Internal Revenue Bulletin 2007-19 (PDF rendition): IRS Revenue Procedures

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Bulletin No. 200
7-19
May 7, 2007
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2007–29, page 1223.
Federal rates; adjusted federal rates; adjusted federal
long-termrateandthelong-termexemptrate.For pur-
poses of sections 382, 642, 1274, 1288, and other sections
of the Code, tables set forth the rates for May 2007.
Announcem
ent 2007–44, page 1238.
This annou
ncement provides that for purposes of the Archer
Medical Sa
vings Account (Archer MSA) pilot program under
section 22
0(j)(2) of the Code, 2005 and 2006 are not cut-off
years.
EMPLOYEE PLANS
T.D. 9321, page 1123.
Final regulations set forth guidance on the application of sec-
tion 409A to nonqualified deferred compensation plans. The
regulations provide a definition of a nonqualified deferred com-
pensation plan subject to section 409A, including rules related
to the statutory effective date, and rules governing initial and
subsequent deferral elections, the establishment of the time
and form of payment, and the acceleration of payments un-
der a plan. Notice 2005–1 obsoleted in part. Notice 2006–4
superseded in part. Notice 2006–64 superseded for taxable
years on or after January 1, 2008.
EXEMPT ORGANIZATIONS
Announcement 2007–46, page 1239.
The IRS has revoked its determination that World Project, Inc.,
of Brooklyn, NY; Izaak Walton League of America, Calumet Re-
gion Chapter, of Dolton, IL; Greenbriar Club, Inc., of Clearwa-
ter, FL; Cunningham Family Foundation of West Jordan, UT;
Roxbury Insurance Company of Los Angeles, CA; and Wishes
Are Forever Foundation of Salt Lake City, UT, qualify as orga-
nizations described in sections 501(c)(3) and 170(c)(2) of the
Code.
ADMINISTRATIVE
Rev. Proc. 2007–31, page 1225.
Qualified mortgage bonds; mortgage credit certificates;
national median gross income.Guidance is provided con-
cerning the use of the national and area median gross income
figures by issuers of qualified mortgage bonds and mortgage
credit certificates in determining the housing cost/income ratio
described in section 143(f) of the Code. Rev. Proc. 2006–20
obsoleted in part.
Announcements of Disbarments and Suspensions begin on page 1227.
Fi
nding Lists begin on page ii.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
May 7, 20072007–19 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of May 2007. See Rev. Rul. 2007-29, page 1223.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
aresetforthforthemonthofMay2007. SeeRev.
Rul. 2007-29, page 1223.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of May 2007. See Rev. Rul.
2007-29, page 1223.
Section 409A.—Inclusion in
Gross Income of Deferred
Compensation Under
Nonqualified Deferred
Compensation Plans
26 CFR 1.409A–6: Application of section 409A and
effective dates.
T.D. 9321
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Application of Section 409A
to Nonqualified Deferred
Compensation Plans
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations regarding the application
of section 409A to nonqualified deferred
compensation plans.The final regulations
are necessary to clarify and explain the
rules governing the application of section
409A to nonqualified deferred compen-
sation plans. The regulations affect ser-
vice providers receiving amounts of de-
ferred compensation and the service recip-
ients for whom the service providers pro-
vide services.
FOR FURTHER INFORMATION
CONTACT: Stephen Tackney, (202)
927–9639 (not a toll-free number).
DATES:Effective Date:These regulations
are effective April 17, 2007.
Applicability Dates:For dates of appli-
cability, see §1.409A–6(b).
SUPPLEMENTARY INFORMATION:
Background
Section 409A was added to the Internal
Revenue Code (Code) by section 885 of
the American Jobs Creation Act of 2004,
Public Law 108–357 (118 Stat. 1418).
Section 409A generally provides that un-
less certain requirements are met, amounts
deferred under a nonqualified deferred
compensation plan forall 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. Section 409A also in-
cludes rules applicable to certain trusts
or similar arrangements associated with a
nonqualified deferred compensation plan,
where such arrangements are located out-
side of the United States or are restricted
to the provision of benefits in connection
with a decline in the financial health of the
sponsor.
On December 20, 2004, the IRS issued
Notice 2005–1 (published as modified on
January 6, 2005, in 2005–1 C.B. 274),
setting forth initial guidance with respect
to the application of section 409A, and
supplying transition guidance pursuant to
a statutory directive. A notice of proposed
rulemaking (REG–158080–04, 2005–2
C.B. 786 [70 FR 57930]) was published in
theFederal Registeron October 4, 2005.
See §601.601(a)(3). A public hearing was
conducted on January 25, 2006. In addi-
tion, the IRS received written and elec-
tronic comments responding to the notice
of proposed rulemaking. After consider-
ation of all the comments, the proposed
regulations are adopted as amended by
this Treasury decision. The amendments
are discussed in this preamble.
The Treasury Department and the IRS
have also issued six additional notices pro-
viding transition guidance with respect to
section 409A: (1) Notice 2005–94, 2005–2
C.B. 1208 (transition guidance with re-
spect to 2005 reporting and withholding
obligations); (2) Notice 2006–4, 2006–3
I.R.B. 307 (transition guidance with re-
spect to certain outstanding stock rights);
(3) Notice 2006–33, 2006–15 I.R.B. 754
(transition guidance with respect to the
application of section 409A(b)); (4) No-
tice 2006–64, 2006–29 I.R.B. 88 (interim
guidance regarding payments necessary to
meet Federal conflict of interest require-
ments); (5) Notice 2006–79, 2006–43
I.R.B. 763 (additional transition relief);
and (6) Notice 2006–100, 2006–51 I.R.B.
1109 (transition guidance with respect to
2005 and 2006 reporting and withholding
obligations). See §601.601(d)(2). For a
discussion of the continued applicability
of these notices, see theEffect on Other
Documentssection of this preamble.
Explanation of Provisions and
Summary of Comments
I.Structure and Format of Regulations
The final regulations generally adopt
the structure and format of the proposed
regulations. A table of contents has been
included in the final regulations, as well
as several additional sets of examples ad-
dressing various topics.
II.Definition of Nonqualified Deferred
Compensation Plan
A.Excluded plans
The final regulations exclude the types
of plans described in section 409A(d)(1)
from the definition of a nonqualified de-
ferred compensation plan, as well as cer-
tain other arrangements that were also set
forth in the proposed regulations. Accord-
ingly, the final regulations generally pro-
vide that a nonqualified deferred compen-
sation plan for purposes of section 409A
2007–19 I.R.B.1123May 7, 2007

does not include a qualified plan, abona
fidesick leave or vacation plan, a disability
plan, a death benefit plan, or certain medi-
cal expense reimbursement arrangements.
The final regulations clarify that the
exemption from coverage under section
409A for certain welfare plans does not
apply to medical expense reimbursements
that constitute taxable income to the ser-
vice provider. The coverage exemption
applies only to arrangements that provide
benefits that are excludable from gross in-
come under section 105 or section 106.
Several commentators requested clari-
fication of when a leave program will be
treated as abona fidesick leave or va-
cation leave plan for purposes of section
409A. Another commentator requested a
clarification of the definition of a compen-
satory time plan. Because the definitions
of these terms may raise issues and require
coordination with the provisions of section
451, section 125, and, with respect to cer-
tain taxpayers, section 457, the final regu-
lations do not address these issues.
Notice 2005–1, Q&A–6 provides that,
until further guidance, taxpayers whose
participation in a nonqualified deferred
compensation plan would be subject to
section 457(f) may rely on the definitions
ofbona fidevacation leave, sick leave,
compensatory time, disability pay, or
death benefit plan applicable for purposes
of section 457(f) as also being applicable
for purposes of section 409A. Until further
guidance, such taxpayers may continue to
rely on such definitions for purposes of
section 409A.
One commentator requested that a
qualified employer plan for purposes of
the exclusion from section 409A include
certain plans covered by section 402(d)
(certain plans with a foreign-situs trust
treated as qualified plans with respect to
the taxation of the participants and bene-
ficiaries) and retirement plans described
in section 1022(i)(2) of the Employee Re-
tirement Income Security Act of 1974, as
amended (certain Puerto Rican retirement
plans). The final regulations adopt this
suggestion.
B.Section 457 plans
The final regulations provide that sec-
tion 409A is not applicable to an eligi-
ble deferred compensation plan under sec-
tion 457(b), but may be applicable to a de-
ferred compensation plan that is subject to
section 457(f). Commentators requested
clarification of the application of the ex-
ception in the proposed regulations from
the definition of deferred compensation re-
ferred to as the short-term deferral rule (de-
scribed in section III.C.1 of this preamble)
to a section 457(f) plan. As discussed be-
low, a right to deferred compensation gen-
erally refers to a legally binding right in
one taxable year to compensation that is
or may be payable in a subsequent tax-
able year. For purposes of determining the
time of payment, the term “payment” gen-
erally refers to an actual or constructive
payment of cash or property. However, the
final regulations provide that for purposes
of the short-term deferral rule, an amount
is treated as paid when it is included in in-
come under section 457(f) whether or not
an actual or constructive payment occurs.
Accordingly, where the income inclusion
under section 457(f) stems from the lapse
of a substantial risk of forfeiture that is
also treated as a substantial risk of for-
feiture for purposes of section 409A, the
amount included in income will be consid-
ered a short-term deferral for purposes of
section 409A. However, the right to earn-
ings on amounts that have previously been
included under section 457(f) will be de-
ferred compensation for purposes of sec-
tion 409A unless the right to the earn-
ings independently satisfies the require-
ments for an exclusion.
C.Arrangements with independent
contractors
The final regulations provide that sec-
tion 409A generally does not apply to an
amount deferred under an arrangement
between a service provider and an unre-
lated service recipient if during the service
provider’s taxable year in which the ser-
vice provider obtains a legally binding
right to the deferred amount the service
provider is actively engaged in the trade
or business of providing services (other
than as an employee or as a director of
a corporation), and provides significant
services to two or more service recipients
to which the service provider is not related
and that are not related to one another.
The final regulations retain the safe
harbor in the proposed regulations, under
which a service provider is deemed to be
providing significant services to two or
more such service recipients for this pur-
pose if the revenues generated from the
services provided to any service recipi-
ent or group of related service recipients
during such taxable year do not exceed
70 percent of the total revenues generated
by the service provider from the trade
or business of providing such services.
Commentators expressed concern that the
safe harbor did not permit independent
contractors to know in advance whether
the arrangements under which an inde-
pendent contractor deferred compensation
during a taxable year would be subject to
section 409A. Commentators requested
certain look-back periods, including the
ability to use averaging over the previ-
ous three to five years, or to satisfy the
70 percent threshold over a certain por-
tion of the previous three to five years.
The Treasury Department and the IRS
are concerned that the suggested rules
would allow service providers to engage
in strategic behavior to ensure that activity
in certain years would be exempt from
section 409A. Accordingly, the final reg-
ulations adopt an additional safe harbor
that provides that a service provider that
has actually met the 70 percent threshold
in the three immediately previous years is
deemed to meet the 70 percent threshold
for the current year, but only if at the time
the amount is deferredthe service provider
does not know or have reason to anticipate
that the service provider will fail to meet
the threshold in the current year.
In response to comments, the final regu-
lations provide that if an independent con-
tractor qualifies for the safe harbor for ex-
clusion from coverage under section 409A
with respect to arrangements with unre-
lated service recipients, an arrangement
between the independent contractor and a
service recipient related to the independent
contractor will not be subject to section
409A if the arrangement, and the practices
under the arrangement, arebona fide,arise
in the ordinary course of business, and are
substantially the same as the arrangements
and practices (such as billing and collec-
tion practices) applicable to one or more
unrelated service recipients to whom the
independent contractor provides substan-
tial services and that produce a majority of
the total revenue that the independent con-
tractor earns from the trade or business of
providing such services during the year.
May 7, 200711242007–19 I.R.B.

The final regulations further clarify that
if at the time the legally binding right to the
payment arose, the arrangement was not
subject to section 409A because the ser-
vice provider was an independent contrac-
tor that was eligible for this exclusion from
coverage under section 409A, the amount
deferred under the arrangement during that
taxable year (and earnings credited to the
deferred amount) will not become subject
to section 409A in a later year if the ser-
vice provider becomes an employee, in-
dependent contractor, or other type of ser-
vice provider subject to the rules of section
409A.
Commentators also requested that a ser-
vice recipient be permitted to rely upon a
representation of an independent contrac-
tor that the independent contractor meets
the exclusion requirements, so that a ser-
vice recipient will know whether it is sub-
ject to the reporting requirements with re-
spect to amounts deferred subject to sec-
tion 409A. The Treasury Department and
the IRS are continuing to study this issue.
D.Anti-abuse rule
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 Commis-
sioner may treat the plan as a nonqualified
deferred compensation plan for purposes
of section 409A.
III.Definition of Deferral of
Compensation
A.In general
The final regulations provide that a
nonqualified deferred compensation plan
is a plan that provides for the deferral of
compensation. The final regulations fur-
ther provide that a plan generally provides
for the deferral of compensation if, under
its terms and the relevant facts and circum-
stances, a service provider has a legally
binding right during a taxable year to com-
pensation that, pursuant to its terms, is or
may be payable to (or on behalf of) the
service provider in a later year. For this
purpose, an amount generally is payable
at the time the service provider has a right
to currently receive a transfer of cash or
property, including a transfer of property
includible in income under section 83,
the economic benefit doctrine or section
402(b). Accordingly, a taxable transfer of
an annuity contract is treated as a payment
for purposes of section 409A.
The definition of deferral of compen-
sation in the final regulations excludes the
condition that the amount not be actually
or constructively received and included in
income during the taxable year, because
that language might cause confusion with
respect to the applicable rules governing
deferral elections and the prohibition on
the acceleration of payments. For ex-
ample, if a service provider has made an
irrevocable election to defer an amount
of his or her salary to a future year, that
amount is treated as deferred compen-
sation regardless of whether the service
recipient actually pays such amount to
the service provider during the year in
which the services are performed. Any
early payment of the deferred compensa-
tion (or any right to receive such an early
payment) generally would constitute an
impermissible acceleration of the payment
of the deferred amount.
For this purpose, a plan will be treated
as providing for a payment to be made in
a subsequent year whether the plan explic-
itly so provides (including through a ser-
vice provider election) or the deferral con-
dition is inherent in the terms of the con-
tract. Where the parties have agreed that
a payment will be made upon an event
that could occur after the year in which the
legally binding right to the payment arises,
the plan generally will provide for a defer-
ral of compensation (unless otherwise ex-
cluded under a specific exception, such as
the short-term deferral rule).
For example, if a plan provides a ser-
vice provider a right to a payment upon
separation from service, the plan gener-
ally will result in a deferral of compen-
sation regardless of whether the service
provider separates from service and re-
ceives the payment in the same year as the
grant, because under the plan the payment
isconditioneduponaneventthatmayoc-
cur after the year in which the legally bind-
ing right to the payment arises. Simi-
larly, if an arrangement such as a stock op-
tion or stock appreciation right not other-
wise excluded from coverage under sec-
tion 409A provides a right to a payment for
a term of years where the payment could
be received during the short-term defer-
ral period or a subsequent period but is
not otherwise includible in income until
paid, the arrangement will provide for de-
ferred compensation even though the ser-
vice provider could receive the payment
during the short-term deferral period (for
example, by exercising the stock option or
stock appreciation right). However, where
a plan does not specify a payment date,
payment event or term of years, (or spec-
ifies a date or event certain to occur dur-
ing the year in which the services are per-
formed), the plan generally will not pro-
vide for the deferral of compensation if the
service provider actually or constructively
receives the payment within the short-term
deferral period.
The proposed regulations provided
that earnings on deferred amounts are
generally treated as deferred compensa-
tion for purposes of section 409A. Under
the final regulations, whether a deferred
amount constitutes earnings on an amount
deferred, or actual or notional income
attributable to an amount deferred, is de-
termined under the principles defining in-
come attributable to the amount taken into
account under §31.3121(v)(2)–1(d)(2).
A commentator requested clarification
of whether a payment for a noncompeti-
tion agreement could be subject to section
409A. Because such a payment would
occur in connection with the performance
or nonperformance of services, and a
covenant not to compete does not create a
substantial risk of forfeiture for purposes
of section 409A, a legally binding right
obtained in one year to a payment in a
subsequent year in connection with a non-
competition agreement generally would
constitute deferred compensation.
B.Legally binding right
The regulations define deferral of com-
pensation in the context of a legally bind-
ing right to a payment of compensation in
a future taxable year. Commentators re-
quested clarification of the standard that
would be used to determine whether a ser-
vice provider has a legally binding right. A
legally binding right includes a contractual
right that is enforceable under the applica-
ble law or laws governing the contract. A
legally binding right also includes an en-
forceable right created under other appli-
cable law, such as a statute.
One commentator suggested that no
legally binding right exists where the pay-
ment is made only upon the realization
2007–19 I.R.B.1125May 7, 2007

of gain from a particular investment. For
example, the commentator argued that a
bonus payable based upon the amount that
a service provider obtains in selling prop-
erty should not be treated as granting the
service provider a legally binding right to
the payment until the property is sold. In
such a situation, however, the requirement
that the property be sold is a condition to
the right to the payment, but the right to
the payment is still a legally binding right.
The service recipient could not simply
revoke the promise, sell the property, and
not pay the bonus. However, the condition
that the property be sold before the service
provider becomes entitled to payment may
constitute a substantial risk of forfeiture,
depending on the specific facts and cir-
cumstances.
C.Short-term deferrals
1.In general
Subject to the modifications described
in this section III.C of the preamble, the fi-
nal regulations generally adopt the short-
term deferral rule that was contained in
the proposed regulations. Under the short-
term deferral rule, a deferral of compen-
sation does not occur for purposes of sec-
tion 409A if the arrangement under which
a payment is made does not provide for a
deferred payment and the payment is made
no later than the 15
th
day of the third month
followingthelateroftheendoftheservice
provider’s taxable year or the end of the
service recipient’s taxable year in which
occurs the later of the time the legally bind-
ing right to the payment arises or the time
such right first ceases to be subject to a
substantial risk of forfeiture (subject to cer-
tain extensions for unforeseeable events).
For this purpose, an arrangement provides
for a deferred payment if it provides for a
payment that will be made or completed
after a date or an event that will or may
occur later than the end of the 2
1
/2month
period described in the preceding sentence,
either because of an affirmative election on
the part of the service provider or service
recipient or a deferral condition inherent in
the terms of the contract (for example, that
the amount will be paid upon the service
provider’s separation from service, which
may occur in a future year).
Several commentators requested that
additional flexibility be provided to al-
low payments to be short-term deferrals.
By analogy to the rules in the proposed
regulations concerning when payments
of deferred compensation amounts are
considered timely for purposes of the
payment date rules, the commentators
suggested that payments should qualify as
short-term deferrals if made by the end of
the year after the year in which a substan-
tial risk of forfeiture lapses, rather than
by the 15
th
day of the third month of that
year. The final regulations do not adopt
this suggestion. The short-term deferral
rule is based on the historical treatment
of certain payments paid within a short
period following the end of a taxable year
as not constituting deferred compensa-
tion. See §1.404(b)–1T, Q&A–2(b). That
short period has been defined as ending
on the 15
th
dayofthethirdmonthfollow-
ing the end of the year, subject to certain
extensions for unforeseeable events. Ex-
tending the payment date by which a
short-term deferral could be paid would
be inconsistent with this approach and the
legislative history of section 409A (H.R.
Conf. Rep. No. 108–755, at 735 (2004)),
and accordingly is notadopted in the final
regulations. However, the final regula-
tions liberalize the standard under which a
payment can be a short-term deferral even
if it is delayed due to unforeseeable events.
The proposed regulations provided gen-
erally that payment could be delayed if
the payment would jeopardize the service
recipient’s solvency and such insolvency
was unforeseeable at the time the service
provider obtained the right to the payment.
By contrast, the final regulations provide
generally that payment may be delayed
where the payment would jeopardize the
ability of the servicerecipient to continue
as a going concern.
Commentators asked how the
short-term deferral rule applies to a se-
ries of payments scheduled to commence
following the lapse of a substantial risk of
forfeiture. The final regulations provide
that the short-term deferral rule applies
separately to each payment, applying the
technical definition of “payment” set out
in the regulations, provided that the entire
payment is made during the short-term
deferral period. Accordingly, where a
payment has been designated as a separate
payment, it may qualify as a short-term
deferral (and thus not deferred compensa-
tion) even where the service provider has
a right to subsequent payments under the
same arrangement. In contrast, where a
payment has not been designated as a sep-
arate payment (such as, for example, a life
annuity payment or a series of installment
payments treated as a single payment), any
initial payments in the series will not be
treated as a short-term deferral even if paid
within the short-term deferral period. For
a discussion of the definition of payment,
see §1.409A–3.
Commentators suggested that a right to
a reimbursement be treated as potentially
subject to the short-term deferral rule, ar-
guing that the right to the reimbursement
payment is subject to a substantial risk of
forfeiture that the service provider will not
incur the expense. Commentators argued
that the short-term deferral rule then could
apply if the reimbursement payment were
made within a short period following the
occurrence of the expense. Generally, the
risk that a service provider will fail to in-
cur a reimbursable expense will not qual-
ify as a substantial risk of forfeiture, so
the short-term deferral rule will not be ap-
plicable. However, the final regulations
provide considerable additional flexibility
with regard to structuring reimbursement
arrangements to meetthe requirements of
section 409A. For a discussion of these
provisions, see section VII.B.2 of this pre-
amble.
2.Applicationtoevent-basedpayments
Some commentators asked whether any
payments based on a legally binding right
arising in the year of a separation from
service are excluded from coverage under
section 409A, if paid by the end of the rele-
vant short-term deferral period. For exam-
ple, where an employee had accrued bene-
fits under a defined benefit supplemental
executive retirement plan (SERP) during
his career that was payable immediately
upon a separation from service, including
an amount accrued in the year of sepa-
ration from service, commentators asked
whether the payment of the portion of the
benefits accrued in that final year is ex-
cluded from coverage under section 409A
if paid by March 15 of the year following
the separation from service, because the
amount is paid within a short period fol-
lowing the year the service provider ob-
tains a vested legally binding right to the
additional benefit accrual. (This gener-
May 7, 200711262007–19 I.R.B.

