Section 409A was added to the Internal Revenue Code as part of the American
Jobs Creation Act of 2004, Pub. Law No. 108-357, 118 Stat. 1418. Section
409A generally provides that all amounts deferred under a nonqualified deferred
compensation plan for all taxable years are currently includible in gross
income to the extent not subject to a substantial risk of forfeiture and not
previously included in gross income, unless certain requirements are met.
The IRS issued Notice 2005-1, 2005-1 C.B. 274, on December 20, 2004 (published
as modified on January 6, 2005) and issued proposed regulations (REG-158080-04,
2005-2 C.B. 786) under section 409A on September 29, 2005 (70 Fed. Reg. 57930
(Oct. 4, 2005)). The proposed regulations do not limit the application of
the guidance provided in Notice 2005-1.
II. Accelerated Payments of Nonqualified Deferred Compensation to
Satisfy Federal Conflict of Interest Requirements
Section 409A(a)(3) provides that a plan may not permit acceleration
of the time or schedule of payment for nonqualified deferred compensation
subject to section 409A except as provided in regulations by the Secretary.
The legislative history to section 409A provides that it was intended that
the Secretary would provide limited exceptions to the prohibition on acceleration
of payments, including, for example, a distribution necessary to comply with
Federal conflict of interest requirements. H.R. Conf. Rep. No. 108-755, at
731 (2004). Both Notice 2005-1, Q&A-15(c) and § 1.409A-3(h)(2)(ii)
of the proposed regulations provide that a plan may permit such acceleration
of the time and schedule of a payment of nonqualified deferred compensation
subject to the requirements of section 409A as may be necessary to comply
with a certificate of divestiture (as defined in section 1043(b)(2)).
Commentators, including the Office of Government Ethics, expressed concern
about the indication in Notice 2005-1 and the proposed regulations that a
“certificate of divestiture” (as defined in section 1043(b)(2))
would be effective to permit an accelerated payment of nonqualified deferred
compensation subject to section 409A. The Office of Government Ethics issues
such certificates of divestiture so that an employee may defer recognition
of capital gains when property is sold to comply with conflict of interest
provisions. Because payment under a nonqualified deferred compensation plan
is treated as ordinary income, rather than as capital gain, the Office of
Government Ethics could not issue a certificate of divestiture in connection
with an accelerated payment under such a plan.
Accordingly, until further guidance is issued, a nonqualified deferred
compensation arrangement subject to section 409A may permit such acceleration
of the time or schedule of payment as is necessary to satisfy requirements
established pursuant to a written determination by the Office of Government
Ethics that: (1) divestiture of the financial interest or termination of
the financial arrangement is reasonably necessary to comply with any Federal
conflict of interest statute, regulation, rule or executive order (including
section 208 of title 18, United States Code), or is requested by a congressional
committee as a condition of confirmation; and (2) specifies the financial
interest to be divested or terminated. Of course, amounts actually paid pursuant
to such acceleration generally will be includible in income by the recipient.
III. Drafting Information
The principal author of this notice is Stephen Tackney of the Office
of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).
However, other personnel from the Treasury Department and the IRS participated
in its development. For further information regarding this notice, contact
Stephen Tackney at (202) 927-9639 (not a toll-free call).
You can either: Search all IRS Bulletin Documents issued since January 1996, or Search the entire site. For a more focused search, put your search word(s) in quotes.