IRS Publishes Interim Guidance on §457A

In Notice 2009-8, the Internal Revenue Service has published guidance on the application of §457A to nonqualified deferred compensation plans of nonqualified entities.
The IRS notes that Section 457A applies to amounts deferred that are attributable to services performed after December 31, 2008. Additionally, the notice explains that, in the case of any amount deferred to which § 457A would not otherwise apply solely by reason of the fact that the amount is attributable to services performed before January 1, 2009, to the extent the amount deferred is not included in gross income in a taxable year beginning before 2018, that amount deferred is includible in gross income in the later of (a) the last taxable year beginning before January 1, 2018 or (b) the first taxable year in which there is no substantial risk of forfeiture of the right to the amount deferred.
The IRS notes that, until further guidance is issued, taxpayers may rely on the rules in this notice for purposes of § 457A effective from October 3, 2008 (the date of enactment of TEAMTRA). The Notice also clarifies that further guidance that would expand the coverage of § 457A will be prospective and will not apply to a service provider’s taxable years beginning before the issuance of such guidance.
Areas Covered
Included in the guidance are answers to (and some examples of ) the following:
  • What is a nonqualified deferred compensation plan for purposes of § 457A?
  • What is a substantial risk of forfeiture for purposes of § 457A?
  • What is a short-term deferral for purposes of § 457A (a § 457A short-term deferral)?
  • To which types of service providers does § 457A apply?
  • What is a nonqualified entity for purposes of § 457A?
  • How is it determined whether an entity is a foreign corporation or a partnership for purposes of determining whether an entity is a nonqualified entity under § 457A?
  • How is it determined whether substantially all of a foreign corporation’s income is subject to a comprehensive foreign income tax?
  • How is it determined whether substantially all of a foreign corporation’s income is effectively connected with the conduct of a trade or business in the United States?
  • When is a foreign person eligible for the benefits of a comprehensive income tax treaty for purposes of § 457A?
  • How is it determined whether substantially all of a partnership’s income for a taxable year is allocated to persons other than (A) foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax and (B) organizations which are exempt from tax under Title 26 of the United States Code?
  • Does § 457A apply to deferred compensation that would have been deductible against income of a foreign corporation which is taxable under § 882 if the compensation had been paid in cash on the date that such compensation ceased to be subject to a substantial risk of forfeiture?
  • When is the determination made whether an entity is a nonqualified entity?
  • How is it determined whether a nonqualified deferred compensation plan is a plan of a nonqualified entity?
  • Does § 457A apply to a right to earnings on deferred compensation that is subject to § 457A?
  • How is the amount includible in income under § 457A determined?
  • If an amount is included in gross income under § 457A before the amount is paid to the service provider, is the amount also includible in income when the amount is paid to the service provider?
  • If an amount is included in income under § 457A before the amount is paid to the service provider, and before such amount is paid the right to the amount is forfeited or otherwise permanently lost, is the service provider entitled to a loss?
  • When is the deferred amount to which a service provider is entitled treated as not determinable for purposes of § 457A?
  • When is a deferred amount that is treated as not determinable at the time that the compensation is otherwise includible in gross income under § 457A required to be included in income?
  • What additional taxes apply to a deferred amount that is treated as not determinable at the time that the compensation is otherwise includible in gross income under § 457A?
  • What is the effective date of § 457A?
  • For purposes of applying the effective date, how are the periods of service to which the compensation is attributable determined?
  • How does § 457A coordinate with § 409A?
  • What transition rules apply under § 409A with respect to amounts covered by § 457A that are attributable to services performed before January 1, 2009?
  • What transition rules apply under § 409A with respect to amounts covered by § 457A that are attributable to services performed after December 31, 2008?
  • What transition rules apply under § 409A with respect to certain back-to-back arrangements attributable to services performed before January 1, 2009?
For further information regarding this notice, contact Stephen Tackney of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities) at (202) 927-9639.
Comments Requested
The Treasury Department and the IRS request comments on the topics addressed in the notice, and any other issues arising under § 457A. Additionally, they specifically requested comments on the following:
  • Whether and to what extent a limitation on benefits provision or exchange of information program is relevant to the determination of what is a “comprehensive income tax treaty.’
  • The extent to which a reimbursement arrangement with respect to a domestic taxpayer service recipient and a nonqualified entity that has agreed to share or reimburse the domestic taxpayer service recipient’s compensation costs should result in the domestic taxpayer service recipient also being treated as a nonqualified entity.
  • The potential scope of the exception to the definition of substantial risk of forfeiture that may be provided by regulation under § 457A(d)(1)(B), relating to the single investment asset.
  • The proper treatment of trusts that are partners in a partnership and beneficiaries of these trusts for purposes of determining to whom income of a partnership is allocated under § 457A(b)(2).


Comments may be submitted to Internal Revenue Service, CC:PA:LPD:PR (Notice 2009-XX), Room 5203, PO Box 7604, Ben Franklin Station, Washington, DC 20044.
Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Couriers Desk at 1111 Constitution Avenue, NW, Washington, DC 20224, Attn:CC:PA:LPD:PR (Notice 2009-XX), Room 5203.
Submissions may also be sent electronically via the internet to the following email address: Notice.comments@irscounsel.treas.gov. Include the notice number in the subject line.

Ex-Employee Given Green Light for Cash Balance Suit

Drawing a distinction between claims to recover pension benefits and those to collect damages in a pension dispute, a federal judge has given a former JP Morgan Chase employee permission to pursue his cash balance plan lawsuit.

U.S. District Judge Denise Cote of the U.S. District Court for the Southern District of New York ruled that, because of the benefits versus damages distinction, ex-employee Frank Bilello would still be considered a participant under the Employee Retirement Income Security Act (ERISA) even though he had taken a lump sum distribution.

Declaring him still a participant under ERISA, Cote said, gave him the requisite legal standing.

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Bilello alleged in his suit that the company violated ERISA by not giving employees proper notice of the cash balance conversion’s impact on their benefits level.

In issuing the ruling, Cote relied on recent case law stating that former employees who take a lump sum distribution cannot later sue for damages—because they would no longer be considered ERISA participants—but can later pursue claims for additional benefits they should have received but for the alleged ERISA violations.

Cote ruled that Bilello’s requested remedy to have the plan returned to its traditional defined benefit formula under which he claimed he would have received more benefits than under the cash balance program was what gave him standing to pursue the case despite his distribution.

The case is Bilello v. JPMorgan Chase Retirement Plan, S.D.N.Y., No. 07 Civ. 7379 (DLC), 1/6/09.

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