ally would be of most concern to speci-
fied employees subject to the requirement
of a six-month delay in payment following
a separation from service.)
The analysis that applies in this situa-
tion is similar to that applied to the gen-
eral definition of deferral of compensation,
discussed in section III.A of this preamble.
The short-term deferral rule does not pro-
vide an exclusion from the requirements of
section 409A for such current-year bene-
fit accruals because the rule does not ap-
ply to amounts of compensation subject to
a deferral election. For this purpose, an
election to defer includes either an affir-
mative election on the part of the service
provider or a deferral condition inherent
in the terms of the contract. Where the
parties have agreed that a payment will be
made upon an event that does not neces-
sarily coincide with the lapsing of the sub-
stantial risk of forfeiture, and could occur
at a time beyond the short-term deferral pe-
riod, the arrangement provides for a defer-
ral election such that the short-term defer-
ral rule does not apply. Accordingly, in
this example, because the benefits accrued
in the final year of the SERP could have
been paid upon an event occurring after the
short-term deferral period (if, for example,
the individual had not separated from ser-
vice until a later year), the payment of the
benefit accrued in the final year is subject
to section 409A and is not a short-term de-
ferral, even if paid by March 15 of the year
following the separation from service.
Also, for example, if a plan that is not
subject to section 457(f) provides that an
amount is subject to a substantial risk of
forfeiture until the completion of three
years of service, and is payable upon a
separation of service following the three
years of service, the right to the amount
is not a short-term deferral even if the
service provider separates from service
immediately after vesting in the right, be-
cause under the plan the payment is based
upon an event other than the lapsing of
the substantial risk offorfeiture and such
event may occur in a year subsequent to
the year in which the risk of forfeiture
lapses.
Conversely, where a plan specifies no
payment date or payment event, or spec-
ifies only the date at which the substan-
tial risk of forfeiture lapses, the plan may
qualify for the short-term deferral rule if
the payment is made within the applica-
ble short-term deferral period. However,
such a plan generally would violate section
409A if the payment were made after the
short-term deferral period.
As discussed in this preamble with
respect to the general definition of de-
ferred compensation, to implement the
statutory scheme, including the applicable
reporting and form requirements, taxpay-
ers generally must be able to determine
whether an arrangement provides for a
deferral of compensation at the time the
service provider obtains a legally binding
right to the compensation. Although a
plan need not specify a payment date to
be a short-term deferral that is excluded
from coverage under section 409A, the
short-term deferral exclusion does not
apply if the payment event or date is spec-
ified and will or may occur after the end
of the short-term deferral period.
The preamble to the proposed regula-
tions explained that where a plan requires
that a payment be made on a date within
the short-term deferral period, but the
payment is made after the specified date
and after the end of the short-term deferral
period, the arrangement will be treated
as a nonqualified deferred compensation
plan, but the payment date will be treated
as a specified date. Thus, under such
an arrangement, if the service provider
receives the payment after the specified
date, but not later than the end of the
year in which the specified date occurs,
the payment generally will comply with
section 409A. However, taxpayers should
note that a provision requiring only that
a payment be made on or before the end
of the short-term deferral period may not
qualify as a permissible specified date
for this purpose, if under the facts and
circumstances the payment could have
been made in more than one taxable year.
For a discussion of the application of the
definition of a specified payment date to
this type of plan, see section VII.B of this
preamble.
For a discussion of when rights to com-
pensation upon a separation from service
for good reason may be treated as rights to
compensation upon an involuntary termi-
nation, and the potential application of the
short-term deferral exception to these ar-
rangements, see section III.J.3 of this pre-
amble.
D.Stock options and stock appreciation
rights
1.In general
Subject to the modifications described
in this preamble, the final regulations
adopt the provisions of the proposed reg-
ulations excluding from coverage under
section 409A statutory stock options and
certain other stock rights. Generally un-
der the regulations, nondiscounted stock
options and nondiscounted stock appre-
ciation rights issued on service recipient
stock that do not include any additional
deferral feature are excluded from section
409A.
2.Statutory stock options
The final regulations adopt the exclu-
sion from coverage under section 409A for
statutory stock options, including incen-
tive stock options described in section 422
of the Code and options granted under an
employee stock purchase plan described in
section 423 of the Code. This exclusion
applies regardless of whether the statutory
stock option would be excluded if the same
option were not treated as a statutory stock
option. For example, an employee stock
purchase plan described in section 423 of-
fering a discounted purchase price is not
a deferred compensation plan for purposes
of section 409A.
Commentators requested clarification,
however, of the treatment of a statutory
stock option that is modified, or otherwise
becomes ineligible to be treated as a statu-
tory stock option. The final regulations
adopt the rule set forth in the proposed
regulations, and provide that at the time
of such modification or event, the mod-
ification or other event is treated as the
grant of a new option, or causes the op-
tion to be treated as having had a defer-
ral feature from the date of grant, as appli-
cable, for purposes of section 409A only
if such modification or other event would
have been so treated had the option been a
nonstatutory stock option immediately be-
fore such modification or other event. For
example, where an incentive stock option
is modified through an extension of the op-
tion’s term, the extended option will be
treated as having had an additional deferral
feature from the date of grant for section
409A purposes only if the same extension
2007–19 I.R.B.1127May 7, 2007

of a nonstatutory stock option would have
resulted in such treatment.
Commentators also requested that the
exclusion from coverage under section
409A for certain stock rights issued under
plans meeting the requirements of sec-
tion 423 (employee stock purchase plans)
be extended to employee stock purchase
plans offered by foreign employers that
do not meet such requirements, where the
shares are made available for purchase
at a discount and substantially all of the
participants are nonresident aliens. The
legislative history does not provide a ba-
sis for extending theexception applicable
to options meeting the requirements of
section 423 to grants of discounted stock
options not meeting the requirements of
section 423. Accordingly, this suggestion
is not adopted in the final regulations.
3.Definition of service recipient stock
The final regulations adopt the require-
ment in the proposed regulations that for
the exclusion for certain stock rights to ap-
ply, the stock right must relate to service
recipient stock. Commentators criticized
the definition of service recipient stock
contained in the proposed regulations as
too restrictive. Generally such criticisms
centered on two different aspects of the
definition of service recipient stock in the
proposed regulations – the classes of stock
that may qualify as service recipient stock,
and the issuer or issuers whose stock may
constitute service recipient stock, where
the service recipient is comprised of more
than one entity.
a.Classes of stock that may qualify as
service recipient stock
Commentators requested clarification
and expansion of the classes of stock of
a corporation that may constitute service
recipient stock. Commentators generally
focused on two issues. First, with respect
to stock of a particular service recipient
corporation, commentators requested that
the stock right be permitted to relate to
any class of common stock, regardless of
whether another class of common stock of
that corporation was publicly traded, and
regardless of whether that class of com-
mon stock had the greatest aggregate value
of all classes of common stock issued by
that corporate entity. Subject to the re-
strictions governingcertain preferences as
to distributions, the final regulations gen-
erally provide that any class of common
stock may be used, regardless of whether
another class of common stock that could
qualify as service recipient stock is pub-
licly traded or has a higher aggregate value
outstanding, and regardless of whether the
class of stock is subject to transferability
restrictions or buyback rights (provided
such buyback rights reflect the fair market
value of the stock at the time of purchase).
Second, commentators suggested nar-
rowing the types of preferences on a class
of common stock that would prohibit that
class from being treated as service recip-
ient stock. One commentator requested
that the classes of stock permitted as ser-
vice recipient stockinclude any class of
stock that is widely held by non-service re-
cipients. While it may be unlikely that a
widely-held class of stock was created to
facilitate an abusive avoidance of section
409A, it does not follow that service re-
cipient stock rights issued on such stock
necessarily would be consistent with the
intended application of section 409A if,
for example, holders of such class enjoyed
preferences that would make such stock
rights a suitable substitute for nonqualified
deferred compensation.
To be treated as service recipient stock
under the final regulations, a class of stock
must qualify as common stock under sec-
tion 305 of the Code. Accordingly, the fi-
nal regulations provide that stock that is
not common stock under section 305 is
not service recipient stock for purposes of
section 409A. However, the mere classi-
fication of a class of stock as common
stock under section 305 is not sufficient for
such stock to be treated as service recipient
stock for purposes of section 409A. The
Treasury Department and the IRS are con-
cerned that classes of stock that are com-
mon stock under section 305 may provide
preferences that could permit stock rights
with respect to such stock to resemble tra-
ditional nonqualified deferred compensa-
tion, such that exclusion of such stock
rights would permit the avoidance of sec-
tion 409A.
Commentators suggested that a pref-
erence with respect to liquidation rights,
without any other preferences such as a
preferential right to dividends, should be
permitted under the definition of service
recipient stock. A holder of this class of
stock would not be guaranteed any return,
but rather would simply be guaranteed pre-
ferred distribution rights upon a complete
liquidation of the service recipient. The
final regulations generally adopt this sug-
gestion.
With respect to other preferential rights,
commentators were unable to provide a
workable standard under which permis-
sible preferences could be distinguished
from impermissible preferences. Accord-
ingly, the final regulations do not treat any
stock including such preferences as ser-
vice recipient stock. However, the Trea-
sury Department and the IRS continue to
study this area, and the final regulations
authorize the publication of other addi-
tional guidance, should a workable stan-
dard be developed.
b.Entities the stock of which may qualify
as service recipient stock
Commentators also requested an ex-
pansion of the class of entities the stock
of which can qualify as service recipient
stock where the service recipient is com-
prised of multiple entities. The Treasury
Department and the IRS believe that the
stock right exception under section 409A
was intended to cover stock rights directly
reflecting the enterprise value of the entity
for which the service provider is providing
services. Consistent with this approach,
the final regulations provide that service
recipient stock may include the stock
of the corporation for which the service
provider was providing services at the date
of grant. In addition, the final regulations
provide that service recipient stock may
include stock of any corporation in a chain
of organizations all of which have a con-
trolling interest in another organization,
beginning with the parent organization and
ending with the organization for which the
service provider was providing services at
the date of grant of the stock right. Simi-
larly to the proposed regulations, the final
regulations provide that the term “con-
trolling interest” has the same meaning
as provided in §1.414(c)–2(b)(2)(i), ex-
cept that where that regulation requires
at least an 80 percent interest, the final
regulations generally require only a 50
percent interest. 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 crite-
ria, the final regulations generally require
May 7, 200711282007–19 I.R.B.

only a 20 percent interest. For purposes
of determining ownership of an interest
in an organization, the attribution rules of
§1.414(c)–4 apply, and the exclusion rules
of §1.414(c)–3 also apply. For example,
under the final regulations, with respect to
an employee of a subsidiary corporation,
the common stock of the ultimate parent
corporation, or of a subsidiary corporation
anywhere in the chain of corporate owner-
ship between the subsidiary that employed
theemployeeandtheultimateparentcor-
poration (a higher tier subsidiary), could
qualify as service recipient stock for pur-
poses of determining whether a stock right
issued to such employee with respect to
such stock was excluded from coverage
under section 409A, provided that the 50
percent or 20 percent ownership standard,
as applicable, was satisfied by each corpo-
ration in the chain.
The proposed regulations contained
many requirements for using an ownership
level of less than 50 percent. Commen-
tators requested several simplifications
of these requirements. In response, the
final regulations no longer require a for-
mal election by any corporation. Rather,
each individual grant of a stock right is
analyzed to determine whether the stock
qualifies as service recipient stock with
respect to a service provider at the time
the stock right is granted. If a corporation
owns at least 50 percent of the stock of one
corporation and owns less than 50 percent
of the stock of another corporation, and
it intends to treat its stock as service re-
cipient stock with respect to employees of
both corporations, there is no requirement
that a legitimate business criteria exist
with respect to the issuance of stock rights
on the parent corporation stock to service
providers of the first such corporation.
The legitimate business criteria standard
applies only to stock rights issued to ser-
vice providers of subsidiaries that are not
majority-owned, because the test of legiti-
mate business criteria relates to the actual
issuance of a stock right to a particular ser-
vice provider. Accordingly, a subsidiary
may have more than one shareholder cor-
poration the stock of which qualifies as
service recipient stock with respect to a
subsidiary employee such as, for example,
where three entities each own a one-third
interest in the subsidiary. However, with
respect to each grant of a stock right on
stock of a particular non-majority share-
holder corporation to a service provider of
a particular subsidiary, there must exist le-
gitimate business criteria for issuing such
a stock right. Even if legitimate business
criteria exist with respect to the issuance
of a stock right on stock of a particular
shareholder corporation to a particular ser-
vice provider, legitimate business criteria
may or may not exist with respect to the is-
suance of a stock right to the same service
provider on stock of another shareholder
corporation.
The legitimate business criteria require-
ment is a facts and circumstances test, fo-
cusing generally on whether there is suf-
ficient nexus between a particular service
provider and the entity, the stock of which
underlies the stock right granted to the ser-
vice provider, for the grant to serve a legit-
imate non-tax business purpose. As pro-
vided in the preamble to the proposed reg-
ulations, if a corporation issued a stock
rightonitsstocktoacurrentemployeeofa
joint venture in which the corporation was
a venturer, and the employee was a former
employee of the corporate venturer, gen-
erally the issuance would be based on le-
gitimate business criteria. Similarly, if the
corporate venturer issued such a right to
an employee of the joint venture who it
reasonably expected would become an em-
ployee of the corporate venturer in the fu-
ture, generally the legitimate business cri-
teria requirement would be met. By con-
trast, where an employee has no real nexus
with a corporate venturer, such as gener-
ally happens when the corporate venturer
is a passive investor in the service recip-
ient, the use of the investor corporation
stock as the stock underlying a stock right
grant to that employee generally would not
be based upon legitimate business crite-
ria. Similarly, where a corporation holds
only a minority interest in an entity that
in turn holds a minority interest in the en-
tity for which the employee performs ser-
vices, such that the corporation holds only
an insubstantial indirect interest in the en-
tity receiving the services, legitimate busi-
ness criteria generally would not exist for
issuing a stock right on the corporation’s
stock to the employee.
The Treasury Department and the IRS
remain concerned that the manipulation of
the structure of a related group of corpora-
tions may be used to allow stock options
or stock appreciation rights to mimic the
characteristics of nonqualified deferred
compensation, by compensating holders
based on predictable amounts and invest-
ment returns unrelated to the enterprise
value of an operating entity. Accordingly,
the exception contained in the proposed
regulations under which the stock of a
corporation servingas investment vehi-
cle is not considered service recipient
stock has been retained. In addition, an
anti-abuse rule has been added to address
corporate structures, transactions, or stock
right grants, a principal purpose of which
is the avoidance of the application of sec-
tion 409A to an arrangement otherwise
providing deferred compensation. These
corporate structures, transactions, and
stock right grants generally will occur
where the structure, transaction, or grant is
intended to provide enhanced security for
the value of the stock right as a means of
providing deferred compensation, rather
than as compensation related to an in-
crease in the true enterprise value of the
service recipient. The regulations provide
that 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, if any stock
rights are issued with respect to such en-
tity it is presumed that such structure was
established for purposes of avoiding the
application of section 409A.
c.Equity interests in certain
non-corporate entities
The final regulations permit certain eq-
uity interests in a non-stock mutual com-
pany to be treated analogously to equity in-
terests in a corporation. Commentators re-
quested that the definition of service recip-
ient stock be expanded to cover interests in
cooperatives and interests in the value of
an Indian tribal enterprise. The regulations
do not include such interests in the defini-
tion of service recipient stock, but provide
the IRS authority to provide guidance ex-
panding the definition of service recipient
stock. For a discussion of the application
of the exclusion for certain stock rights to
rights issued on equity interests in entities
taxed as partnerships, see section III.G of
this preamble.
2007–19 I.R.B.1129May 7, 2007

4.Valuation
a.In general
The final regulations provide that for
the exclusion for stock rights to apply, the
stock right must specify an exercise price
of the stock right that may never be less
than the fair market value of the underlying
stock on the date the stock right is granted.
For purposes of this discussion and the
final regulations, the exercise price of a
stock appreciation right refers to the base
stock value from which the appreciation is
measured for purposes of determining the
compensation payable under the stock ap-
preciation right (forexample, a stock ap-
preciation right providing for a payment of
the excess of the fair market value of 100
shares over $100 would have a $1 per share
exercise price).
Several commentators expressed con-
cerns regarding the determination of the
fair market value of the underlying stock.
Some commentators requested that the
valuation rules applicable to incentive
stock options be applied for purposes of
the exclusion from section 409A. Under
those rules, if the stock option would
otherwise fail to be an incentive stock
option solely because the exercise price
was less than the fair market value of the
underlying stock as of the date of grant,
generally the option is treated as an incen-
tive stock option if the issuer attempted in
good faith to set the exercise price at fair
market value. See section 422(c)(1). The
Treasury Department and the IRS believe
that this is not the appropriate standard
for determining whether stock rights are
subject to section 409A. Incentive stock
options are subject to strict limitations
on the amount of such options that may
be granted to a particular employee. See
section 422(d). In contrast, there are no
such limits applicable to nonstatutory
stock options, and grants of nonstatutory
stock options often far exceed the limita-
tion applicable to incentive stock options.
In addition, section 422(c)(1) explicitly
provides for the good faith standard with
respect to incentive stock options, while
no such provisions exist within section
409A or its legislative history.
Commentators requested clarification
of the consistency standard with respect
to the use of a valuation method. Specif-
ically, commentators asked whether one
valuation method could be used for pur-
poses of establishing the exercise price
while another method could be used for
purposes of determining the fair mar-
ket value of the stock at the time of the
payment (for example, to determine the
amount of payment in the case of a stock
appreciation right or a stock option where
the stock is subject to repurchase by the
service recipient). The final regulations
clarify that consistency is not required,
provided that each valuation method used
otherwise meets the requirements of the fi-
nal regulations. Accordingly, a service re-
cipient may use one valuation method for
purposes of establishing an exercise price,
but another valuation method for purposes
of establishing the payment amount (in
the case of a stock appreciation right)
or the buyback amount (in the case of a
stock option where the underlying stock
is subject to a buyback arrangement).
However, once an exercise price has been
established, the exercise price may not
be changed through the retroactive use
of another valuation method. In addition,
where after the date of grant, but before
the date of exercise, of the stock right,
the service recipient stock to which the
stock right relates becomes readily trad-
able on an established securities market,
the service recipient must use a valuation
method for stock readily tradable on an
established securities market for purposes
of determining the payment amount (in
the case of a stock appreciation right) or
the buyback amount (in the case of a stock
option where the underlying stock is sub-
ject to a buyback arrangement).
b.Valuation — stock readily tradable on
an established securities market
The final regulations adopt the rules
under the proposed regulations governing
valuation of stock readily tradable on an
established securities market, generally
requiring that the valuation of such stock
be based upon the contemporaneous prices
established in the securities market, sub-
ject to the modifications discussed in this
preamble. Some commentators requested
additional guidancewith respect to when
a stock will be treated as readily trad-
able. The final regulations adopt the same
standard as that set forth in §1.280G–1,
Q&A–6(e), that stock is treated as readily
tradable if it is regularly quoted by brokers
or dealers making a market in such stock.
With respect to the rules governing the
valuation of stock that is readily tradable
on an established securities market, com-
mentators generally focused on the provi-
sion of the proposed regulations permit-
ting the use of an average selling price
during a specified period that is within
30 days before or 30 days after the date
of grant. Specifically, comments concen-
trated on the requirement that the commit-
ment to grant the stock right with an exer-
cise price set using such an average sell-
ing price be irrevocable before the begin-
ning of the specified period. Commenta-
tors questioned both the purpose of the re-
quirement of the commitment to the valua-
tion method, as well as the actions required
to satisfy the rule if averaging were being
used.
The rule was intended to prohibit the
use of an average price, set on a look-
back basis, to ensure a discounted exercise
price. For example, if a corporation de-
cidedtograntastockoptiononJuly1,and
it could set the exercise price using an av-
erage selling price for any period falling
within the prior 30 days without having
had a prior commitment to a specific av-
eraging period, the corporation could sim-
ply look for the lowest price that occurred
during the prior June. Furthermore, if the
corporation were not committed to grant
the stock option on July 1, the corpora-
tion could wait untilits stock price began
to rise and then grant an option using the
selling price on a given day during the pre-
vious 30 days to provide a particular dis-
count. Accordingly, the final regulations
require that the commitment to grant the
stock right with an exercise price set us-
ingsuchanaveragesellingpricebeirrev-
ocable before the beginning of the speci-
fied period. To satisfy this requirement,
the service recipient must designate the
recipient of the stock option, the number
of shares the stock option will permit the
holder of the stock option to purchase, 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.
One commentator stated that the re-
quirement of an irrevocable commitment
to the averaging period could not be met
under French law, because French law re-
quires that the stock option exercise price
May 7, 200711302007–19 I.R.B.

