noncompliant plan terms, or to supply any specific plan terms required by
this section, §1.409A-2 or §1.409A-3, are disregarded.
(2) Plan aggregation rules--
(i) In general. Except as otherwise provided, the
following rules apply with respect to the application of this section and
§§1.409A-2 through 1.409A-6 to deferrals of compensation with respect to
a service provider:
(A) All deferrals of compensation at the election of that
service provider under all plans of the service recipient that are account
balance plans, except to the extent that the plan is described in paragraph
(c)(2)(i)(D), (E), (F), (G), or (H) of this section, are treated as deferred
under a single plan. For purposes of this paragraph, the term account
balance plan means
(1) An agreement, method, program, or other arrangement
that is an account balance plan as defined in §31.3121(v)(2)-1(c)(1)(ii)(A)
of this chapter, including mandatorily bifurcating the agreement, method,
program, or other arrangement in accordance with the rules provided in §31.3121(v)-1(c)(1)(iii)(B)
of this chapter; or
(2) An agreement, method, program, or other arrangement
that would be described in paragraph (c)(2)(i)(A)(1) of this section
if the service provider were an employee.
(B) All deferrals of compensation other than at the election
of that service provider, including deferrals reflecting matching by the
service recipient with respect to amounts a service provider elects to defer,
under all plans of the service recipient that are account balance plans,
except to the extent the plan is described in paragraph (c)(2)(i)(D), (E),
(F), (G), or (H) of this section, are treated as deferred under a single
plan. For purposes of this paragraph (c)(2)(i)(B), the term account balance
plan has the same meaning as provided in paragraph (c)(2)(i)(A) of this
section.
(C) All deferrals of compensation with respect to that
service provider under all plans of the service recipient that are nonaccount
balance plans, except to the extent such plan is described in paragraph
(c)(2)(i)(D), (E), (F), (G), or (H) of this section, are treated as deferred
under a single plan. For purposes of this paragraph (c)(2)(i)(C), the term
nonaccount balance plan means
(1) An agreement, method, program, or other arrangement
that is a nonaccount balance plan as defined in §31.3121(v)(2)-1(c)(2)(i)
of this chapter, including mandatorily bifurcating the agreement, method,
program, or other arrangement in accordance with the rules provided in §31.3121(v)-1(c)(1)(iii)(B)
of this chapter; or
(2) An agreement, method, program, or other arrangement
that would be described in paragraph (c)(2)(i)(C)(1) of this section
if the service provider were an employee.
(D) All deferrals of compensation with respect to that
service provider under all separation pay plans (as defined in paragraph
(m) of this section) of the service recipient to the extent an amount deferred
under the plans is not described in paragraph (c)(2)(i)(E) of this section
and is payable solely upon an involuntary separation from service within
the meaning of paragraph (n) of this section or as a result of participation
in a window program, are treated as deferred under a single plan.
(E) All deferrals of compensation with respect to that
service provider under all plans of the service recipient to the extent
such amounts deferred consist of rights to in-kind benefits or reimbursements
of expenses, such as membership fees, or expenses related to aircraft or
vehicle usage, to the extent that the right to the in-kind benefit or reimbursement,
separately or in the aggregate, does not constitute a substantial portion
of either the overall compensation earned by the service provider for performing
services for the service recipient or the overall compensation received
due to a separation from service, are treated as deferred under a single
plan.
(F) All deferrals of compensation with respect to that
service provider under all plans of the service recipient to the extent
that the taxation of such compensation is governed by §1.61-22 or §1.7872-15
(split-dollar life insurance arrangements), or the taxation of such compensation
would be governed by §1.61-22 or §1.7872-15 but for the operation of §1.61-22(j)
(effective date provisions), are treated as deferred under a single plan.
(G) All deferrals of compensation with respect to that
service provider under all agreements, methods, programs, or other arrangements
of the service recipient to the extent the deferrals under the agreements,
methods, programs, or other arrangements are deferrals of amounts that would
be treated as modified foreign earned income (meaning foreign earned income
as defined under section 911(b)(1) without regard to section 911(b)(1)(B)(iv)
and without regard to the requirement that the income be attributable to
services performed during the period described in section 911(d)(1)(A) or
(B)) if paid to the service provider at the time the amount is first deferred,
and provided further that substantially all the participants in such agreements,
methods, programs, or other arrangements and any substantially similar agreements,
methods, programs, or other arrangements are nonresident aliens and that
the service provider does not participate in a substantially identical agreement,
method, program, or other arrangement that does not meet the requirements
of this paragraph (c)(2)(i)(G) (a domestic arrangement), are treated as
deferred under a single plan.
(H) All deferrals of compensation with respect to that
service provider under all plans of the service provider to the extent such
plans are stock rights (as defined in paragraph (c)(2)(l) of this section)
subject to section 409A, are treated as deferred under a single plan.
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