• (A) Gross income inclusion

• (i) In general
  If at any time during a taxable year a nonqualified deferred compensation plan
  (I) fails to meet the requirements of paragraphs (2), (3), and (4), or
  (II) is not operated in accordance with such requirements,
  all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.
• (ii) Application only to affected participants
  Clause (i) shall only apply with respect to all compensation deferred under the plan for participants with respect to whom the failure relates.

• (B)  Interest and additional tax payable with respect to previously deferred compensation

• (i) In general
  If compensation is required to be included in gross income under subparagraph (A) for a taxable year, the tax imposed by this chapter for the taxable year shall be increased by the sum of
  (I) the amount of interest determined under clause (ii), and
  (II) an amount equal to 20 percent of the compensation which is required to be included in gross income.
• (ii) Interest
  For purposes of clause (i), the interest determined under this clause for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture.

• (A)  In general
  The requirements of this paragraph are met if the plan provides that compensation deferred under the plan may not be distributed earlier than

• (i) In general
  If at any time during a taxable year a nonqualified deferred compensation plan
  (I) fails to meet the requirements of paragraphs (2), (3), and (4), or
  (II) is not operated in accordance with such requirements,
  all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.
• (ii) Application only to affected participants
  Clause (i) shall only apply with respect to all compensation deferred under the plan for participants with respect to whom the failure relates.

• (B) Special rules

• (i) Specified employees
  In the case of any specified employee, the requirement of subparagraph (A)(i) is met only if distributions may not be made before the date which is 6 months after the date of separation from service (or, if earlier, the date of death of the employee). For purposes of the preceding sentence, a specified employee is a key employee (as defined in section 416 (i) without regard to paragraph (5) thereof) of a corporation any stock in which is publicly traded on an established securities market or otherwise.
• (ii) Unforeseeable emergency
  For purposes of subparagraph (A)(vi)
  (I) In general
  The term "unforeseeable emergency" means a severe financial hardship to the participant resulting from an illness or accident of the participant, the participants spouse, or a dependent (as defined in section 152(a)) of the participant, loss of the participants property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant.
  (II) Limitation on distributions
  The requirement of subparagraph (A)(vi) is met only if, as determined under regulations of the Secretary, the amounts distributed with respect to an emergency do not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the participants assets (to the extent the liquidation of such assets would not itself cause severe financial hardship).

• (C) Disabled
  For purposes of subparagraph (A)(ii), a participant shall be considered disabled if the participant

• (i)  is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or
• (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the participants employer.

• The requirements of this paragraph are met if the plan does not permit the acceleration of the time or schedule of any payment under the plan, except as provided in regulations by the Secretary.

• (A)  In general
  The requirements of this paragraph are met if the requirements of subparagraphs (B) and (C) are met.

• (B)   Initial deferral decision

• (i) In general
  The requirements of this subparagraph are met if the plan provides that compensation for services performed during a taxable year may be deferred at the participants election only if the election to defer such compensation is made not later than the close of the preceding taxable year or at such other time as provided in regulations.
• (ii) First year of eligibility
  In the case of the first year in which a participant becomes eligible to participate in the plan, such election may be made with respect to services to be performed subsequent to the election within 30 days after the date the participant becomes eligible to participate in such plan.
• (iii)  Performance-based compensation
  In the case of any performance-based compensation based on services performed over a period of at least 12 months, such election may be made no later than 6 months before the end of the period.

• (C) Changes in time and form of distribution
  The requirements of this subparagraph are met if, in the case of a plan which permits under a subsequent election a delay in a payment or a change in the form of payment

• (i)  the plan requires that such election may not take effect until at least 12 months after the date on which the election is made,
• (ii) in the case of an election related to a payment not described in clause (ii), (iii), or (vi) of paragraph (2)(A), the plan requires that the first payment with respect to which such election is made be deferred for a period of not less than 5 years from the date such payment would otherwise have been made, and
• (iii)  the plan requires that any election related to a payment described in paragraph (2)(A)(iv) may not be made less than 12 months prior to the date of the first scheduled payment under such paragraph.

• In the case of assets set aside (directly or indirectly) in a trust (or other arrangement determined by the Secretary) for purposes of paying deferred compensation under a nonqualified deferred compensation plan, for purposes of section 83 such assets shall be treated as property transferred in connection with the performance of services whether or not such assets are available to satisfy claims of general creditors

• (A) at the time set aside if such assets (or such trust or other arrangement) are located outside of the United States, or
• (B) at the time transferred if such assets (or such trust or other arrangement) are subsequently transferred outside of the United States.

• This paragraph shall not apply to assets located in a foreign jurisdiction if substantially all of the services to which the nonqualified deferred compensation relates are performed in such jurisdiction.

• In the case of compensation deferred under a nonqualified deferred compensation plan, there is a transfer of property within the meaning of section 83 with respect to such compensation as of the earlier of

• (A) the date on which the plan first provides that assets will become restricted to the provision of benefits under the plan in connection with a change in the employers financial health, or
• (B) the date on which assets are so restricted,

• whether or not such assets are available to satisfy claims of general creditors.

• Income inclusion for offshore trusts and employers financial health
• For each taxable year that assets treated as transferred under this subsection remain set aside in a trust or other arrangement subject to paragraph (1) or (2), any increase in value in, or earnings with respect to, such assets shall be treated as an additional transfer of property under this subsection (to the extent not previously included in income).

• Interest on tax liability payable with respect to transferred property
• (A) In general
  If amounts are required to be included in gross income by reason of paragraph (1) or (2) for a taxable year, the tax imposed by this chapter for such taxable year shall be increased by the sum of

• (i) the amount of interest determined under subparagraph (B), and
• (ii) an amount equal to 20 percent of the amounts required to be included in gross income.

• (B Interest
  For purposes of subparagraph (A), the interest determined under this subparagraph for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the amounts so required to be included in gross income by paragraph (1) or (2) been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such amounts are not subject to a substantial risk of forfeiture.

For purposes of this section:

• The term "nonqualified deferred compensation plan" means any plan that provides for the deferral of compensation, other than

• (A) a qualified employer plan, and
• (B) any bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefit plan.

For purposes of this section:

• The term "qualified employer plan" means

• (A) any plan, contract, pension, account, or trust described in subparagraph (A) or (B) of section 219 (g)(5) (without regard to subparagraph (A)(iii)),
• (B) any eligible deferred compensation plan (within the meaning of section 457 (b)), and
• (C) any plan described in section 415 (m).

For purposes of this section:

• The term "plan" includes any agreement or arrangement, including an agreement or arrangement that includes one person.

For purposes of this section:

• The rights of a person to compensation are subject to a substantial risk of forfeiture if such persons rights to such compensation are conditioned upon the future performance of substantial services by any individual.

For purposes of this section:

• References to deferred compensation shall be treated as including references to income (whether actual or notional) attributable to such compensation or such income.

For purposes of this section:

• Except as provided by the Secretary, rules similar to the rules of subsections (b) and (c) of section 414 shall apply.