be set based on the average trading price
over the preceding 20 days and the com-
mitment to the grant before the beginning
of the period may be viewed as violating
that requirement. The final regulations
provide that where applicable foreign law
requires that the compensatory stock right
granted by the issuer must be priced based
upon a specific price averaging method
and period, a stock right granted in accor-
dance with such applicable foreign law
will be treated as meeting the requirement,
provided that the averaging period may
not exceed 30 days.
c.Valuation – stock not readily tradable
on an established securities market
i.In general
The final regulations adopt the provi-
sions in the proposed regulations relating
to the valuation of stock not readily trad-
able on an established securities market,
subject to the modifications discussed in
this section III.C.4.c. Accordingly, a valu-
ation of stock based upon a reasonable ap-
plication of a reasonable valuation method
is treated as reflecting the fair market value
of the stock. To meet this standard, it is
not necessary that a taxpayer demonstrate
that the value was determined by an inde-
pendent appraiser. Where the taxpayer can
otherwise demonstrate that the valuation
was determined by the reasonable applica-
tion of a reasonable valuation method, the
standard will be met.
One commentator requested that the
factors to be considered in determining
the fair market value of the stock should
be modified to include consideration of
any recent equity sales made by the cor-
poration in arm’s-length transactions. The
final regulations adopt this suggestion.
The final regulations continue to re-
quire that in the case of a stock right is-
sued with respect to stock that was not
publicly traded at the time the right was
issued, but becomes publicly traded be-
fore the right is exercised, the stock value
for purposes of calculating the payment
amount (in the case of a stock apprecia-
tion right) or the buyback amount (in the
case of a stock option where the underlying
stock is subject to a buyback agreement)
must be based upon the rules governing
stock that is publicly traded. This does
not mean that the initial exercise price de-
termined under the rules governing stock
that is not publicly traded must be reset.
Rather, this means only that the value at the
time of exercise used to determine the pay-
ment amount or the buyback amount must
be determined under the rules governing
stock that is publicly traded. For exam-
ple, if a service provider holds an excluded
stock appreciation right with an exercise
price of $1 that was fixed based on a val-
uation of the closely-held corporate stock
at the time of grant, and before exercise
the stock becomes readily tradable on an
established securities market, the amount
payable upon exercise must be the excess
of the value of the stock based on its trad-
ing price over the $1 exercise price.
ii.Safe harbor presumptions
The final regulations adopt a presump-
tion in specified circumstances that, for
purposes of section 409A, a valuation of
stock reflects the fair market value of the
stock, rebuttable only by a showing that
the valuation is grossly unreasonable. The
presumption applies where the valuation
is based upon an independent appraisal, a
generally applicable repurchase formula
(applicable for both compensatory and
noncompensatory purposes) that would be
treated as fair market value under section
83, or, in the case of illiquid stock of a
start-up corporation, a valuation by a qual-
ified individual or individuals applied at a
time that the corporation did not otherwise
anticipate a change in control event or
public offering of the stock.
Many of the comments with respect to
these presumptions related to the presump-
tion applicable to illiquid stock of start-up
corporations. As set forth in the proposed
regulations, the start-up corporation pre-
sumption would not apply if the service
recipient or service provider could reason-
ably anticipate, as of the time the valuation
is applied, that the service recipient would
undergo a change in control event or make
a public offering of securities within the
12 months following the event to which
the valuation is applied. Commentators
suggested that a 12-month period is too
long, because changes occur so rapidly in
the business world that it often is diffi-
cult or impossible to predict so far in ad-
vance whether such an event will occur.
Commentators suggested that the service
provider should retain the benefit of the
presumption unless the issuing corporation
entered into a definitive agreement or filed
its registration statement with the Securi-
ties and Exchange Commission within a
period of 15 or 30 days after issuing the
stock right.
The Treasury Department and the IRS
believe that a 15-day or a 30-day period
is too short. Although there is always a
risk that a public offering will fail or that
a corporate transaction will not occur, the
Treasury Department and the IRS also be-
lieve that a person should reasonably be
able to anticipate whether such a transac-
tion will occur during a reasonable period
before the transaction.
Accordingly, the final regulations pro-
vide that the start-up corporation presump-
tion will not apply if at the time the valua-
tion is made, the service recipient or ser-
vice provider may reasonably anticipate
that the service recipient will undergo a
change in control event in the next 90 days
or an initial public offering within the next
180 days. As under the proposed regula-
tions, the rule in the final regulations is
concerned with what the parties may rea-
sonably anticipate at the time the stock
right is issued.
Other comments requested examples of
persons with sufficient knowledge, expe-
rience, and skill in valuing illiquid stock
of a start-up corporation. Because knowl-
edge, skill and training may be obtained
in different ways, the final regulations do
not provide specific examples. However,
the regulations clarify that the standard to
be applied is whether a reasonable individ-
ual, upon being apprised of such person’s
relevant knowledge, experience, education
and training, would reasonably rely on the
advice of such person with respect to valu-
ation in deciding whether to accept an of-
fer to purchase or sell the stock being val-
ued. The final regulations also clarify that
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 compa-
rable experience in the line of business or
industry in which the service recipient op-
erates.
With respect to the presumption based
upon a generally applicable buyback for-
mula, some commentators requested that
the presumption apply where the formula
is applicable to all compensatory stock
2007–19 I.R.B.1131May 7, 2007

transactions, but not also applicable to all
noncompensatory stock transactions. The
final regulations do not adopt this sugges-
tion. However, the final regulations clarify
that to meet the requirements of the pre-
sumption, the buyback formula is required
to be applicable to compensatory and non-
compensatory transactions with the issuer
or a person owning 10 percent or more of
the stock of the issuer, but is not required
to be applicable to transactions with other
persons or transactions that are part of an
arm’s length transaction constituting the
sale of all or substantially all of the stock
of the issuer to an unrelated purchaser.
5.Modification of a stock right
The final regulations continue to apply
certain rules addressing modifications, ex-
tensions and renewals of stock rights. Al-
though these rules in many respects resem-
ble the rules applicable to statutory stock
options, the rules are not intended to in-
corporate the rules applicable to statutory
stock options except where explicitly pro-
vided.
The final regulations generally retain
the rules in the proposed regulations that
generally treat extensions of the exercise
period of a stock right as an additional de-
ferral feature as of the date of grant of
the right, with an exception for certain
limited extensions following a separation
from service. Commentators character-
ized these rules as unnecessarily restric-
tive. Specifically, commentators argued
that the extension of a stock option upon
the occurrence of a separation from ser-
vice (often in connection with a program
of layoffs) or a corporate transaction is a
common practice, and that often these ex-
tensions cover periods longer than the lim-
ited period provided in the proposed regu-
lations. In addition, commentators argued
that the same substantive results could be
obtained by specifying a longer term for
the stock right and providing the service
recipient the discretion to shorten the term,
rather than providing discretion to extend a
shorter term, and that the former approach
would be permissible under the proposed
regulations. In response, the final regula-
tions provide that the extension of an op-
tion exercise period generally is not treated
as an additional deferral feature or a mod-
ification of the stock option for section
409A purposes if the exercise period is not
extended beyond the earlier of the original
maximum term of the option or 10 years
from the original date of grant of the stock
right.
Many commentators also requested
that the extension of the exercise period of
a stock right not be treated as an additional
deferral feature for purposes of section
409A, where at the time of the extension
the fair market value of the underlying
stock does not exceed the exercise price
(an “underwater” option). Because the
issuance of an otherwise identical option
with an exercise period ending after the
end of the exercise period of the under-
water option would be excluded from
coverage under section 409A, the final
regulations provide that such an extension
does not constitute an additional deferral
feature.
The final regulations adopt the provi-
sions in the proposed regulations regarding
substitution or assumption of stock rights
due to a corporate transaction, which are
generally in accordance with the corre-
sponding provisions governing incentive
stock options. The final regulations clar-
ify that the applicable corporate transac-
tions for this purpose include only those
transactions described in §1.424–1(a)(3).
One commentator requested that the provi-
sion permitting substitutions of stock op-
tions be modified to reflect that a holder
of a nonstatutory stock option is not re-
quired to be employed by the successor en-
tity. The final regulations adopt this sug-
gestion, so that a substituted nonstatutory
stock option may be treated as a continu-
ation of the initial option even where the
holder of the option is not employed or oth-
erwise providing services to the successor
entity, provided the substitution otherwise
meets the rules provided in the regulations.
6.Other stock right issues
The final regulations adopt certain def-
initions from the regulations governing
statutory stock options, modified as ap-
propriate for purposes of applying the
rules under section 409A. These include
the time and date of grant of an option
(§1.421–1(c)), and the definitions of op-
tion (§1.421–1(a)), stock (§1.421–1(d)),
exercise price (§1.424–1(e)), exercise
(§1.421–1(f)), and transfer (§1.421–1(g)).
These definitions apply by analogy to
stock appreciation rights.
The final regulations adopt the rule that
a right to a payment of accumulated divi-
dend equivalents at the time of the exercise
of a stock right generally will be treated
as a reduction in the exercise price of the
stock right, causing the stock right to be
deferred compensation subject to the re-
quirements of section 409A. The final reg-
ulations provide that an arrangement to ac-
cumulate and pay dividend equivalents the
payment of which is not contingent upon
the exercise of a stock right may be treated
as a separate arrangement for purposes of
section 409A. Such an arrangement gener-
ally will be required to comply with sec-
tion 409A (unless it independently quali-
fies for an exception from coverage under
section 409A), but will not affect whether
the related stock rightqualifies for the ex-
clusion from coverage under section 409A.
The right to the dividend equivalents may
be set forth within the stock right plan or
the individual stock right grant, or in a sep-
arate document, as long as the payment of
the dividend equivalents is not contingent
upon the exercise of the stock right.
Commentators also asked whether the
exclusion of stock rights from coverage
under section 409A would apply to tan-
dem rights, meaning a stock right that com-
bines a stock option right and a stock ap-
preciation right, exercisable on an alterna-
tive basis. Similarly, commentators asked
whether the substitution of a stock option
for a stock appreciation right, orvice versa,
where all the terms except the mode of
payment upon exercise are similar, would
be treated as a modification of a stock
right. The application of section 409A
generally is not affected by the medium of
a taxable payment (for example, cash or
stock). Accordingly, whether a stock right
is expressed as a tandem arrangement un-
der which the exercise of one right termi-
nates the other right, or there is a substi-
tution of a stock appreciation right for a
stockoptionidenticalin all respects except
for the medium of payment, generally does
not impact whether the arrangement is ex-
cluded from coverage under section 409A.
Commentators requested further clari-
fication of the application of section 409A
to stock option gain deferrals. The abil-
ity to defer gain upon the exercise or ex-
change (including a purported forfeiture)
of a stock right is incompatible with the ex-
clusion of certain stock rights from the re-
quirements of section 409A because such
May 7, 200711322007–19 I.R.B.

exclusion is predicated on the option not
having any additional deferral feature. Ac-
cordingly, if an arrangement provides for
a potential to defer the payment of cash or
property upon the exercise or exchange of
a stock right beyond the year the right is
exercised or beyond the original term of
the stock right, the arrangement provides
for a deferral feature and must comply with
the requirements of section 409A from the
time the legally binding right granted by
the award arises.
Because a stock option with a deferral
feature is subject to section 409A regard-
less of whether the deferral feature is actu-
ally utilized, an option that includes a pro-
vision permitting deferral of option gain
generally will not satisfy the time and form
of payment rules under section 409A if the
service provider can exercise the option in
more than one taxable year. If a deferral
feature is added to a preexisting option, the
option will be treated as having included a
deferral feature as of the original date of
grant, generally resulting in a violation of
section 409A.
However, the final regulations provide
that a stock right will not be treated as hav-
ing a deferral feature where the service re-
cipient delays a payment because the mak-
ing of the payment would violate applica-
ble Federal, state, local, or foreign law or
jeopardize the ability of the service recip-
ient to continue as a going concern. Al-
though these provisions permit the delay
for purposes of section 409A, no inference
should be drawn as to the Federal tax con-
sequences of such a delay under any other
section of the Code or Federal tax doctrine
such as section 83, section 451, the con-
structive receipt doctrine, or the economic
benefit doctrine.
Commentators requested that the def-
inition of service recipient stock be ex-
panded to include the stock of a corpora-
tion for which a servicerecipient provides
substantial services, at least with respect to
a service provider of the service recipient
that is providing services to the corpora-
tion. The legislative history does not sup-
port such a broad interpretation of service
recipient stock, and the final regulations do
not adopt this suggestion.
E.Restricted property
The final regulations provide, as did the
proposed regulations, that a grant of re-
stricted property generally will not consti-
tute a deferral of compensation for pur-
poses of section 409A. Commentators re-
quested that the regulations clarify that a
vested right to receivenonvested property
in a future year does not constitute deferred
compensation. Commentators argued that
a right to receive nonvested property is
not truly vested. For example, commenta-
tors argued that a right to receive restricted
stock that will be subject to a substantial
risk of forfeiture until the service provider
completes three years of future services
cannot be a vested right. The final regula-
tions adopt this suggestion, so long as the
risk of forfeiture to which the stock is sub-
ject constitutes a substantial risk of forfei-
ture for purposes of section 409A.
Commentators specifically requested
clarification of the circumstances under
which a service provider may elect to
be paid a bonus or other payment in the
form of restricted stock, rather than cash.
Generally an election between compensa-
tion alternatives, none of which provides
for a deferral of compensation within the
meaning of section 409A, will not cause
the election to be subject to the section
409A timing restrictions. Thus, a choice
between an award of restricted stock or
stock options that are not subject to section
409A will not be governed by the section
409A election timing rules. However,
where any of the alternatives involves a
deferral of compensation subject to sec-
tion 409A, the election must comply with
the provisions of section 409A. In addi-
tion, no inference should be drawn as to
the Federal tax consequences of such an
election provision under any other section
of the Code or Federal tax doctrine such as
section 83, section 451, the constructive
receipt doctrine, or the economic benefit
doctrine.
F.Section 402(b) trusts
The final regulations continue to except
from coverage under section 409A trans-
fers of a beneficial interest in a trust, or a
transfer to or from a trust, to the extent such
a transfer is subject to section 402(b). The
final regulations further clarify that a right
to compensation required to be included
in income under section 402(b)(4)(A) (al-
ternative taxation of highly compensated
employees of a section 402(b) trust that
fails to meet the requirements of section
401(a)(26) or section 410(b)) also is not
a deferral of compensation. However, a
right to receive a benefit formulated as a
right to a future contribution to a section
402(b) trust is similar to a right to receive
property in a future taxable year, and gen-
erally would constitute deferred compen-
sation.
G.Arrangements between partnerships
and partners
The proposed regulations did not ad-
dress the application of section 409A to ar-
rangements between partnerships and part-
ners, and these final regulations also do not
address such arrangements. The statute
and the legislative history of section 409A
do not specifically address arrangements
between partnerships and partners provid-
ing services to a partnership and do not
explicitly exclude such arrangements from
the application of section 409A. Commen-
tators raised a number of issues, relating
both to the scope of the arrangements sub-
ject to section 409A and the coordination
of the provisions of subchapter K and sec-
tion 409A with respect to those arrange-
ments that are subject to section 409A. The
Treasury Department and the IRS are con-
tinuing to analyze the issues raised in this
area. Notice 2005–1, Q&A–7 provides in-
terim guidance regarding the application
of section 409A to arrangements between
partnerships and partners. Until further
guidance is issued, taxpayers may continue
to rely on Notice 2005–1, Q&A–7 and sec-
tions II.E and VI.E of the preamble to the
proposed regulations.
Notice 2005–1, Q&A–7 provided that
until further guidance is issued for pur-
poses of section 409A, taxpayers may treat
the issuance of a partnership interest (in-
cluding a profits interest) or an option to
purchase a partnership interest, granted in
connection with the performance of ser-
vices under the same principles that gov-
ern the issuance of stock. For this purpose,
taxpayers may apply the principles appli-
cable to stock options or stock appreciation
rights under these final regulations, as ef-
fective and applicable, to equivalent rights
with respect to partnership interests.
Taxpayers also may continue to rely
upon the explanation in the preamble to
the proposed regulations regarding the ap-
plication of section 409A to guaranteed
payments for services described in sec-
2007–19 I.R.B.1133May 7, 2007

tion 707(c). As stated in that preamble,
until further guidance is issued, section
409A will apply to guaranteed payments
described in section 707(c) (and rights to
receive such guaranteed payments in the
future), only in cases where the guaran-
teed payment is for services and the part-
ner providing services does not include the
payment in income by the 15
th
day of the
third month following the end of the tax-
able year of the partner in which the part-
ner obtained a legally binding right to the
guaranteed payment or, if later, the taxable
year in which the right to the guaranteed
payment is first no longer subject to a sub-
stantial risk of forfeiture.
Commentators raised issues concern-
ing the application of the provision in
Notice 2005–1, Q&A–7 stating that un-
til further guidance is issued, taxpayers
may treat arrangements providing for pay-
ments subject to section 736 (payments
to a retiring partner or a deceased part-
ner’s successor in interest) as not being
subject to section 409A, except that an
arrangement providing for payments that
qualify as payments to a partner under
section 1402(a)(10) is subject to section
409A. Section 1402(a)(10) provides for an
exception from the Self-Employment Con-
tributions Act (SECA) tax for payments to
a retired partner, provided that certain con-
ditions are met. Specifically, the payments
must be made pursuant to a written plan of
the partnership, must be on account of the
partner’s retirement and must continue at
least until the partner’s death. In addition,
to qualify for the exception, the partner
must not have rendered services during the
partnership’s taxable year ending within
or with the partner’s taxable year in which
the amounts were received, as of the close
of the partnership’s taxable year no obli-
gation must exist from the other partners
to such retired partner except with respect
to retirement payments under such plan,
and before the end of the partnership’s
taxable year such retired partner’s share, if
any, of the capital of the partnership must
have been paid to him in full.
Commentators questioned the appropri-
ateness of the inclusion of such arrange-
ments under section 409A, because nei-
ther the statute nor the legislative history
refers to section 1402(a)(10). However,
the Treasury Department and the IRS be-
lieve it is appropriate for such arrange-
ments to be subject to section 409A be-
cause such arrangements are purposefully
created to provide deferred compensation,
and do not raise issues regarding the coor-
dination of the provisions of section 409A
with the provisions of section 736, specif-
ically the rules governing the classifica-
tion of payments to a retired partner un-
der section 736(a) (payments considered
as distributive share or guaranteed pay-
ments) and section 736(b) (payments for
interest in partnership).
However, further clarification and relief
is provided concerning the application of
the deferral election timing rules to these
payments. Until further guidance is is-
sued, for purposes of section 409A, tax-
payers may treat the legally binding right
to the payments excludible from SECA
tax under section 1402(a)(10) as arising on
the last day of the partner’s taxable year
before the partner’s first taxable year in
which such payments are excludible from
SECA tax under section 1402(a)(10), and
the services for which the payments are
compensation as performed in the part-
ner’s first taxable year in which such pay-
ments are excludible from SECA tax un-
der section 1402(a)(10). Accordingly, for
purposes of section 409A, the time and
form of payment of such amounts gener-
ally may be established, including through
an election to defer by the partner, on or
before the final day of the partner’s tax-
able year immediately preceding the part-
ner’s first taxable year in which such pay-
ments are excludible from SECA tax un-
der section 1402(a)(10). However, this in-
terim relief does not apply a second time
where an amount paid under an arrange-
ment in one year has been excluded from
SECA tax under section 1402(a)(10), and
an amount paid in a subsequent year has
not been excluded from SECA tax under
section 1402(a)(10)because, for example,
the partner performed services in that sub-
sequent year.
H.Foreign plans
1.Plans covered by an applicable treaty
The proposed regulations provided an
exclusion from the definition of a non-
qualified deferred compensation plan for
any scheme, trust, or arrangement main-
tained with respect to an individual where
contributions made by or on behalf of
such individual to such scheme, trust or
arrangement are excludable for Federal
income tax purposes under an applicable
income tax treaty. The final regulations
retain that exclusion and clarify that the ex-
clusion applies to the extent contributions
made by or on behalf of such individual to
such scheme, trust, arrangement or plan,
or credited allocations, accrued benefits,
or 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 bilat-
eral income tax convention to which the
United States is a party.
2.Exclusion for benefits earned under a
broad-based foreign retirement plan
The proposed regulations contained
an exclusion from coverage under sec-
tion 409A for amounts deferred under a
broad-based foreign retirement plan, sub-
ject to certain conditions, including that
the service provider not be eligible to par-
ticipate in a qualified employer plan, and
that if the person is a U.S. citizen or lawful
permanent resident, the exception only
applies to nonelective deferrals of for-
eign earned income (as defined in section
911(b)(1)) that do not exceed the limits
under section 415(b) and (c) that would
be applicable if the plan were a qualified
plan. Deferrals by participants that are
nonresident aliens are not subject to the
limitation based on section 415. The final
regulations adopt this provision, subject to
certain modifications.
Many of the commentators requested
expansion of the exclusion for broad-based
foreign retirement plans. One commenta-
tor requested that the exclusion apply to
U.S. citizens working in the United States
for a foreign employer. The Treasury
Department and the IRS do not believe
such an exception is justified. How-
ever, the exception for U.S. citizens or
lawful permanent residents has been ex-
panded to cover nonelective deferrals of
foreign earned income as defined in sec-
tion 911(b)(1) without regard to section
911(b)(1)(B)(iv) and without regard to
the requirement that the income be attrib-
utable to services performed during the
period described in section 911(d)(1)(A)
or (B). Accordingly, the exception may
now cover certain participation by a U.S.
citizen or lawful permanent resident who
May 7, 200711342007–19 I.R.B.

works overseas during only part of a year,
and therefore is not abona fideresident
of a foreign country for an uninterrupted
period that includes an entire taxable year,
or is not present in the foreign country at
least 330 full days during a period of 12
consecutive months.
The regulations have also been modi-
fied to address nonqualified deferred com-
pensation plans coveringbona fideresi-
dents of a U.S. possession. Under the regu-
lations abona fideresident of a possession
who participates in a broad-based foreign
retirement plan is not subject to section
409A with respect to participation in such
plan. In addition, a plan substantially all
of the participants in which arebona fide
residents of a possession is eligible to be
treated as a broad-basedforeign retirement
plan, so that U.S. citizens and resident
aliens (other thanbona fideresidents of a
possession)whoparticipateinsuchaplan
may be eligible for the more limited exclu-
sion for participation in a broad-based for-
eign retirement plan.
Another commentator requested that
the exclusion apply to a plan that oth-
erwise meets the requirements for the
exclusion, regardless of whether the plan
is sponsored by a foreign or U.S. em-
ployer. This suggestion has been adopted
in the final regulations.
Other commentators requested further
clarification and revision of certain of the
requirements to qualify for the exclusion.
One commentator requested a safe har-
bor treating any plan granted favorable tax
treatment under the laws of a foreign ju-
risdiction as qualifying for the exclusion.
The Treasury Department and the IRS be-
lieve this standard is both too broad and not
administrable, and this suggestion has not
been adopted in the final regulations.
Another commentator requested that
the regulations provide a safe harbor per-
centage for determining whether substan-
tially all of a foreign plan’s participants
are nonresident aliens. The final regu-
lations do not adopt such a provision.
However, the final regulations clarify that
in determining whether substantially all
of a foreign plan’s participants are non-
resident aliens orbona fideresidents of
a possession, only active participants are
considered. For thispurpose, active par-
ticipants include individuals who, under
the terms of the plan and without further
amendment or action by the plan sponsor,
are eligible to make or receive contribu-
tions or accrue benefits under the plan
(even if the individual has elected not to
participate in the plan).
A similar standard applies to the re-
quirement that the individual not be eligi-
ble to participate ina qualified employer
plan. The final regulations provide that a
service provider will be treated as eligible
to participate in a qualified employer plan
if, under the plan’s terms and without fur-
ther amendment or action by the plan spon-
sor, the service provider is eligible to make
or receive contributions or accrue benefits
under the plan (even if the service provider
has elected not to participate in the plan).
The final regulations also clarify that
the exclusion for United States citizens
and lawful permanent residents applies
to nonelective deferrals even if elective
deferrals are permitted under the same
plan, provided that the amounts deferred
through nonelective deferrals and earnings
on such amounts are distinguishable from
amounts deferred through elective defer-
rals and earnings on such amounts, such
as through the use of separate accounts.
3.Tax equalization payments
The proposed regulations excluded
from coverage under section 409A certain
arrangements, referred to as tax equal-
ization arrangements, that provide for
payments intended to compensate the
service provider for the excess of taxes
actually imposed by a foreign jurisdiction
on the compensation paid over the taxes
that would be imposed if the compensa-
tion were subject solely to United States
Federal income tax, subject to certain re-
quirements. The final regulations adopt
these provisions, subject to modifications.
Based upon the comments received, the
final regulations generally expand the ex-
clusion in two respects. First, the final
regulations extend the tax equalization
payments exception to cover reimburse-
ments of U.S. taxesthat exceed foreign
taxes. Second, the final regulations pro-
vide that the payment must be made by
the end of the second taxable year of the
service provider following the latest of
the deadline for filing a U.S. Federal tax
return or the deadline for filing foreign
tax returns (or if a foreign return is not re-
quired to be filed, the due date for foreign
tax payments) reflecting the compensation
for which the tax equalization payment is
provided.
Commentators also asked how such
reimbursement agreements could address
the potential for an audit or other tax
controversy, both in the U.S. and abroad.
The same issue arises with respect to tax
gross-up payments in general. For a dis-
cussion of the treatment of the right to
such payments, see section VII.B.4 of this
preamble.
4.Certain Limited Deferrals by
Nonresident Aliens
The proposed regulations provided an
exception for amounts deferred by a non-
resident alien under a foreign plan main-
tained by a foreign service recipient, to
the extent the amounts deferred during the
year did not exceed $10,000. The final reg-
ulations adopt this provision, subject to the
modifications described in this preamble.
In response to comments, the final regula-
tions clarify that the exception applies to
amounts deferred in that taxable year up to
the specified limit, regardless of whether
additional amounts are deferred. In mak-
ing this modification, the exclusion pro-
vision has been moved from the section
providing a definition of nonqualified de-
ferred compensation plan (§1.409A–1(a))
to the section providing a definition of an
amount deferred (§1.409A–1(b)). In addi-
tion, the final regulations clarify that this
exception applies toearnings on amounts
deferred that were subject to the excep-
tion, provided that the taxpayer can iden-
tify both the deferred amounts excepted
and the applicable earnings. Finally, in
response to comments requesting that the
limit be increased and indexed, the final
regulations increase the limit for the small
deferral exception to the limit provided for
elective deferrals under section 402(g).
The small deferral exception is intended
to provide relief to service providers that
are not U.S. citizens or lawful permanent
residents, are participating in a foreign
plan, and perform services in the U.S.
for which they are compensated. In such
cases, the nonresident alien may inadver-
tently defer a relatively small amount of
compensation that would otherwise be
subject to U.S. Federal income tax. This
may occur where the service provider
defers the compensation that the service
provider would otherwise have been paid
2007–19 I.R.B.1135May 7, 2007

for a brief period of service in the United
States, or where the service provider re-
ceives service or compensation credit for a
brief period of service in the United States
under a benefit formula of a nonqualified
deferred compensation plan.
Some commentators requested that
the exemption be extended to cover all
amounts deferred by nonresident aliens
under foreign plans to the extent the non-
resident alien provides only temporary
servicesintheU.S.Wherethecompen-
sation earned by such a nonresident alien
would be subject to U.S. income tax if
paid when earned, the Treasury Depart-
ment and the IRS do not believe that such
a broad exception is warranted.
5.Other Foreign Plans
The final regulations adopt the exclu-
sion in the proposed regulations for defer-
rals of amounts that would be excluded as
foreign earned income under section 911
if the amounts had been paid out when
earned. The final regulations clarify that
theamountislimitedtoanamountequal
to or less than the difference between the
maximum section 911 exclusion for the
year and the amount actually excluded for
the year. Commentators requested that the
exception for the deferral of amounts that
would be excluded under section 911 be
relaxed, so that U.S. expatriates who re-
turn for periods longer than 30 days or who
earn compensation for services performed
in the U.S. that is not excluded as foreign
earned income, may also take advantage
of the exception. This exception was not
intended to address such plans. Rather,
the provision was intended to provide re-
lief from the section 409A requirements
for U.S. expatriates who intend to work
full-timeoutsidetheU.S.forcompensa-
tion that is less than the exclusion amount
under section 911, because it would se-
verely disadvantage such workers to ex-
pect them to request that their potential
foreign employers modify standard plans
to accommodate them, or to expect such
workers to otherwise be able to determine
how to avoid or comply with section 409A.
Commentators pointed out, however,
that earnings on deferred amounts, includ-
ing increases in amounts deferred under
a nonaccount balance plan solely due to
the passage of time, may not be treated
as earned income under section 911 and
argued that, nonetheless, such amounts
should not lower the amount otherwise
available to be deferred under the ex-
ception. The final regulations generally
provide that rights to earnings credited on
amounts that qualify for this exception are
also excepted from coverage under section
409A, provided that the earnings satisfy
the definition of earnings in §1.409A–1(o).
I.Indemnification arrangements
The final regulations generally provide
that the right to the payment of contingent
amounts pursuant to aservice recipient’s
indemnification for expenses incurred as a
result of a legal claim for damages related
to the service provider’s performance as a
service provider, to the extent permissible
under applicable law, will not be treated as
the right to deferred compensation. Simi-
larly, a right to liability insurance coverage
providing for such payments in the event
of such a suit also will not be treated as pro-
viding for a deferral of compensation.
J.Separation pay plans
1.In general
The final regulations generally adopt
the provisions addressing separation pay
plans set forth in the proposed regulations,
subject to certain modifications. The fi-
nal regulations clarify that separation pay
refers only to compensation to which the
service provider’s right is conditioned
upon a separation from service (including
a separation from service due to death
or disability) and not to compensation
the service provider could receive with-
out separating from service (such as an
amount also payable upon a change in
control, as a result of an unforeseeable
emergency, or on a date certain). For ex-
ample, the right to a gross-up payment
for taxes payable due to the application
of section 280G will constitute separation
pay if a separation from service is required
to obtain the payment. The final regu-
lations also clarify that a separation pay
plan for purposes of section 409A, includ-
ing for purposes of the plan aggregation
rules, refers only to plans providing for
payments of amounts of deferred compen-
sation (disregarding the exceptions from
the definition of deferred compensation
for certain types of separation pay) where
one of the conditions to the right to the
payment is a separation from service. A
right to a payment upon a separation from
service that is not deferred compensation
does not become subject to section 409A
under the plan aggregation rule. For ex-
ample, the accelerated vesting due to a
separation from service of stock options
excluded from coverage under section
409A would not constitute a separation
pay plan or otherwise become subject to
section 409A under the plan aggregation
rules.
The final regulations generally retain
and supplement the various exceptions
from the definition of deferred compen-
sation for certain types of separation pay,
providing exceptions for (1) certainbona
fidecollectively bargained arrangements,
(2) certain arrangements providing sep-
aration pay due solelytoaninvoluntary
separation from service or participation
in a window program in limited amounts
and for a limited period of time, (3) cer-
tain foreign separation pay arrangements,
(4) certain reimbursement arrangements
providing for expense reimbursements or
in-kind benefits for a limited period of
time following a separation from service,
and (5) certain rights to limited amounts
of separation pay. These exceptions from
coverage under section 409A for specified
separation pay plans may be used in com-
bination. For example, the rights of an
employee to the maximum amount avail-
able under the exception for separation
payments made solely due to involuntary
separation from service or participation in
a window program, to reimbursements for
reasonable moving expenses and outplace-
ment expenses that meet the requirement
for exclusion from coverage under section
409A, and to rights to payments that do not
exceed the limit on elective deferrals un-
der section 402(g) andaccordingly qualify
for the limited payment exception, may all
be excluded from coverage under section
409A due to application of the various
exceptions.
The final regulations continue to pro-
vide that any amount, or entitlement to
any amount, that acts as a substitute for,
or replacement of, amounts deferred under
a separate nonqualified deferred compen-
sation plan constitutes a payment of de-
ferred compensation or deferral of com-
pensation under the separate nonqualified
deferred compensation plan. Commenta-
tors asked how this would apply where the
May 7, 200711362007–19 I.R.B.

service provider would otherwise forfeit a
payment upon separation from service but
a payment is made anyway, in whole or in
part.
The regulations provide that if a sepa-
ration from service is voluntary, it is pre-
sumed that the payment results from an ac-
celeration of vesting followed by a pay-
ment of the deferred compensation that is
subject to section 409A. Accordingly, any
change in the payment schedule to accel-
erate or defer the payments would be sub-
ject to the rules of section 409A. The pre-
sumptionthatarighttoapaymentisnot
a new right, but is instead a right substi-
tuted for an existing nonvested right, may
be rebutted by demonstrating that the ser-
vice provider’s right to the payment after
the separation from service would have ex-
isted regardless of the forfeiture of the non-
vested right. Factors indicating that a right
would have existed regardless of the for-
feiture include that the amount to which
the service provider obtains a right is ma-
terially less than the present value of the
forfeited amount multiplied by a fraction,
the numerator of which is the period of
service the service provider actually com-
pleted, 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.
Another factor is that the payment consists
of a type of payment customarily made to
service providers who separate from ser-
vice with that service recipient and do not
forfeit nonvested rights to deferred com-
pensation (for example, a payment of ac-
crued but unused leave or a payment for a
release of potential claims).
2.Separation pay due solely to
involuntary separation from service or
participation in a window program
The final regulations generally continue
the exception from coverage under sec-
tion 409A in the proposed regulations for
rights to payments available only upon an
involuntary separation from service or par-
ticipation in a window program, payable
no later than the end of the second taxable
year of the service provider following the
year of the separation from service, and
limitedtoanamountthatisgenerallythe
lesser of two times the service provider’s
annual compensation or two times the
limitoncompensationsetforthinsection
401(a)(17). This exception only applies
where the payment is available solely due
to an involuntary separation from service
of the service provider, or the service
provider’s participation in a window pro-
gram, and not to a plan providing for a
payment upon a voluntary separation from
service or other event. For a discussion of
when a separation from service for good
reason may be treated as an involuntary
separation from service, see section III.J.3
of this preamble.
Commentators requested that the exclu-
sion continue to apply to payments up to
the limit, even where the entire amount of
the separation payments exceeds the limit.
The final regulations adopt this rule. Ac-
cordingly, where a service provider is en-
titled to a payment that qualifies for the
exception except that it exceeds the limit,
only the excess over the limit will be sub-
ject to section 409A. The right to the pay-
ment up to the applicable limit will not
be subject to section 409A, including the
requirement that the payment be delayed
for six months in the case of a specified
employee, provided that such limited pay-
ment is otherwise required to be made,
and is made, no later than the end of the
second taxable year following the service
provider’s taxable year in which the sepa-
ration from service occurs.
The final regulations clarify that
for purposes of applying the section
401(a)(17) limit, the statutory limit ap-
plicable for the year of the separation from
service occurs applies. The final regu-
lations also clarify that for purposes of
determining the service provider’s annual
rate of pay for the taxable year preceding
the taxable year in which the separation
from service occurs, an annual rate of
pay based upon the service provider’s
taxable year immediately preceding the
service provider’s taxable year in which
the separation from service occurs is used,
adjusted for any increase during the year
that was expected to continue indefinitely
if the service provider had not separated
from service. One commentator requested
that the limit be set at twice the amount
of compensation set forth under sec-
tion 401(a)(17), regardless of the service
provider’s actual income. This suggestion
has not been adopted in the final regula-
tions.
3.Definition of involuntary separation
from service
The proposed regulations provided an
exclusion from coverage under section
409A that applied only to certain amounts
paid solely because of an actual involun-
tary separation from service or participa-
tion in a window program. Many com-
ments asked how to determine whether a
separation from service is involuntary for
this purpose. The final regulations contain
a definition of involuntary separation from
service and also apply this definition for
purposes of the definition of a substan-
tial risk of forfeiture, pursuant to which a
payment that will not be made unless the
service provider experiences an involun-
tary separation from service is subject to a
substantial risk of forfeiture for purposes
of section 409A. (See section V of this
preamble).
The final regulations provide that
whether a separation from service is invol-
untary is determined based on all the facts
and circumstances. For this purpose, any
characterization of the separation from
service as voluntary or involuntary by the
service provider and the service recipient
in the documentation relating to the sepa-
ration from service is rebuttably presumed
to properly characterize the nature of the
separation from service. For example, if
a separation from service is characterized
as voluntary, the presumption may be re-
butted by demonstrating that absent the
voluntary separation from service the ser-
vice recipient would have terminated the
service provider’s services, and that the
service provider had knowledge that the
service provider would be so terminated.
Commentators requested that a sepa-
ration from service for good reason be
treated as an involuntary separation from
service. The final regulations provide that
where the right to a payment is contin-
gent upon a voluntary separation from ser-
vice following an occurrence that consti-
tutes good reason for the service provider
to terminate his or her services, the right
may be treated as payable only upon an
involuntary separation from service where
the good reason condition is such that the
service provider’s separation from service
effectively is an involuntary separation for
purposes of section 409A. To be treated
as an involuntary separation for purposes
of section 409A, the avoidance of the re-
2007–19 I.R.B.1137May 7, 2007

quirements of section 409A must not be a
purpose of the inclusion of any good rea-
son condition in the plan or of the actions
by the service recipient in connection with
the satisfaction of a condition. In addi-
tion, such good reason condition must re-
quire actions taken by the service recipi-
ent resulting in a material negative change
in the employment relationship, such as a
material negative change in the duties to
be performed, the conditions under which
such duties are to be performed, or the
compensation to be received. Additional
factors that may be relevant to whether a
purported separation from service for good
reason is the result of abona fidegood
reason condition not having as a princi-
pal purpose the avoidance of section 409A
include the extent to which the payments
upon a separation from service for good
reason are in the same amount and are
madeatthesametimeandinthesame
form as payments available upon an actual
involuntary separation from service, and
whether the service provider is required to
give the service recipient notice of the ex-
istence of the good reason condition and
a reasonable opportunity to remedy the
condition. Where a good reason condi-
tion is sufficient to be treated for purposes
of section 409A as a condition requiring
an involuntary separation from service, an
amount payable on account of a separa-
tion from service for good reason will be
treated the same as an amount payable on
account of an actual involuntary separation
from service.
The final regulations also provide a safe
harbor under which a provision for a pay-
ment upon a voluntary separation from ser-
vice for good reason will be treated for pur-
poses of section 409A as providing for a
payment upon an actual involuntary sepa-
ration from service. Those conditions in-
clude that the amount be payable only if
the service provider separates from service
within a limited period of time not to ex-
ceed two years followingthe initial exis-
tence of the good reason condition, and
that the amount, time and form of payment
upon a voluntary separation from service
for good reason be identical to the amount,
time and form of payment upon an invol-
untary separation from service. In addi-
tion, the service provider must be required
to provide notice of the existence of the
good reason condition within a period not
to exceed 90 days of its initial existence,
and the service recipient must be provided
a period of at least 30 days during which
it may remedy the good reason condition.
For these purposes, a good reason condi-
tion may consist of one or more of the fol-
lowing conditions arising without the con-
sent of the service provider: (1) a material
diminution in the service provider’s base
compensation; (2) a material diminution
in the service provider’s authority, duties,
or responsibilities; (3) a material diminu-
tion in the authority, duties, or responsi-
bilities of the supervisor to whom the ser-
vice provider is required to report, includ-
ing a requirement that a service provider
report to a corporate officer or employee
instead of reporting directly to the board
of directors of a corporation (or similar en-
tity with respect to an entity other than a
corporation); (4) a material diminution in
the budget over which the service provider
retains authority; (5) a material change in
geographic location at which the service
provider must perform the services; or (6)
any other action or inaction that constitutes
a material breach of the terms of an appli-
cable employment agreement.
4.Collectively bargained plans
Commentators requested an exception
from coverage under section 409A to ad-
dress certain plans providing for payments
upon a voluntary separation from service,
in the context of a collective bargaining
agreement covering services performed
for multiple employers. The Treasury
Department and the IRS believe these is-
sues are better addressed in the definition
of separation from service. See section
VII.C.2.b of this preamble.
5.Treatment as a separate plan
For purposes of the plan aggrega-
tion rules, the final regulations provide
for separate treatment of plans provid-
ing for separation pay solely due to an
involuntary separation from service or
participation in a window program. This
exception is intended to apply only where
the amounts are payable solely due to an
involuntary separation from service or
participation in a window program, and
not where the amounts may also become
payable for some other reason, even where
such payments actually are made due to
an involuntary separation from service
or participation in a window program.
Accordingly, any amount that would be
paid as a result of a voluntary separation
from service will not be included in this
category. An arrangement that does not
provide for deferred compensation will
not be aggregated with a deferred com-
pensation plan under this rule, merely
because the arrangement not providing for
deferred compensation accelerates vesting
or payment upon an involuntary separation
from service (for example, the accelera-
tion of the vesting of a stock option or
stock appreciation right that is excluded
from coverage under section 409A).
6.Reimbursement and fringe benefit plans
a.In general
The proposed regulations provided that
certain plans under which a service recip-
ient reimburses certain types of expenses
(for example, reasonable moving expenses
or reasonable outplacement expenses di-
rectly related to a termination of the ser-
vice provider’s services) actually incurred
by a service provider (including certain
in-kind benefits provided to the service
provider) following a separation from ser-
vice are not nonqualified deferred com-
pensation plans for purposes of section
409A, if such reimbursements are avail-
able only for expenses incurred, and the re-
imbursements are made, during a limited
period (generally not after the second tax-
able year of the service provider following
the separation from service).
In response to questions from commen-
tators, the final regulations clarify that a
right to a benefit that is excludible from
income will not be treated as a deferral
of compensation for purposes of section
409A. Accordingly, for example, an ar-
rangement to provide health coverage ex-
cludible from income under section 105
generally would not be subject to section
409A.
Many commentators requested in-
creased flexibility to provide for reim-
bursement arrangements upon a separation
from service, including certain requests to
exempt broad categories of such arrange-
ments, such as the continuation of any
plan in which the service provider par-
ticipated while performing services. The
Treasury Department and the IRS believe
that an exemption from coverage under
section 409A is not appropriate in such
May 7, 200711382007–19 I.R.B.

circumstances, because such plans may
provide for rights to significant amounts
of deferred compensation over lengthy
periods of time. However, the final reg-
ulations extend the limited period during
which taxable reimbursements of medical
expenses may be provided, to cover the
period during which the service provider
would be entitled (or would, but for such
arrangement, be entitled) to continuation
coverage under a group health plan of
the service recipient under section 4980B
(COBRA)iftheserviceproviderelected
such coverage and paid the applicable
premiums. In addition, the final regula-
tions contain several provisions governing
reimbursement plans (including plans
providing in-kind benefits) that consti-
tute nonqualified deferred compensation
plans for purposes of section 409A, so
that taxpayers will be able to design such
arrangements to comply with the payment
timing requirements of section 409A. For
a discussion of these provisions, see sec-
tion VII.B.2 of this preamble.
b.Specific exceptions for post-separation
reimbursement plans
The final regulations continue to ex-
clude from coverage under section 409A
the reimbursement of certain expenses
such as reasonable outplacement expenses
and reasonable moving expenses for a lim-
ited period of time due to a separation from
service, whether the separation from ser-
vice is voluntary or involuntary. The final
regulations, like the proposed regulations,
require that the eligible expense must be
incurred by the service provider no later
than the end of the second year following
the year in which the separation from ser-
vice occurs. In response to questions from
commentators, the final regulations clarify
that the exception applies to the qualify-
ing reimbursements available during the
limited period of time, even if the plan
extends beyond the limited period of time.
Several commentators requested that
the limited period of time refer solely to
the time the expense is incurred, and not
the time the expense is reimbursed, to
reflect the need for time to process the re-
imbursement request. Although the final
regulations do not adopt this suggestion,
the final regulations extend the period dur-
ing which a service provider can receive a
reimbursement payment by providing that
such payments must be made not later than
the end of the third year following the sep-
aration from service. This extension ap-
plies only to reimbursements of expenses
incurred by the service provider. Where
the service recipient provides in-kind ben-
efits (as defined in the regulations), or the
service recipient pays a third party to pro-
vide in-kind benefits, such benefits must
be provided by the end of the second year
following the separation from service.
Commentators also requested that the
final regulations clarify the treatment of
rights to a reimbursement of any loss in-
curred due to a sale of a residence. The
regulations clarify that for this purpose,
reasonable moving expenses include the
reimbursement of an amount related to a
loss incurred due to a sale of a primary res-
idence, provided that the reimbursement
does not exceed the loss actually incurred.
7.Limited payments of separation pay
The final regulations provide that, if not
otherwise excluded, a taxpayer may treat a
right or rights under a separation pay plan
to a payment or payments of an aggregate
amount not to exceed the applicable dollar
amount under section 402(g)(1)(B) for the
year of the separation from service as not
providing for a deferral of compensation.
Commentators raised questions concern-
ing the calculation of the excluded amount,
and requested an increase in the amount.
The limited payment exception is intended
to avoid the application of section 409A
to incidental benefits often provided upon
a separation from service, where the par-
ties may not realize that the benefits are
nonqualified deferred compensation. The
exception is not intended to address ex-
tended or significant benefits. Accord-
ingly, the final regulations do not substan-
tially increase the amount of the exclu-
sion. However, to permit the excluded
amount to automatically reflect cost-of-
living increases, the maximum exclusion
now equals the maximum amount of an
elective deferral permitted under section
402(g) for the year of the separation from
service.
The aggregate amount refers to the ag-
gregate amount of payments to which the
service provider has a right or rights. The
exclusion may be applied to any type of
separation pay plan, but may apply only
once with respect to amounts paid by a ser-
vice recipient to a service provider. So, for
example, if a service provider treats a right
to a payment of separation pay equal to the
applicable limit under section 402(g) in the
first year following a separation from ser-
vice as an excluded right, the right to the
amount is not treated as a deferral of com-
pensation regardless of when the amount
is actually paid (though other provisions of
the Code and the constructive receipt doc-
trine continue to apply). However, once
the right is treated as excluded, the service
provider may not treatany other right with
respect to the service recipient, such as an
additional right to a payment equal to the
applicable limit under section 402(g) in the
second year following the separation from
service, as excludedunder this exception.
K.Non-taxable benefits
The final regulations clarify that a
legally binding right to receive a non-
taxable benefit does not provide for a
deferral of compensation for purposes of
section 409A, 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 in-
come (other than due to participation in a
cafeteria plan described in section 125).
In addition, because such benefits do not
provide for a deferral of compensation,
the plan aggregation rules will not result
in taxation of other benefit plans merely
because the terms of such nontaxable ben-
efit arrangements would not comply with
section 409A if the arrangement were cov-
ered by section 409A. For a discussion of
the requirements for a taxable reimburse-
ment plan to satisfy the payment timing
requirements of section 409A, see section
VII.B.2 of this preamble.
L.Legal settlements
Commentators requested clarification
of the application of section 409A to
amounts paid pursuant to litigation be-
tween the service provider and service
recipient, including both court awards
andbona fidesettlements, and includ-
ing amounts characterized as wages or
otherwise treated as replacing compensa-
tion. The Treasury Department and the
IRS believe that section 409A was not
intended to govern settlements or awards
resolvingbona fidelegal claims based on
2007–19 I.R.B.1139May 7, 2007

wrongful termination, employment dis-
crimination, the Fair Labor Standards Act,
or worker’s compensation statutes, regard-
less of whether such claims arise under
Federal, state, local, or foreign laws, even
where settlements or awards pursuant to
such claims are treated as compensation
for Federal tax purposes. The final regu-
lations generally treat such arrangements
as not providing for deferred compen-
sation for purposes of section 409A. In
addition, the final regulations generally
provide that section 409A does not ap-
ply to the payment of, or reimbursement
for, attorney’s fees incurred in connection
with the enforcement of such a claim.
However, the exception covers only rights
arising from thebona fideclaim, and is
not intended to allow such settlements
or awards to act as substitutes for, or to
allow for the restructuring of, preexisting
deferred compensation subject to section
409A. For example, a change to the timing
of the payment of a pre-existing amount
of deferred compensation as part of such
a settlement would be subject to the rules
governing accelerated payments and sub-
sequent deferral elections. In addition,
the payment of an amount upon the ex-
ecution of a waiver of any or all of such
claims does not necessarily indicate that
the amounts are paid as an award or settle-
ment of an actualbona fideclaim. Rather,
to qualify for the exception under this
provision, the amounts must be paid with
respect to an actualbona fideclaim for
damages under the applicable law. For a
discussion of the treatment of settlements
ofbona fidedisputes regarding the right to
preexisting deferred compensation subject
to section 409A, see section VIII.G of this
preamble.
M.Split-dollar life insurance
arrangements
Some commentators requested that
split-dollar life insurance arrangements
be excluded from coverage under section
409A. Split-dollar life insurance arrange-
ments are often used as a method of pro-
viding deferred compensation and there is
no indication in the statute or legislative
history of any legislative intent that such
arrangements be excluded from coverage
under section 409A. In addition, like a
promise to transfer property in the future,
a promise to transfer an economic benefit
in the future may provide for deferred
compensation. Accordingly, a split-dollar
life insurance arrangement may provide
for deferred compensation, and whether
a split-dollar life insurance arrangement
provides for deferred compensation must
be determined through application of the
general rules defining deferred compen-
sation and a nonqualified deferred com-
pensation plan. In response to requests
for additional guidance, the Treasury De-
partment and the IRS anticipate issuing a
notice addressing the application of sec-
tion 409A to split-dollar life insurance
arrangements.
Commentators raised issues concerning
the interplay between the modifications
that may be needed to satisfy the require-
ments of section 409A and the effective
date rules applicable to split-dollar life in-
surance arrangements under §1.61–22(j).
Commentators pointed out that the modifi-
cations necessary to meet the requirements
of section 409A and these regulations may
cause the arrangement to be treated as a
new arrangement under §1.61–22(j) and
requested relief. The notice will also ad-
dress this issue.
N.Educational benefits
Commentators requested an exclusion
from coverage under section 409A for
promises to provide future taxable educa-
tional benefits to service providers. These
benefits typically would be provided as
an inducement to provide a period of ser-
vices. Commentators expressed concern
that the amount and timing of the payment
of such benefits would be difficult to as-
certain, because the amount and timing
of the payments would depend upon the
service provider’s decisions with respect
to further education. The final regula-
tions generally provide an exception from
coverage under section 409A for rights to
educational benefits, where the benefits
consist solely of educational assistance (as
defined for purposes of section 127(c))
provided solely for the education of the
service provider.
IV.Definition of Plan
A.Plan aggregation rules
The proposed regulations generally
provided that all amounts deferred with
respect to a service provider under all
plans of a service recipient falling within
a particular category would be treated as
deferred under a single plan. The enumer-
ated categories included amounts deferred
under account balance plans, amounts de-
ferred under nonaccount balance plans,
amounts deferred under separation pay
plans providing payments due solely to an
involuntary terminationor participation in
a window program, and amounts deferred
under any other plan. The final regulations
adopt these provisions, subject to certain
modifications described in this preamble.
The final regulations provide that the
bifurcation rules applicable to plans under
§31.3121(v)(2)–1(c)(1)(iii)(B), which are
permissive for purposes of the application
of section 3121(v)(2), must be applied for
purposes of the plan aggregation rules un-
der section 409A. Accordingly, a portion
of a nonqualified deferred compensation
plan is a separate account balance plan if
that portion otherwise qualifies as an ac-
count balance plan and the amount payable
to service providers under that portion is
determined independently of the amount
payable under the other portion of the plan.
The final regulations also provide ad-
ditional categories of plans for purposes
of the aggregation rules. One category
covers split-dollar life insurance arrange-
ments. Another category is comprised
of reimbursement plans, providing for
the reimbursement of expenses incurred
or the provision of in-kind benefits (as
defined in the regulations), to the extent
the right to such benefits or reimburse-
ments, separately or in the aggregate,
does not constitute a substantial portion
of the overall compensation earned by the
service provider forperforming services
for the service recipient, or the overall
compensation received due to a separation
from service. Stock rights that constitute
nonqualified deferred compensation for
purposes of section 409A also comprise a
separate category.
The final regulations further provide for
account balance plans to be subdivided
into a category for elective plans and a
category for nonelective plans. Plans will
only be subdivided in this manner to the
extent the amounts deferred under an elec-
tive deferral arrangement (and earnings on
such amounts) may be separately identi-
fied. For this purpose, a right to a match
on an elective deferral will not be treated
as an elective deferral arrangement.
May 7, 200711402007–19 I.R.B.

In an additional category, any amounts
deferred under a foreign plan may be
treated as deferred under a separate plan
from any amounts deferred under a do-
mestic plan, provided that the deferrals
under the plan 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 the foreign plan is not sub-
stantially identical to a domestic plan in
which the service provider participates.
For this purpose, a foreign plan is a plan
that the service recipient provides primar-
ily to 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)).
B.Written plan requirement
Commentators requested clarification
and simplification of the provisions re-
quired to be included in writing in plan
documents to comply with section 409A.
As a general rule, the final regulations
provide that to satisfy the requirement
that a plan be in writing, the document
or documents constituting the plan must
specify, at the time an amount is deferred,
the amount to which the service provider
hasarighttobepaid(or,inthecaseofan
amount determinable under an objective,
nondiscretionary formula, the terms of
such formula), and the payment schedule
or payment triggering events that will re-
sult in a payment of the amount.
A plan must provide for the six-month
delay requirement applicable to payments
to specified employees upon a separation
from service no later than the time the pro-
vision may become applicable to a sepa-
ration from service of the specified em-
ployee. Accordingly, the plan must con-
tain the provision by the time at which the
employee becomes a specified employee
(either because the stock of a component
of the service recipient becomes publicly
traded, or because the specified employee
effective date has been reached for a list of
specified employees that includes the em-
ployee). A provision applicable to a plan
sponsored by a service recipient or a plan
in which a specified employee participates
is effective with respect to a specified em-
ployee only to the extent the provision is
binding on the employee.
With respect to a deferral election,
whether an initial or subsequent deferral
election, the plan must specify no later
than the time by which that election is
required to be irrevocable the conditions
under which that election may be made.
With respect to permitted accelerations of
a payment, the plan need not specify the
conditions under which the accelerated
payment will be made except as explicitly
required in these regulations. However,
the taxpayer must demonstrate that the
acceleration of the payment complies with
the requirements of section 409A and
these regulations.
Commentators also requested clarifi-
cation regarding whether the requirement
that a plan be in writing also means that
the plan must be contained in a single doc-
ument. For purposes of this rule, the plan
consists of all documents that together
define the service provider’s rights to the
compensation. Accordingly, the terms
of a plan document may be contained in
more than one document including, for
example, a deferral election document.
Commentators asked whether a savings
clause would be sufficient to ensure com-
pliance with section 409A, where the sav-
ings clause providesthat each provision of
the plan will be interpreted to be consis-
tent with the requirements of section 409A
and that any provision of the plan that does
not satisfy such requirements will be of
no force or effect. The final regulations
provide that for purposes of determining
the terms of a plan, general provisions of
the plan that purport to nullify noncompli-
antplanterms,ortosupplyrequiredspe-
cific plan terms, are disregarded. Accord-
ingly, if a plan contains terms that do not
meet the requirements of section 409A and
these regulations, or fails to contain a plan
term necessary to meet the requirements
of section 409A and these regulations, the
plan will violate the requirements of sec-
tion 409A and these regulations regardless
of whether the plan contains such a savings
clause.
Several commentators requested that
the Treasury Department and the IRS
publish model amendments. Due to the
complex and varied universe of deferred
compensation plans, the Treasury Depart-
ment and the IRS do not believe that it is
feasible to publish model amendments at
this time.
V.Definition of Substantial Risk of
Forfeiture
A.In general
The final regulations generally adopt
the definition of substantial risk of forfei-
ture set forth in the proposed regulations.
Several commentators requested that the
definition of substantial risk of forfeiture
be the same as the definition of substantial
risk of forfeiture in §1.83–3(c). However,
the definition of substantial risk of forfei-
ture for purposes of compensatory trans-
fers of property under section 83 reflects
different policy concerns from those in-
volved in section 409A, and there are also
practical differences between transfers of
restricted property and promises to pay
deferred compensation. This is reflected
in the provisions of section 409A(e)(5),
directing the Secretary of the Treasury
Department to issue regulations disregard-
ing a substantial risk of forfeiture in cases
where necessary to carry out the purposes
of section 409A. Accordingly, the final
regulations do not adopt this suggestion.
A right to an amount deferred may
be subject to the satisfaction of two or
more different conditions that each inde-
pendently would be a substantial risk of
forfeiture. In that case, the substantial
risk of forfeiture generally would con-
tinue until all of such conditions had been
met. Alternatively, a right to an amount
deferred may be subject to the satisfaction
of any of two or more different conditions
that each independentlywould constitute a
substantial risk of forfeiture. In that case,
the substantial risk of forfeiture generally
would lapse as soon as one of the condi-
tions had been met.
The final regulations explicitly provide
that a payment conditioned on an involun-
tary separation from service without cause
may be treated as subject to a substantial
risk of forfeiture if there is a substantial
risk that the service provider will not be in-
voluntarily separated from service without
cause. Many of the comments relating to
the definition of a substantial risk of forfei-
ture requested also that a benefit available
2007–19 I.R.B.1141May 7, 2007

only upon a separation from service for
good reason be treated as subject to a sub-
stantial risk of forfeiture. Under the defini-
tion of an involuntary separation from ser-
vice provided in the final regulations, the
right to a payment upon a separation for
service for good reason may, in certain cir-
cumstances, be treated as a right to a pay-
ment upon an involuntary separation from
service. For a discussion of the definition
of an involuntary separation from service,
see section III.J.3 of this preamble.
Commentators requested that a require-
ment that an employee sign a release of
claims to receive a benefit be treated as
a substantial risk of forfeiture. Generally,
conditions under the discretionary control
of the service provider (other than the deci-
sion whether or not to continue providing
services) are not treated as creating a sub-
stantial risk of forfeiture. Accordingly, the
final regulations do not adopt this sugges-
tion.
One commentator suggested that any
right to a payment be treated as subject
to a substantial risk of forfeiture until the
amount of the payment is readily deter-
minable, at least where the payment could
be zero. The Treasury Department and the
IRS do not believe that this standard is ap-
propriate.
B.Election between vested and nonvested
rights
The final regulations provide that an
amount will not be considered subject to a
substantial risk of forfeiture after the date
or time at which the recipient otherwise
could have elected to receive the amount
of compensation, unless the present value
of the amount purportedly subject to a sub-
stantial risk of forfeiture (disregarding, in
calculating the present value, the risk of
forfeiture) is materially greater than the
present value of the vested amount the re-
cipient otherwise could have elected to re-
ceive. For example, if a service provider
can elect to receive, in lieu of a payment of
current compensation, a bonus based upon
a formula that would otherwise subject the
bonus to a substantial risk of forfeiture, the
bonus will be subject to a substantial risk
of forfeiture for purposes of section 409A
only if the present value of the amount of
the bonus (disregarding the risk of forfei-
ture) is materially greater than the present
value of the current compensation amount.
Some commentators asked whether
this exception addressed the extension of
a substantial risk of forfeiture as part of
the negotiated extension of an employ-
ment contract. Commentators argued that
rights a service provider obtains under
a new or extended employment contract
could be viewed as a right to an amount
materially greater than the amount the
service provider otherwise could have re-
ceived. The final regulations clarify that
for purposes of this rule, compensation
the service provider would receive for
continuing to perform services regardless
of whether the service provider elected to
receive the vested payment is not taken
into account for purposes of determining
whether the present value of the right to the
nonvested payment is materially greater.
VI.Initial Deferral Election Rules
A.In general
The final regulations adopt the provi-
sions contained in the proposed regula-
tions relating to initial deferral elections,
subject to the modifications described in
this preamble.
The proposed regulations generally
provided that in a nonelective plan, a
service recipient may designate the time
and form of payment on or before the
date the service provider obtains a legally
binding right to the payment. Commen-
tators requested clarification of how the
service recipient’s discretion to designate
a time and form of payment related to
the requirement in the proposed regula-
tions that a service provider’s deferral
election be irrevocable by the applica-
ble deadline. Specifically, commentators
requested that a deferral election by a ser-
vice provider be treated as irrevocable,
even if during the period during which
the service recipient could have set the
time and form of payment (that is, through
the date the service recipient grants the
service provider a legally binding right to
the payment), the service recipient retains
the right to override the service provider’s
deferral election and provide for deferral
of a lesser or greater amount. The final
regulations do not adopt this suggestion.
If a service provider may make an initial
deferral election, including an election
as to the time and form of payment, the
election must be irrevocable as of the date
required under the rules governing such
service provider elections. Accordingly, a
plan may not provide for such an override,
unless such override cannot occur after the
deadline by which the service provider’s
election must be effective.
Many commentators requested a clarifi-
cation of the rules with respect to a deferral
of a discretionary bonus, where the legally
binding right to the bonus does not arise
until a year subsequent to the year in which
services are performed. For example, an
employer announces in 2010 that it will
be awarding discretionary bonuses for ser-
vices performed in 2011, and will decide
which employees will receive bonuses and
in what amounts at the beginning of 2012.
Section 409A(a)(4) generally provides that
compensation for services performed dur-
ing a taxable year may be deferred at the
service provider’s election only if the elec-
tion to defer such compensation is made
not later than the close of the taxable year
preceding the year in which the services
are rendered. Accordingly, even where
the bonus is discretionary such that the
legally binding right to the bonus does not
arise until after the period of services for
which the bonus is paid has begun, a ser-
vice provider’s deferral election must oc-
cur before the year in which the period
of services begins absent some other ap-
plicable exception (such as, for example,
the deferral election rules related to per-
formance-based compensation). The de-
termination of the period of services for
which compensation is earned is based on
all the facts and circumstances, but may in-
clude periods of service before the date the
service provider obtains a legally binding
right to the compensation. Although not
necessarily determinative, one of the fac-
tors taken into account in that determina-
tion is a designation by the service recipi-
ent of the period of services for which the
compensation is earned.
B.Nonelective deferrals
Commentators pointed out that under
the proposed regulations, a service recip-
ient might be required to designate a time
and form of payment with respect to a non-
elective deferral at an earlier date than the
service provider would have to make such
a designation if an election had been pro-
vided to the service provider. Commen-
tators requested that the service recipient
May 7, 200711422007–19 I.R.B.

be provided the same flexibility as the ser-
vice provider in such cases. The final reg-
ulations generally adopt this suggestion, so
that if the service provider has no elec-
tion as to the time and form of payment
of an amount of deferred compensation,
the service recipient may set the time and
form of payment on any date on or be-
fore the later of the latest date the service
provider would have been permitted un-
der these regulations to elect such time and
form of payment if an election had been
provided to the service provider, or the
date the service recipient grants the legally
binding right to the compensation. So, for
example, where compensation is perfor-
mance-based compensation, and the ser-
vice recipient retains the discretion to es-
tablish the time and form of the payment,
the plan generally could permit the service
recipient to establish the time and form
of the payment on or before the date six
months before the end of the relevant per-
formance period.
C.Performance-based compensation
The final regulations generally adopt
the definition of performance-based com-
pensation contained in the proposed reg-
ulations, subject to the modifications
described in this preamble. The final
regulations clarify that where a portion
of an award would qualify as perfor-
mance-based compensation if the portion
were the sole amount available under the
plan, that portion of the award will not
fail to qualify as performance-based com-
pensation merely because another portion
of the award does not qualify as perfor-
mance-based compensation, if the portion
that would qualify as performance-based
compensation is designated separately or
otherwise separately identifiable under
the terms of the plan and each portion is
determined independently of the other.
Commentators asked whether in or-
der to use the deferral rules regarding
performance-based compensation, a ser-
vice provider must be required to perform
services during the entire performance
period, or from the date the performance
criteria are set through the end of the per-
formance period. Commentators argued
that because a payment cannot be substan-
tially certain to be made at the time of the
deferral election under the deferral elec-
tion rules applicable to performance-based
compensation, a service provider’s ability
to manipulate the timing of income inclu-
sion under a performance-based compen-
sation arrangement is limited. The final
regulations require only that the service
provider provide services from the later of
the date the performance period starts or
thedatetheperformancecriteriaareestab-
lished through the date the initial deferral
election is made.
Commentators suggested that a provi-
sion in a plan for automatic payment to oc-
cur upon death, disability, or a change in
control event (as defined for purposes of
section 409A) should not result in a fail-
ure of the arrangement to qualify as perfor-
mance-based compensation. The final reg-
ulations adopt this suggestion, provided
that where such an event occurs before a
deferral election has been made, the right
to the payment will no longer be treated as
performance-based compensation so that a
deferral election may not be effective un-
less made in accordance with another ap-
plicable deferral election rule.
In response to comments, the require-
ment that a deferral election under the rule
applicable to performance-based compen-
sation be made before the compensation
has become substantially certain to be paid
has been modified, and now requires that
the election be made before the amount is
readily ascertainable. Where the right to
a specified amount is subject to a perfor-
mance requirement being met (for exam-
ple, a right to a payment of $10,000 if a
certain profit level is attained), the amount
is treated as readily ascertainable when it is
substantially certain that the performance
requirement will be met. With respect to
the right to an amount of compensation
that varies based upon the level of perfor-
mance, the payment, or any portion of the
payment, is treated as readily ascertainable
to the extent the amount or the payment
is calculable and the performance require-
ment is substantially certain to be met. For
this purpose, a right to a payment is bi-
furcated between the amount that is read-
ily ascertainable and the amount that is not
readily ascertainable. Accordingly, any
minimum amount that is calculable and for
which the performance requirement enti-
tling the service provider to the payment
is substantially certain to be met generally
will be treated as readily ascertainable.
For example, a service recipient agrees
to pay $100 for every additional widget
meeting certain quality requirements that
is produced in a calendar year in excess
of 100 widgets. At the end of the six
months, 125 widgets have been produced
and no election to defer has been made. As
of that date, the performance-based com-
pensation with respect to which an elec-
tion to defer can be made does not include
the $2500 ((125-100) multiplied by $100)
that is calculable and for which the perfor-
mance requirement is substantially certain
to be met. In addition, the performance-
based compensation does not include any
additional amount that the service provider
is substantially certain to earn based on
the number of additional widgets that the
service provider is substantially certain to
produce before the end of the year. How-
ever, the payment is bifurcated so that any
additional amount that is not substantially
certain to be paid may be treated as perfor-
mance-based compensation such that an
election to defer such compensation may
be made.
Commentators requested clarifica-
tion of the circumstances under which
compensation, the amount of which is
determined by reference to the value of
service recipient stock, may qualify as
performance-based compensation. The
fair market value of stock at any given
time generally incorporates the market’s
perception of the probability that the stock
will increase or decrease in value. Accord-
ingly, compensation payable for a service
period that is equal to the value of a pre-
determined number of shares of stock, and
is variable only to the extent that the value
of such shares appreciates or depreciates,
generally will not be performance-based
compensation. However, if the right to
such compensation is subject to a perfor-
mance-based vesting requirement, such
compensation may be performance-based
compensation. Also, the attainment of a
prescribed value for the service recipient
(or a portion thereof), or a share of stock
of the service recipient, may be used as
a performance-based criterion, if it is a
condition for receiving the compensation
and the other requirements are met.
D.Initial eligibility
Section 409A(a)(4)(B)(ii) provides that
in the case of the first year in which a ser-
vice provider becomes eligible to partic-
ipate in the plan, an initial deferral elec-
2007–19 I.R.B.1143May 7, 2007

tionmaybemadewithin30daysafterthe
date the service provider becomes eligible
to participate in the plan, with respect to
compensation for services to be performed
subsequent to the election. The final regu-
lations adopt the provisions implementing
the initial eligibility deferral election rules
set forth in the proposed regulations, sub-
ject to the following modifications.
Many of the commentators on the initial
eligibility deferral election rule expressed
concerns about the application of the plan
aggregation rules. The proposed regula-
tions provided that the plan aggregation
rules would apply in determining whether
a service provider was newly eligible for
a plan, so that if a service provider was al-
ready participating in an arrangement that
is required to be aggregated with the ar-
rangement for which the service provider
is initially eligible, the service provider
would not be able to take advantage of
the initial eligibility deferral election rule.
Some commentators requested that the
plan aggregation rules not apply for this
purpose. However, the Treasury Depart-
ment and the IRS believe that such a rule
would result in the potential for the adop-
tion of serial plans as a means to claim
repeated initial eligibility and the ability
thereby to make late deferral elections. In
addition, such a rule would require diffi-
cult determinations of whether one plan
was sufficiently dissimilar from another
plan to qualify as a separate plan.
Other commentators requested that the
plan aggregation rulesapply, but that plans
allowing elections between current and de-
ferred compensation, or the part of a plan
allowing such elections, be treated sepa-
rately from nonelective plans or nonelec-
tive benefits in each category. The fi-
nal regulations generally adopt this rule
through the modifications to the plan ag-
gregation rules described in section IV.A
of this preamble.
Other comments focused on the ap-
plication of the initial eligibility deferral
election rule in the case of a rehire or a
change in position within a service re-
cipient. Commentators pointed out that
under the standard in the proposed regu-
lations, if an employee had not received
a distribution after the initial termina-
tion of employment, or had transferred
to a position not participating in the plan
without receiving a distribution and then
transferred back to a position participat-
ing in the plan, the rehired or returning
employee would still retain the right to
benefits under the plan and thus would not
be able to use the initial eligibility defer-
ral election rules. The final regulations
provide that the initial eligibility deferral
election rules are applicable to a service
provider provided that the service provider
has not been an active participant in the
plan (applying the plan aggregation rules)
for at least 24 months. For this purpose,
a service provider is an active participant
in the plan if, under the plan’s terms and
without further amendment or action by
the plan sponsor, the service provider is
eligible to accrue benefits under the plan
(even if the service provider has elected
not to participate in the plan), other than
earnings on amounts previously deferred.
Commentators requested relief with re-
spect to the timing rules for initial elec-
tions establishing thetime and schedule of
payments under nonelective excess bene-
fit plans. Commentators noted that un-
der such plans, a service provider often
automatically becomes a participant when
the service provider’s benefits under the
qualified plan become limited under the
rules governing qualified plans. Because
determining whether a service provider is
a participant requires calculations, com-
mentators observed that both the service
provider and the service recipient may be
unaware that the service provider has be-
come a participant in the plan for some
time after the service provider actually first
becomes eligible. The final regulations
generally provide that with respect to a
nonelective excess benefit plan, a service
provider is treated as initially eligible to
participate in the plan as of the first day of
the service provider’s taxable year imme-
diately following the first year the service
provider accrues a benefit under such plan,
so that an initial deferral election with re-
spect to the time and form of payment may
be effective for benefits accrued under the
plan based on services performed during
the taxable year immediately preceding the
year in which the election is made. This
rulemayonlybeusedoncewithrespectto
a service provider’s participation in a plan.
E.Initial deferral elections with respect to
certain forfeitable rights
The proposed regulations provided a
rule for initial deferral elections with re-
spect to certain forfeitable rights, generally
intended to addressad hocawards. Under
the rule in the proposed regulations, if a
legally binding right to a payment in a sub-
sequent year is subject to a forfeiture con-
dition requiring the service provider’s con-
tinued services for a period of at least 12
months from the date the service provider
obtains the legally binding right, an elec-
tion to defer such compensation may be
made on or before the 30
th
day after the ser-
vice provider obtains the legally binding
right to the compensation, provided that
the election is made at least 12 months in
advance of the earliest date at which the
forfeiture condition could lapse. The final
regulations retain this rule, subject to the
modifications described in this preamble.
Commentators suggested that the re-
quirement of at least a 12-month service
period following the deferral election dur-
ing which the right could be forfeited due
to a separation from service be shortened
to 11 months, because the combination
of the 30-day election period plus the
12-month service period requirement gen-
erally resulted in a requirement of at least
a 13-month performance period. The re-
quirement of a 12-month service period
after an election is made ensures that the
election occurs while at least an entire year
(12 months) of services is still required.
This conforms in many respects to the gen-
eral rule that the deferral election must be
made in the year before the year in which
the services are performed. Any shorter
period would permit service providers to
make deferral elections in the same tax-
able year in which all of the services are
performed. The Treasury Department and
the IRS do not believe that such a rule is
consistent with the legislative intent.
The final regulations also provide that
this rule is available even if the right to
the compensation may vest earlier than 12
months following the election due to the
service provider’s death or disability, or
due to a change in control event (as de-
fined for purposes of section 409A) with
respect to the service recipient. However,
if death, disability, or a change in control
event occurs and the condition lapses be-
fore the end of such 12-month period, a de-
ferral election may be given effect only if
the deferral election is permitted under the
regulations without regard to this rule.
May 7, 200711442007–19 I.R.B.

F.Initial deferral election with respect to
fiscal year compensation
The final regulations retain the initial
deferral election rule with respect to fis-
cal year compensation that was in the pro-
posed regulations. The final regulations
clarify that the rule with respect to the de-
ferral of fiscal year compensation is based
upon the service recipient’s taxable year,
regardless of whether the service recipi-
ent’s taxable year is the calendar year or
some other period. Accordingly, where a
service recipient with a calendar year tax-
able year is providing fiscal year compen-
sation to a service provider based upon a
calendar year, a service provider with a
non-calendar year taxable year generally
could take advantage of the rule to defer
such fiscal year compensation on or before
the December 31 preceding the calendar
year upon which the fiscal year compen-
sation is based.
G.Initial deferral elections with respect
to commissions
The final regulations continue to pro-
vide a special deferral election rule with
respect to commission payments. These
rules are intended to address concerns that,
for many commission arrangements, it is
difficult to determine when the services
related to a particular commission pay-
ment began, so that it is difficult to ap-
ply the general rule that requires that a de-
ferral election be made before the year in
which any services are performed. This
rule is not intended to address whether, ab-
sent such a deferral election, a particular
commission arrangement would result in
deferred compensation. Whether a com-
mission arrangement otherwise provides
for deferred compensation must be deter-
mined through the application of the gen-
eral rules defining deferred compensation.
However, where a commission arrange-
ment requires that the service provider be
providing services at the time of the pay-
ment to be entitled to the payment, the
commission is paid in the normal course,
and neither the serviceprovider nor the ser-
vice recipient has a right to specify a pay-
ment date, the arrangement generally will
not provide for the deferral of compensa-
tion.
The final regulations generally adopt
the deferral election rule set forth in the
proposed regulations treating the services
related to a commission payment as per-
formed in the year in which the customer
remits payment to the service recipient.
For this purpose, the proposed regulations
provided that commissions include only
compensation contingent upon the service
recipient receiving payment from an unre-
lated customer for the product or services
provided.
Commentators asked that this rule be
extended to cover arrangements under
which the service recipient paid the com-
mission based upon consummation of
a transaction, regardless of whether the
customer paid the service recipient for
the service or good purchased from the
service recipient. For example, commen-
tators stated that in some industries the
service recipient pays a salesperson com-
missions based on the amount of sales
recorded, even though the customer is not
obligated to pay the service recipient until
a later date. The final regulations gener-
ally adopt this suggestion by permitting
the taxable year in which the sale occurs
to be substituted for the year in which the
customer remits payment. However, to
avoid manipulation of the deferral elec-
tion timing rules, the taxable year of the
sale may be used only if it is applied con-
sistently to all similarly situated service
providers.
Commentators also asked that this rule
be extended to commissions earned due to
the increase in value, or maintenance of
overall value, of a pool of assets or ac-
counts. In response, the final regulations
provide that, for purposes of the initial de-
ferral election rules, the services with re-
spect to investment commission compen-
sation are deemed to be performed over the
12 months immediately preceding the date
as of which the overall value of the assets
or asset accounts is determined for pur-
poses of the calculation of the investment
commission compensation. For this pur-
pose, investment commission compensa-
tion means compensation earned by a ser-
vice provider if a substantial portion of the
services provided by such service provider
to a service recipient consists of sales of fi-
nancial products or the provision of other
direct customer services to an unrelated
customer with respect to customer assets
or customer asset accounts. For this pur-
pose, amounts will only be treated as in-
vestment commission compensation if the
customer retains the right to terminate the
customer relationship and transfer or with-
draw the assets or asset accounts without
undue delay (which may be subject to a
reasonable notice period), the compensa-
tion paid by the service recipient to the
service provider consists of a portion of
the value of the overall assets or asset ac-
count balance, an amount substantially all
of which is calculated by reference to the
increase in the value of the overall assets
or account balance during a specified pe-
riod, or both, and the value of the over-
all assets or account balance and invest-
ment commission compensation is deter-
mined at least annually.
Commentators also requested that the
exception for commissions be expanded to
address arrangements involving customers
related to either the service provider or the
service recipient. The Treasury Depart-
ment and the IRS are concerned that where
arrangements involve related parties, there
is the potential for manipulation of the tim-
ing of the payment and the commission,
but also understand that many of such ar-
rangements may not involve abuse. There-
fore, the final regulations provide that the
special rules with respect to commissions
apply to arrangements involving a cus-
tomer related to the service provider or the
service recipient provided that substantial
sales or substantial services occur between
the service recipient and a significant num-
ber of unrelated customers, and the sales
or service arrangement and the commis-
sion arrangement with respect to a cus-
tomer related to eitherthe service recipient
or the service provider arebona fideand
arise in the ordinary course of business,
and both the terms and practices are sub-
stantially the same as the terms and prac-
tices applicable to customers to whom the
service provider and service recipient are
not related, and to whom, either individu-
ally or in the aggregate, the service recipi-
ent has made substantial sales or provided
substantial services.
H.Involuntary and voluntary separations
from service
The final regulations provide that with
respect to separation pay paid upon an ac-
tual involuntary separation from service,
where the service provider had no prior
right to such separation pay, and where the
separation pay is the subject ofbona fide,
2007–19 I.R.B.1145May 7, 2007

arm’s length negotiations, the initial defer-
ral election may be made at any time be-
fore the service provider obtains a legally
binding right to the payment. The final
regulations expand this rule to include vol-
untary separations from service as well as
involuntary separations, as long as all of
the other conditions in the previous sen-
tence are met. The exception addresses
both a choice between a current and a de-
ferred payment, and the establishment of
the time and form of payment of deferred
compensation.
The exception is intended to address
legally binding rights to deferred com-
pensation arising as part of the process
of separating from service and not based
upon previously existing legally binding
rights. The exception is intended to alle-
viate concern that where such rights are
expressed or calculated based on prior
compensation or service, any election by
the service provider as to the timing of the
payment during the negotiation process
could be viewed as a late initial deferral
election made during or after the year
in which the services were performed,
and to avoid the potential for the plan
aggregation rules to eliminate the abil-
ity to make an initial eligibility deferral
election. The Treasury Department and
the IRS have become aware that certain
taxpayers have attempted to apply this
provisiontoexistingdeferredcompensa-
tion plans, believing that the exception
allows new elections provided that the
separation pay was the subject ofbona
fidenegotiations. This application is in-
consistent with the explicit provision of
the proposed regulations and these final
regulations. The provision does not ad-
dress preexisting legally binding rights to
deferred compensation, including legally
binding rights that are subject to a substan-
tial risk of forfeiture. Any change in the
time and form of payments under those ar-
rangements would be required to meet the
rules governing subsequent deferral elec-
tions and accelerated payments (including
any applicable reliefprovided during the
transition period). For a discussion of the
treatment of benefits forfeitable upon the
separation from service, see section III.J.1
of this preamble.
I.Elections to annualize recurring
part-year compensation
Commentators asked how the deferral
election rules would apply to an election
by certain employees providing services
over less than a 12-month period to re-
ceive payments for services on an annual-
ized basis. For example, teachers perform-
ing services during a school year running
from September of one year through June
of the next year often are provided an elec-
tion to receive the compensation on an an-
nualized basis over 12 months instead of
during only the school year. This raises is-
sues under the general initial deferral elec-
tion rules under section 409A because the
teacher is permitted to elect after the be-
ginning of the calendar year to defer some
of the compensation that would be paid in
September through December of that year
to a period in the subsequent year.
The final regulations provide that with
respect to recurring part-year compensa-
tion, an election to defer all or a portion
of the compensation to be earned during a
particular period of service may be made
at any time before the period of service
begins, provided that no amounts are de-
ferred under the election to a date after the
last day of the 13
th
month following the
first day of the performance period. For
this purpose, recurring part-year compen-
sation is defined as compensation paid for
services rendered in a capacity that the ser-
vice recipient reasonably anticipates will
continue in subsequent years on similar
terms and conditions, and will require ser-
vices to be provided over successive ser-
vice periods of less than 12 months, each
of which begins in one taxable year of the
service provider and ends in the next such
taxable year. For example, a teacher earn-
ing compensation from September 15 of
one year through June 30 of the subse-
quent year could elect to defer compensa-
tionearnedduringsuchperiodonanydate
on or before September 15 of the first year,
provided that no amount deferred in ac-
cordance with this rule is deferred beyond
October 31 of the following year. This
exception may be applied to a particular
amount of compensation only once, so that
an amount deferred under this exception
may not be deferred a second time through
treatment of the amount as earned in a sub-
sequent service period.
J.USERRA
The final regulations provide that the
initial deferral election rules are deemed
satisfied to the extent that a deferral elec-
tion provided to a service provider is
necessary to satisfy the requirements of
the Uniformed Services Employment and
Reemployment Rights Act of 1994, as
amended, 38 U.S.C. 4301–4334. Similar
relief has been provided with respect to
changes in the time and form of payment
and accelerations of payments.
VII.Time and Form of Payment
A.In general
The final regulations clarify that except
as explicitly provided otherwise, a single
time and form of payment must be desig-
nated with respect to each payment that is
payable upon a payment event. For exam-
ple, a plan must designate how an amount
will be paid upon a change in control event,
and generally cannot provide one time and
form of payment upon a particular type of
change in control event, and another time
and form of payment upon another type of
change in control event. The final regula-
tions retain the rule, however, that permits
aplantoprovideforadifferenttimeand
form of payment, depending upon whether
the permissible payment event occurs be-
fore or after a specified date. In addition,
the final regulations also provide for a lim-
ited ability to designate different times and
forms of payment based upon the condi-
tions under which a service provider’s sep-
aration from service occurs. See section
VII.C.5 of this preamble for a discussion
of payments upon a separation from ser-
vice.
The proposed regulations provide that
for purposes of applying the payment
rules, a payment will be treated as made
on a fixed date or on a fixed schedule if
the payment or payments are made by the
end of the calendar year in which a spec-
ified fixed payment date, or due date of
a payment under a fixed schedule, occurs
or, if later, the 15th day of the third month
following such fixed date or due date.
The final regulations clarify that the same
flexibility applies to making a payment on
account of a payment event. So, for exam-
ple, where a payment is scheduled to be
made upon the death of a service provider
May 7, 200711462007–19 I.R.B.

whose taxable year is the calendar year,
the payment is timely if made on or before
the later of December 31 of the calendar
year in which the death occurs, or the 15th
day of the third month following the date
of death. If the service provider’s taxable
year is not the calendar year, the final reg-
ulations specify that the service provider’s
taxable year is used for purposes of this
rule.
Commentators also requested that
where a payment is scheduled to be made
on a fixed date, a service recipient be per-
mitted to pay at any preceding date within
the same calendar year. Commentators
argued that if the regulations permitted a
payment to be made later within the same
calendar year because the amount would
be reflected on the same income tax re-
turn in the case of an individual service
provider, then the same rationale should
permit payments to be made earlier in the
same calendar year. Because the adoption
of this provision would conflict with the
administration of the rules governing sub-
sequent deferrals, the final regulations do
not adopt this suggestion.
The subsequent deferral rules require
that any election to extend the deferral pe-
riod must not be effective for at least one
year after the date the payment is due. If
a payment due on a specified date during
a calendar year could always be made on
January 1 or any subsequent date during
the calendar year, then the one-year wait-
ingperiodwouldhavetobegintorunon
the previous January 1, regardless of the
actual payment date the plan specified.
For example, if a plan specified Decem-
ber 31 as the payment date, but the pay-
ment could be made on January 1, then any
subsequent deferral election would need to
be made on or before January 1 of the pre-
ceding calendar year, making the deadline
for a subsequent deferral election almost
two years before the actual specified pay-
ment date. Such a rule would unduly bur-
den service providers who cannot actually
receive a payment before the date specified
in the plan. However, to lower the poten-
tial for unintentional violations, the final
regulations provide that a payment will be
deemed made at the scheduled time of pay-
ment if made not earlier than 30 days be-
fore the scheduled date, provided that the
service provider is not permitted, directly
or indirectly, to designate the taxable year
of the payment.
In addition, the final regulations con-
tinue to provide that a plan may desig-
nate an entire taxable year of the service
provider, rather than a specific date, as the
specified date of payment. If a plan pro-
vides only for the taxable year of payment,
the payment may be made at any time dur-
ing such year. For purposes of the subse-
quent deferral rules, the payment will be
treated as scheduled to be paid on the first
day of the service provider’s taxable year.
Commentators also requested clarifica-
tion of the treatment of deadlines for pay-
ment, where the plan does not designate
a specific payment date or taxable year of
the service provider. For example, com-
mentators asked whether a provision re-
quiring payment as soon as administra-
tively feasible but in no event later than the
15
th
day of the third month following the
end of the year would be treated as having
a fixed date of payment. The final regu-
lations provide that such a provision will
be a specified payment date only if the pe-
riod during which such payment may be
made is restricted either to a specified tax-
able year of the service provider or a pe-
riod of not more than 90 days and the ser-
vice provider is not provided an election
as to the taxable year of the payment. If
a specific payment date is not established,
thefirstpossibledateonwhichapayment
could be made under the plan is the speci-
fied payment date for purposes of the rules
relating to subsequent deferral elections.
For example, a payment scheduled to be
made at any time on or after January 1,
2008, and on or before July 1, 2008, to
a service provider whose taxable year is
the calendar year will be deemed to have
a fixed payment date. For purposes of the
subsequent deferral rules, January 1, 2008,
is the specified payment date.
By contrast, a payment scheduled to
be made to such a service provider at any
time on or before July 1, 2008, would
not be deemed to have a fixed payment
date, because the payment could be made
before January 1, 2008. In addition, a
payment scheduled to be made to a service
provider, for example, within 180 days of
a separation from service generally will
not provide for a specified time and form
of payment under the final regulations,
because it specifies neither the taxable
year of the service provider in which the
payment must be made following the sep-
aration from service, nor a period of 90
days or less following the separation from
serviceinwhichthepaymentmustbe
made. Because such a payment schedule
would not provide an objective payment
date based upon the separation from ser-
vice event, the payment also would not
be eligible for the relief provided for pay-
ments made by the later of the end of the
taxable year of the service provider or the
15th day of the third month following the
specified payment date. However, a plan
provision providing that the payment will
be made within 90 days of a separation
from service generally will be treated as a
specified payment date, and for purposes
of the subsequent deferral rules the date of
the separation from service will be treated
as the scheduled payment date.
B.Specified time or fixed schedule of
payments
1.In general
The final regulations generally adopt
the rules defining a specified time or fixed
schedule of payments, including the abil-
ity to designate a service provider’s tax-
able year as the year of payment rather than
a specific date. For example, a plan provi-
sion providing for payment within the ser-
vice provider’s taxable year that includes
December 31, 2008, would be treated as a
fixed date of payment.
2.Reimbursement and in-kind benefit
plans
Many commentators requested ad-
ditional guidance regarding ways in
which rights to taxable reimbursements
or in-kind benefits might be structured
to meet the definition of a fixed sched-
ule of payments. In response, the final
regulations provide that a right to reim-
bursements or in-kind benefits will meet
the requirement of a fixed time and form
of payment if certain requirements are sat-
isfied. For this purpose, a reimbursement
plan must provide for the reimbursement
of expenses incurred during an objectively
prescribed period (including a period be-
ginning or ending based upon a service
provider’s death), where the amount of
reimbursable expenses incurred or in-kind
benefits available in one taxable year of the
service provider cannot affect the amount
of reimbursable expenses or in-kind bene-
fits available in a different taxable year. In
2007–19 I.R.B.1147May 7, 2007

addition, the reimbursement payment must
be made by no later than the end of the
service provider’s taxable year following
the taxable year in which the expense is
incurred. Such reimbursement or in-kind
benefit rights may not be subject to liqui-
dation or exchange for another benefit.
For example, a right to a reimbursement
of membership fees incurred for each of
three specified and consecutive calendar
years by a former employee, where the for-
mer employee is entitled to reimbursement
of the expenses incurred each year without
regard to the expenses incurred in a differ-
ent year, and where the former employee
cannot exchange the right for cash or any
other benefit, generally will be treated as
providing for a fixed time and form of pay-
ment if the plan requires that the reim-
bursement payment be made by no later
than the end of the calendar year follow-
ing the year in which the expense is in-
curred. In contrast, a right to reimburse-
ment of membership fees of up to $30,000
over three years would not meet the re-
quirement of a fixed time and form of pay-
ment, because the extent to which the for-
mer employee incurred the expense in the
first year would affect the amount avail-
able for reimbursement in a subsequent
year.
This rule applies similarly to the provi-
sion of in-kind benefits, such as a right to
use a corporate vehicle or aircraft. The fi-
nal regulations also provide a special rule
for arrangements reimbursing medical ex-
penses to permit certain aggregate limits
on the benefits provided, such as lifetime
maximums.
3.Payment schedules with fixed or
formula payment limitations
Commentators asked whether payment
schedules with fixed or objective formula
limitations on the amount that may be
paid during any particular period would
meet the requirement of a fixed schedule
or time and form of payment. Where the
fixed or formula limitation is established
on or before the date the time and form of
payment is otherwise required to be set,
the fixed or formula limitation is based
on a fixed or nondiscretionary, objectively
determinable formula limitation on the
amount that may be paid in a particular
period where all the factors relevant to the
determination of such limit are beyond
the control of the service provider and not
subject to any exercise of discretion by the
service recipient, and the plan specifies
the time and form of payment of any addi-
tional amount due in excess of the fixed or
formula limitation amount, the schedule
will be deemed to be a fixed schedule of
payments because it is not subject to ma-
nipulation. However, a change in the lim-
its or a change in the allocation method for
the payment of the unpaid excess amounts
that will be paid after the original due
dates due to application of the limit may
constitute a subsequent deferral election or
the acceleration of a payment. Similarly,
where the total amount payable under a
plan with multiple participants is limited,
the time and form of payment requirement
may be met if the plan specifies, from the
date the time and form of payment is oth-
erwise required to be set, the following:
(1) a fixed or nondiscretionary, objectively
determinable limit on the amount that may
be paid in a particular period such that
none of the factors relevant to the determi-
nation of such limit is in the control of the
service provider or subject to the exercise
of any discretion by the service recipient;
(2) where there is an overall limitation on
the aggregate amount that may be paid
to a group of service providers during
a specified period, a nondiscretionary,
objectively determinable method to al-
locate the payments that can be made in
accordance with the limitation among the
service providers participating in the plan
over which neither the service recipient
nor any service provider retains control or
discretion; and (3) the time and form of
payment of any amount that will be paid
after its original due date because of the
formula limitation.
For example, a plan may provide that
all payments to all participants under the
plan in a given year may not exceed $1 mil-
lion, provided that the plan must provide
an objective, nondiscretionary method of
currently allocating the $1 million of pay-
ments if the amounts otherwise payable
exceed $1 million (suchas proportionately
to each participant based on the amount
otherwise payable to such participant ab-
sent the limit), and specifies the time and
form of payment of any amount not paid
currently because of the limitation (such
as at the earliest time possible without ex-
ceeding the applicablelimitation for any
subsequent year). However, a change in
the limits or a change in the allocation
method may constitute a subsequent de-
ferral election or an acceleration of a pay-
ment.
Commentators also asked whether the
same analysis would apply where the limit
on a payment is calculated pursuant to a
formula related to business performance,
such as a specified percentage of cash flow
for the period. A payment schedule may
be conditioned on a formula limitation if
the formula limitation is specified at the
time the schedule of payments is otherwise
required to be set, the limitation is nondis-
cretionary and objectively determinable
based on the business performance of the
service recipient, and the service provider
retains no control over the determination
or application of the formula limitation.
For this purpose, a formula limitation
basedonprofitsorotherindiciaof gen-
eral business performance is not treated
as discretionary or in the control of the
service recipient. Thus, a plan providing
that the maximum payment during a year
will equal no more than a set percentage
of the service recipient’s cash flow for
the previous year generally would meet
the requirement of a fixed time and form
of payment. However, a change in the
formula limitation may constitute a subse-
quent deferral election or an acceleration
of a payment. For a discussion of sched-
ules of payments based upon the timing of
payments received by the service recipi-
ent, see section VII.B.6 of this preamble.
4.Tax gross-up payments
Commentators requested clarification
of how section 409A applies to a right
to a tax gross-up payment that provides
the service provider with the right to a
payment of taxes otherwise payable by the
service provider as well as any additional
taxes resulting from the service recipient’s
payment of the taxes. The final regula-
tions provide that a right to a tax gross-up
payment is a right to deferred compen-
sation that satisfies the requirement of a
fixed time and form of payment if the plan
provides that the tax gross up payment
will be made, and the payment is made, by
the end of the service provider’s taxable
year next following the service provider’s
taxable year in which the related taxes are
remitted to the taxing authority.
May 7, 200711482007–19 I.R.B.

In addition, the final regulations pro-
vide that a right to the reimbursement of
expenses incurred due to a tax audit or liti-
gation, whether Federal, state, local, or for-
eign, satisfies the requirement of a fixed
time and form of payment if the right to the
reimbursement provides that payment will
be made, and the payment is made, by the
later of the end of the service provider’s
taxable year next following the year in
which the taxes that are the subject of the
audit or litigation are remitted to the taxing
authority, or, if no taxes are to be remitted,
the end of the service provider’s taxable
year next following the year in which the
audit or litigation is completed. Nothing in
the provisions relating to tax gross-up pay-
ments modifies the application of section
409A to any underlying compensation ar-
rangement that results in the taxes that are
subject to the tax gross-up arrangement.
5.Payment schedules based on payments
to the service recipient
Commentators requested guidance on
payment schedules contingent on the re-
ceipt of certain payments by the service
recipient. For example, commentators
requested clarification whether a plan
requiring an annual payment equal to a
percentage of certain accounts receivable
collected during the prior 12-month pe-
riod would qualify as a fixed time and
form of payment. The ability to schedule
payments based upon the time the service
recipient receives a customer’s payment
raises issues regarding the ability to, in ef-
fect, create an impermissible event-based
payment through characterizing the pay-
ment as a schedule (for example, a pay-
ment “schedule” that pays an amount
every year if a specified transaction oc-
curs in that year actually pays based on
whether and when the transaction occurs,
which is not a permissible payment event
under section 409A). In addition, these
arrangements raise issues regarding the
ability of the service recipient (or service
provider) to control the timing of the pay-
ment of deferred compensation through
an ability to influence the timing of the
payment by the customer. Accordingly,
the final regulations generally provide
that a schedule based upon the timing of
payments to the service recipient is not
a fixed schedule of payments. However,
the final regulations also provide certain
parameters under which such a plan may
qualifyashavingafixedtimeandform
of payment. First, if the service recipient
is comprised of more than one entity, the
payments must be due from a person that
is not one of such entities (for example,
not a payment due from a subsidiary cor-
poration to a parent corporation). Second,
the payments must stem frombona fide
and routine transactions in the ordinary
course of business of the service recipient,
and the service provider must not at the
time such payments are due retain effec-
tive control over the service recipient, the
person from whom the payments to the
service recipient are due, or the collec-
tion of the payments. Third, the payment
schedule must provide for a nondiscre-
tionary, objective method of identifying
the customer payments to the service re-
cipient from which the amount of the
payment is determined, and a nondiscre-
tionary, objective schedule under which
payments of the nonqualified deferred
compensation will be made (for example,
a payment every March 1 of 10 percent of
the accounts receivable collected during
the previous calendar year). Finally, the
sales to which the payment relates must
be of a type that the service recipient is in
the trade or business of making and makes
frequently, and either all such sales must
be taken into account or there must be a
legitimate, nontax business purpose for
limiting the sales taken into account.
C.Separation from service
1.In general
The final regulations generally adopt
the provisions in the proposed regulations
defining the circumstances under which a
separation from service is deemed to oc-
cur, subject to the modifications described
in this preamble. Some commentators re-
quested that the parties to a nonqualified
deferred compensation plan be permitted
to define when a separation from service
occurs, at least if they apply the definition
consistently. The Treasury Department
and IRS believe that a definition of separa-
tion from service that is objectively deter-
minable, nondiscretionary and predictable,
and not subject to negotiations between
the parties is necessary to properly imple-
ment the legislative intent behind section
409A. The definitions of separation from
service suggested by the commentators do
not meet this standard. For example, a
plan that defines separation from service
as the date a service provider is removed
from a payroll would leave to the parties
the discretion to determine a payment date
by an action that may have little practical
significance, especially when compared to
the effect on the service provider’s de-
ferred compensation amounts. The Trea-
sury Department and the IRS continue to
believe that the definition of separation
from service should be based upon an ob-
jective determination of whether the ser-
vice provider continues to provide signifi-
cant services to the service recipient.
2.Employees
a.In general
The proposed regulations provided that
an employee separated from service with
the employer if the employee died, re-
tired, or otherwise had a termination of
employment with the employer. Whether
a termination of employment had occurred
would be determined based on the facts
and circumstances. The proposed regu-
lations provided that where the facts and
circumstances indicated that the employer
and the employee did not intend for the
employee to provide more than insignifi-
cant future services, the employee would
be treated as having a separation from
service. For this purpose, an employer
and employee would not be presumed to
have intended only insignificant services
be provided if the employee continued
providing services at a rate equal to at
least 20 percent of the rate of the previous
threeyears. Whereanemployeecontin-
ued providing services in another capacity
(for example, as an independent contrac-
tor), the employee would be deemed not
to have a separation from service if the
service provider continued providing ser-
vices at a rate equal to at least 50 percent
of the services provided during the pre-
vious three years. Different rules were
provided for service providers who were
not employees.
Commentators criticized this standard
in various respects. The proposed regula-
tions applied one presumption where an
employee continued providing services
as an independent contractor, and another
where an employee continued providing
2007–19 I.R.B.1149May 7, 2007

services as an employee. Commentators
asked why the same presumptions did
not apply regardless of whether the em-
ployee purports to continue service (or
separate from service) as an employee or
purports to continue service (or separate
from service) as an independent contrac-
tor. Commentators also suggested that the
presumptions should be based on the intent
of the employer and employee at the time
of the purported separation from service
(or purported continuation of services),
rather than the actual subsequent conduct.
Commentators also argued that the em-
ployer and employee could be found to
have violated section 409A based on sub-
sequent actual conduct, even where the
parties had abona fidebelief that a separa-
tion from service had or had not occurred,
but circumstances changed.
In response to these comments, the
final regulations provide a simplified stan-
dard, applicable whether an employee
continues to provide services as an em-
ployee or as an independent contractor.
The general standard for determining
whether the employee has terminated em-
ployment is based on whether the facts
and circumstances indicate that the ser-
vice recipient and employee reasonably
anticipated either that no further services
would be performed after a certain date
or that the level ofbona fideservices the
employee would perform after such date
(whether as an employee or as an inde-
pendent contractor) would permanently
decrease to no more than 20 percent of
the average level ofbona fideservices
performed over the immediately preced-
ing 36-month period (or the full period
in which the employee provided services
to the employer (whether as an employee
or as an independent contractor) if the
employee has been providing services for
less than 36 months). For this purpose,
periods during which the employee is on
an unpaidbona fideleave of absence are
disregarded (including for purposes of de-
termining the relevant 36-month period),
and periods during which the employee
is on a paidbona fideleave of absence
are treated as periods during which the
employee provided services at the level
at which the employee would have been
required to perform services to receive the
compensation if not on abona fideleave
of absence. Facts and circumstances to
be considered in determining whether the
employee and employer reasonably antic-
ipated that the service provider’s future
services would be permanently reduced to
less than 20 percent of the average level
ofbona fideservices provided during the
previous 36-month period include, but
are not limited to, whether the employee
continues to be treated as an employee
for other purposes (such as continuation
of salary and participation in employee
benefit programs), whether similarly sit-
uated service providers have been treated
consistently, and whether the employee
is eligible to perform services for, and
realistically available to perform services
for, other employers in the same line of
business.
To assist in applying this standard, cer-
tain rebuttable presumptions are provided.
An employee generally will be presumed
to have separated from service where
the level ofbona fideservices performed
(whether as an employee or an indepen-
dent contractor) changes to a level equal
to 20 percent or less of the average level
of services provided during the previous
36 months (whether as an employee or
an independent contractor). An employee
will be presumed not to have separated
from service where the level ofbona fide
services rendered continues at a level that
is 50 percent or more of the average level
of services provided during the previous
36months. Nopresumptionappliestoa
change to a level of services between 20
percent and 50 percent of the average level
of services provided during the previous
36 months. For purposes of the presump-
tion, the entire period during which the
employee has provided services to the
employer is substituted for 36 months if
the employee has been providing services
to the employer for less than 36 months,
and periods during which the employee is
on abona fideleave of absence are treated
in the same manner as such periods are
treated for the general rule.
The presumptions are rebuttable, by
demonstrating that the employer and the
employee reasonably anticipated that as
of a certain date the level ofbona fideser-
vices would be reduced permanently to a
level less than or equal to 20 percent of the
average level of services provided during
the immediately preceding 36-month pe-
riod or full period in which the employee
has provided services if the employee has
been providing services to the employer
for a period of less than 36 months (or that
the level ofbona fideservices would not
be so reduced). For example, an employee
may demonstrate that the service recipient
and employee anticipated that the em-
ployee would cease providing services,
but that (subsequent to the original cessa-
tion of services) business circumstances
such as termination of the employee’s re-
placement caused the employee to return
to employment. Although the employee’s
return to employment may cause the em-
ployee to be presumed to have continued
in employment because the rehired em-
ployee is providing services at a rate equal
to the rate at which he was providing
services before the termination of employ-
ment, the facts and circumstances in this
case would demonstrate that at the time
the employee terminated employment, the
employee and the service recipient reason-
ably anticipated that the employee would
not provide any services in the future.
Similarly, where the loss of a business
client of the employer results in a perma-
nent reduction in the level ofbona fide
services performed by the employee of
more than 80 percent, so that the employee
would be presumed to have separated from
service, the taxpayer may rebut the pre-
sumption that a separation from service oc-
curred by showing that the employer and
employee reasonably anticipated that the
level of services would not be so reduced.
The separation from service would then
be deemed to occur at the time that the
employer and employee reasonably antic-
ipated that such reduction would continue.
Commentators requested additional
flexibility to treat certain employees as
having experienced a separation from ser-
vice, even where the employee continues
to provide services in a reduced capacity.
This is often referred to as a phased re-
tirement, in which an employee obtains
retirement benefits despite continuing to
provide services on a part-time or reduced
basis. The Treasury Department and the
IRS believe that providing flexibility to
alter the definition of a separation from
service after an amount has been deferred
is inconsistent with the statute and leg-
islative intent, and could be subject to
manipulation.
However, the final regulations permit
certain flexibility for a plan to define a sep-
aration from service as including a change
to a reduced level ofbona fideservices, if
May 7, 200711502007–19 I.R.B.

the definition is specified no later than the
time and form of payment are elected or
otherwise specified. Specifically, the final
regulations provide that rather than treat-
ing a separation from service as requiring
an anticipated permanent reduction in the
level ofbona fideservices to 20 percent or
less of the average level ofbona fideser-
vices provided in the immediately preced-
ing 36 months, a plan may treat another
level of anticipated permanent reduction in
the level ofbona fideservices as a separa-
tion from service, provided that the level of
permanent reduction required must be set
forth in the plan as a specific percentage,
and the anticipated permanently reduced
level ofbona fideservices must be greater
than 20 percent but less than 50 percent
of the average level ofbona fideservices
provided in the immediately preceding 36
months. The plan must specify the defini-
tion of separation from service on or before
the date at which a separation from ser-
vice is designated as a time of payment of
an amount deferred, and once designated,
any change to the definition of separation
from service with respect to such amount
deferred will be subject to the rules regard-
ing subsequent deferrals and the accelera-
tion of payments.
For example, on or before the time at
which a plan must designate a time and
form of payment for a deferred amount,
the plan may specify that a separation
from service will be deemed to occur
at any time that the employee and em-
ployer reasonably anticipate that thebona
fidelevel of services the employee will
perform (whether as an employee or an
independent contractor) will be perma-
nently reduced to a level that is less than
50 percent of the average level ofbona
fideservices the employee performed dur-
ing the immediately preceding 36 months
(or the entire period the employee has pro-
vided services if the employee has been
providing services to the employer less
than 36 months).
b.Identification of the service recipient
Commentators requested that the def-
inition of the term service recipient be
expanded for purposes of determining
whether a separation from service has
occurred. The final regulations generally
adopt this suggestion, so that for pur-
poses of determining whether a service
provider has separated from service with
an employer or other service recipient, the
service recipient is defined as including all
entities that would be treated as part of the
group of entities comprising the service
recipient under section 414(b) and (c) and
the accompanying regulations, but sub-
stituting a 50 percent ownership level for
the 80 percent ownership level in section
414(b) and (c) and the accompanying reg-
ulations. A plan may specify that a higher
or lower percentage ownership level will
be used, provided that the ownership level
may not be higher than 80 percent or lower
than 20 percent, and provided further that
an ownership level of less than 50 per-
cent may be used only where such use
is based on legitimate business criteria.
As discussed, the plan must specify the
percentage on or before the date at which
a separation from service is designated as
a time of payment of the amount deferred,
and where a plan changes the definition
of separation from service with respect
to amounts previously deferred, such a
change will be subject to the rules gov-
erning changes to the time and form of
payment, including the anti-acceleration
provisions.
Commentators also requested special
treatment with respect to the identifica-
tion of the service recipient in instances
where an amount is deferred pursuant to a
bona fidecollective bargaining agreement
covering service with multiple employ-
ers, and the employee may be expected
to perform services covered by thebona
fidecollective bargaining agreement for
a number of different employers. Specif-
ically, commentators expressed concern
that an employee not be treated as having
separated from service when a particu-
lar period of service with an employer
is completed, if the employee has made
herself available to perform services cov-
ered by thebona fidecollective bargaining
agreement for another employer. The
final regulations generally provide that
where the amount is deferred pursuant to a
plan provided under abona fidecollective
bargaining agreement covering services
with multiple employers, and where ser-
vice providers may reasonably anticipate
providing services for more than one of
the participating employers, the plan may
define a separation from service in a man-
ner that treats the service provider as not
having separated from service when the
service provider stopsperforming services
for one employer covered by the agree-
ment and provides services for another
employer covered by the agreement. The
final regulations also provide that the plan
may not treat a service provider as hav-
ing separated from service during periods
where the service provider is not provid-
ing services but has made herself available
to perform services for a participating
employer, provided that the definition re-
quires that the service provider be deemed
to have separated from service no later
than the end of any 12-month period in
which the service provider has not pro-
vided services covered by thebona fide
collective bargaining agreement to any
employer.
c.Bona fide leave
Many of the comments with respect to
the definition of separation from service
for an employee concerned the treatment
ofbona fideleaves of absence. For pur-
poses of determining whether a service
provider has separated from service (and
not for purposes of determining whether a
vacation or sick leave plan is abona fide
vacation or sick leave plan), abona fide
leave of absence refers to a leave of ab-
sence where there is a reasonable expecta-
tion the service provider will return to ser-
vice with the service recipient. The final
regulations provide that an employment
relationship is treated as continuing while
the individual is on sick leave, or other
bona fideleave of absence, if the period of
such leave does not exceed six months, or
if longer, so long as the individual retains
a right to reemployment with the service
recipient under an applicable statute or by
contract. For example, where a tenured
professor takes a leave of absence, but the
professor retains a right to reemployment
with the university as part of the profes-
sor’s tenured status, the professor will not
be deemed to have terminated from em-
ployment merely due to the leave of ab-
sence from the university. If the period of
leave exceeds six months and the individ-
ual does not retain a right to reemployment
under an applicable statute or by contract,
the employment relationship is deemed to
terminate on the first date immediately fol-
lowing such six-month period. However,
the final regulations modify the provisions
in the proposed regulations with respect to
2007–19 I.R.B.1151May 7, 2007

disability leave. With respect to disability
leave, the employment relationship will be
treated as continuing for a period of up to
29 months, unless otherwise terminated by
the employer or the employee, regardless
of whether the employee retains a contrac-
tual right to reemployment. For this pur-
pose, disability leave refers to leave due to
the employee’s inability to perform the du-
ties of his or her position of employment
or any substantially similar position of em-
ployment by reason of any medically de-
terminable physical or mental impairment
that can be expected to result in death or
can be expected to last for a continuous pe-
riod of not less than six months.
d.Salary continuation programs and
terminal leave
Commentators requested that salary
continuation programs be permitted to
delay the occurrence of a separation from
service, where an employee continues to
receive salary and benefits and is other-
wise treated as an employee, although
not required to perform any further mean-
ingful services. Some commentators
also requested this treatment for terminal
leave, or leave intended to bridge a service
provider to a separation from service date
that would permit continuation of benefits
or accrual of additional benefits under,
for example, a qualified plan. The Trea-
sury Department and the IRS believe that
these types of actions are subject to ma-
nipulation and should not delay the time
when a service provider is treated as hav-
ing separated from service for purposes
of section 409A. Accordingly, the final
regulations do not recognize extensions
of leave or salary and benefits as a means
of delaying the date of separation from
service for purposes of section 409A. In
addition, terminal leave with no intent to
return generally would not be treated as
bona fideleave for purposes of the rule for
employees addressingbona fideleave.
Commentators expressed concern that
the service recipient may wish to con-
tinue providing certain employee benefits,
including in-kind benefits and reimburse-
ment plans, during a salary continuation or
terminal leave period. With respect to the
application of section 409A, such plans
generallymaybestructuredtoavoidpro-
viding for the deferral of compensation, or
to provide deferred compensation in com-
pliance with the requirements of section
409A. See sections III.J.6 and VII.B.2 of
this preamble. The definition of separation
from service for purposes of section 409A
is not applicable for purposes of other
Code provisions, such as those provisions
governing qualified retirement plans or
non-taxable benefits.
e.Rehires and suspensions of benefits
Commentators also requested that the
regulations address rehires, and specifi-
cally whether payments of deferred com-
pensation could be suspended during a
subsequent period of employment or other
service until a subsequent separation from
service. Such a suspension generally
would violate the rules governing changes
in the time and form of payment because
payments would be delayed in a manner
that does not satisfy the rules applicable
to subsequent deferral elections. Neither
the statutory language of section 409A
nor the legislative history indicates any
intent to permit such additional flexibility.
Moreover, the Treasury Department and
the IRS believe that suspension of benefits
rules would add significant complexity
to the administration of the Code section.
However, many of the desired results of
a suspension of benefits provision often
may be obtained through deferrals of fu-
ture compensation after rehire.
f.Mergers and acquisitions
Comments with respect to the applica-
tion of the separation from service stan-
dard in the case of a merger or acquisi-
tion generally focused on two areas. First,
commentators requested that the final reg-
ulations adopt permissive use of the rule
generally referred to as the “same desk”
rule, allowing the parties to an asset pur-
chase agreement to decide whether em-
ployees of the selling corporation that con-
tinue in the same position with the pur-
chaser of the assets will be treated as sep-
arating from service. The final regula-
tions adopt a rule providing that where as
part of a sale of assets by one service re-
cipient (seller) to an unrelated service re-
cipient (buyer), a service provider of the
seller would otherwise experience a sep-
aration from service with the seller, the
seller and the buyer may specify whether
a service provider providing services to
the seller immediately before the asset pur-
chase transaction and providing services
to the buyer after and in connection with
the asset purchase transaction has experi-
enced a separation from service, provided
that the asset purchase transaction results
frombona fide, arm’s length negotiations,
all service providers providing services to
the seller immediately before the asset pur-
chase transaction and providing services
to the buyer after and in connection with
the asset purchase transaction are treated
consistently (regardless of position at the
seller) for purposes of applying the pro-
visions of any nonqualified deferred com-
pensation plan, and such treatment is spec-
ified no later than the closing date of the as-
set purchase transaction. For this purpose,
a sale of assets refers to a transfer of sub-
stantial assets, such as a plant or division
or substantially all of the assets of a trade
or business.
Second, commentators requested clari-
fication whether a spin-off of a subsidiary
could result in a separation from service of
an employee of the subsidiary, where the
nonqualified deferred compensation plan
defines a separation from service as in-
cluding any action resulting in the em-
ployee no longer being an employee of the
controlled group of corporations including
the parent corporation. Generally such a
transaction would not result in a termina-
tion of employment for an employee of
the subsidiary, because the employee is
continuing employment with the same em-
ployer both before and after the transac-
tion. However, the rules that provide a ser-
vice recipient discretion to terminate and
liquidate a plan following a change in con-
trol transaction afford taxpayers the flexi-
bility to pay out their deferred compensa-
tion liabilities in particular circumstances.
See section VIII.B of this preamble.
3.Directors
The final regulations provide generally
that where a service provider provides ser-
vices to a service recipient both as an em-
ployee and as an independent contractor,
the service provider must separate from
service both as an employee and as an in-
dependent contractor to be treated as hav-
ing separated from service. But where a
service provider provides services both as
an employee and a member of the board
of directors of a corporate service recip-
ient, the services provided as a director
May 7, 200711522007–19 I.R.B.

are not taken into account for purposes of
determining whether the service provider
has a separation from service as an em-
ployee for purposes of a nonqualified de-
ferred compensation plan in which the ser-
vice provider participates in his or her ca-
pacity as an employee that is not aggre-
gated with any plan in which the service
provider participates as a director. Accord-
ingly, where an employee-director partic-
ipates in a separate plan as an employee,
his or her termination of services as an
employee will constitute a separation from
service for purposes of the employee plan,
regardless of whether he or she continues
providing services as a director (andvice
versa). However, if a non-employee direc-
tor is also providing additional services as
an independent contractor, he or she can-
not have a separation from service for pur-
poses of section 409A until he or she has
separated from service both as a director
and as an independent contractor.
4.Delay for specified employees
Section 409A(a)(2)(B) provides that
with respect to a specified employee, a
payment of nonqualified deferred com-
pensation on account of separation from
service may not occur before the date that
is six months after the date of separa-
tion from service (or, if earlier, the date of
death of the employee). For this purpose, a
specified employee is a key employee of a
corporation any stock of which is publicly
traded on an established securities market
or otherwise. With respect to identifying
specified employees, the final regulations
generally adopt the provisions set forth in
the proposed regulations, subject to the
modifications and clarifications described
in this preamble.
a.Identification of specified employees
Several commentators asked whether
an employee may be subject to the
six-month delay requirement if the service
recipient stock is publicly traded only on
a foreign exchange or is traded on a U.S.
exchange only as American depositary
receipts or American depositary shares
(ADRs). The final regulations define an
established securities market for purposes
of the six-month delay rule by reference to
the rules in §1.897–1(m), which generally
include foreign securities markets. Ac-
cordingly, the six-month delay may apply
to an employee of a service recipient the
stock of which is publicly traded solely on
a foreign exchange, or is traded on a U.S.
exchange only as ADRs. In the case of
a service recipient comprised of multiple
entities, this rule would apply if one of the
entities had stock that was publicly traded
on a foreign exchange.
Some commentators requested that the
final regulations provide that specified em-
ployees are limited to common law em-
ployees, and do not include other individu-
als. Section 409A(a)(2)(B) defines a spec-
ified employee as a key employee as de-
finedinsection416(i) (without regard to
section 416(i)(5)). Accordingly, where an
individual is treated as a key employee for
purposes of section 416(i), that individual
generally is a specified employee for pur-
poses of section 409A.
Commentators requested clarification
of how the definition of compensation
under section 415 applies for purposes
of identifying the key employees that
may ultimately be specified employees.
The final regulations clarify that the gen-
eral definition of compensation under
§1.415(c)–2(a), applied as if the service re-
cipient were not using any safe harbor pro-
vided in §1.415(c)–2(d), any of the special
timing rules provided in §1.415(c)–2(e),
or any of the special rules provided in
§1.415(c)–2(g), will be treated as the
general definition of compensation for
purposes of identifying specified employ-
ees. However, the final regulations also
provide that a service recipient may use
any available definition of compensation
under section 415 and the accompanying
regulations, including any available safe
harbor and any available election under
the timing rules or special rules, provided
that the definition is applied consistently
to all employees of the service recipient
for purposes of identifying specified em-
ployees. A service recipient may elect
to use such a definition of compensation
regardless of whether another definition
of compensation is being used for pur-
poses of a qualified plan sponsored by the
service recipient. However, once a list of
specified employees has become effec-
tive, the service recipient cannot change
the definition of compensation for pur-
poses of identifying specified employees
for the period with respect to which such
list is effective. For a discussion of the
methods for making an election regarding
the definition of compensation, see section
VII.C.4.e of this preamble.
Commentators requested clarification
of the treatment of the compensation of
certain nonresident alien employees. As
discussed in the preceding paragraph, for
purposes of identifying key employees,
the general definition of compensation
under §1.415(c)–2(a) applies. A service
recipient may elect to apply the rule of
§1.415–2(g)(5)(ii) and not treat as com-
pensation certain compensation excludible
from an employee’s gross income on ac-
count of the location of the services or
the identity of the employer that is not
effectively connected with the conduct
of a trade or business within the United
States. If no such election is made, the
provisions of §1.415(c)–2(g)(5)(i) would
apply, requiring the treatment as compen-
sation of certain compensation excludible
from an employee’s gross income due to
the location of the services or the identity
of the service recipient.
b.Alternative methods for applying the
six-month delay requirement
Commentators expressed concern that
an attempt to identify key employees could
result in an underinclusive list. Rather
than risk a violation, commentators sug-
gested that service recipients be permitted
to use an alternative method for determin-
ing employees subject to the six-month de-
lay requirement, even where such alterna-
tivemethodmayresultinanover-inclu-
sive list. A nonqualified deferred com-
pensation plan may provide that all pay-
ments upon separation from service will
commence six months after the separation
from service, regardless of whether the ser-
vice provider is a specified employee. In
addition, the final regulations provide that
aplanmayuseanalternativemethodiden-
tifying the service providers whose distri-
butions will be subject to a six-month de-
lay, provided that thealternative method is
reasonably designed to include all speci-
fied employees, the alternative method is
an objectively determinable standard pro-
viding no direct or indirect election to any
service provider regarding the application
of the rule, and the alternative method re-
sults in no more than 200 service providers
being identified in the class as of any date.
Use of such an alternative method to de-
lay a payment in accordance with the rules
2007–19 I.R.B.1153May 7, 2007

governing the delay of payments to a spec-
ified employee will not be treated as a
change in the time and form of payment for
purposes of the subsequent deferral rules
even if the service provider is not a spec-
ified employee when the payment is de-
layed. However, if the list fails to in-
clude any individual who is a specified em-
ployee and that individual has a right to
a payment of deferred compensation upon
a separation from service without the re-
quired six-month delay, the plan providing
such right to such individual will not be in
compliance with section 409A. For a dis-
cussion of the method of initiating an al-
ternative method designation, see section
VII.C.4.e of this preamble.
c.Specified employee effective date issues
Under the proposed regulations, the
employees identified as of an identifica-
tion date would become specified em-
ployees effective as of the first day of the
fourth month following the identification
date. Commentators stated that service
recipients who could compile the list of
specified employeesmore quickly should
be permitted to make the list effective
at an earlier date. The final regulations
provide that the first day of the fourth
month will be the specified employee ef-
fective date if the service recipient does
not specify another date. However, the
final regulations permit a service recipient
to specify a specified employee effective
date following the specified employee
identification date upon which the new
list of specified employees will become
effective, provided that the specified em-
ployee effective date may not be later
than the first day of the fourth month
following the specified employee identi-
fication date. For example, an employer
that designates December 31 as a specified
employee identification date for purposes
of identifying key employees for purposes
of the six-month delay rule, may spec-
ify any subsequent date on or before the
following April 1 as the first date of the
12-month period during which such list of
key employees will be treated as specified
employees. To prevent manipulation, any
change to the specified employee effec-
tive date may not become applicable until
12 months following the change in such
specified employee effective date.
The final regulations also clarify that
the six-month delay requirement applies
only where the service provider is a speci-
fied employee as of the date of separation
from service, and does not become appli-
cable if the service provider is not a speci-
fied employee as of the date of separation
from service even if the service provider
subsequently would have become a speci-
fied employee if the separation had not oc-
curred.
d.Corporate transactions
In response to comments, the final reg-
ulations significantly alter the proposed
rules governing the identification of spec-
ified employees following a corporate
transaction, such as a merger or spin-off.
Commentators requested clarification of
the determination of the next applicable
specified employee identification date
following the corporate transaction. In ad-
dition, commentators generally objected
to any rule that resulted in the treatment of
more than 50 employees as specified em-
ployees due to a corporate transaction (in
addition to 1-percent and 5-percent own-
ers treated as specified employees). The
final regulations generally permit service
recipients to avoid this result, but also per-
mit service recipients to simply combine
the pre-transaction separate lists of speci-
fied employees where it is determined that
such treatment would be administratively
less burdensome. Service recipients can
determine whether to combine such lists
on a case-by-case basis, if there are multi-
ple transactions during the same year.
With respect to mergers and acquisi-
tions, the final regulations address com-
binations of two public corporations, and
combinations of a public and a closely-
held corporation. For purposes of the dis-
cussion of the rules regarding the treatment
of the identification of specified employ-
ees following such a transaction, refer-
ences to specified employees include spec-
ified employees determined under any per-
missible method that the entities partici-
pating in the transaction used immediately
before the transaction. Where two pub-
lic corporations merge and become one
public corporation, or a public corporation
becomes a subsidiary of another public
corporation, the final regulations provide
that the resulting service recipient’s next
specified employee identification date and
the first specified employee effective date
following the transaction is the specified
employee identification date and specified
employee effective date that the acquiring
service recipient would have been required
to use absent the merger. For the period
after the date of the transaction and before
the next specified employee effective date,
the specified employee list of the resulting
service recipient consists of the 50 most
highly compensated service providers ap-
pearing on the combined lists of the two
service recipients’ specified employees in
effect as of the date of the transaction,
ranking such specified employees in order
of the amount of compensation used to de-
termine each specified employees’ status
as a specified employee, plus any 1-per-
cent and 5-percent owners not otherwise
included who would be treated as speci-
fied employees. Alternatively, however,
the resulting service recipient may use any
other reasonable method to determine its
specified employees immediately after the
transaction, provided that such method is
adopted not later than 90 days after the
merger and applied prospectively from the
date of adoption. For a discussion of the
procedures for adopting such a method, see
section VII.C.4.e of this preamble.
Where a public corporation and a pri-
vate corporation merge and become a pub-
lic corporation, or where a private cor-
poration becomes a subsidiary of a pub-
lic corporation, the resulting service re-
cipient’s next specified employee identi-
fication date and specified employee ef-
fective date following the transaction will
be the specified employee identification
date and specified employee effective date
that the pre-transaction public corporation
would have been required to use absent
such transaction. For the time period after
the transaction and before the next spec-
ified employee effective date, the speci-
fied employees of the pre-transaction pub-
lic service recipient immediately before
the transaction will continue to be the spec-
ified employees of the resulting service re-
cipient, and service providers of the pre-
merger private service recipient will not
become specified employees until the next
specified employee effective date. Con-
sequently, the nonqualified deferred com-
pensation plans in which service providers
of the formerly private service recipient
participate will not be required to contain a
plan term delaying a payment upon separa-
May 7, 200711542007–19 I.R.B.

tion from service of such service providers,
or to delay such a payment, until the next
specified employee effective date.
The final regulations also address spin-
off transactions. Where as part of a corpo-
rate transaction, a public service recipient
becomes two separate public service re-
cipients, the final regulations provide that
the next specified employee identification
date and specified employee effective date
of each of the post-transaction service re-
cipients is the specified employee identifi-
cation date and specified employee effec-
tive date that the pre-transaction service re-
cipient would have been required to use
absent such transaction. For the period af-
ter the date of the transaction and before
the next specified employee effective date,
the specified employees of the pre-transac-
tion service recipient immediately before
the transaction continue to be the specified
employees of the post-transaction service
recipients.
The final regulations provide guid-
ance on initial public offerings and other
corporate transactions where all or part
of a private service recipient becomes
oneormorepublicservice recipients.
In that case, except as discussed in this
paragraph, each post-transaction public
service recipient will have a December
31 specified employeeidentification date
and an April 1 specified employee date.
Alternatively, the new public service re-
cipient may establish a different specified
employee identification date and specified
employee effective date, provided that the
specified employee identification date and
specified employee effective date must be
established on or before the date of the
initial public offering or other corporate
transaction.
For the period between the date of the
initial public offering or other corporate
transaction and the first specified em-
ployee effective date,the list of specified
employees of each post-transaction pub-
lic service recipient is comprised of the
service providers that at the time of the
corporate transaction or public offering
would have been classified as specified
employees of the former private service re-
cipient, had such service recipient adopted
the same specified employee identification
date and specified employee effective date
as selected by such post-transaction public
service recipient, and had such former pri-
vate service recipient been a public service
recipient as of such specified employee
identification date.
e.Alternatives for the identification of
specified employees
As discussed in this preamble, the fi-
nal regulations provide certain default def-
initions for purposes of identifying spec-
ified employees, where the service recip-
ient has not adopted another definition.
These default rules include the following
provisions: the specified employee iden-
tification date is December 31; the spec-
ified employee effective date is April 1;
the general definition of compensation un-
der §1.415(c)–2(a) will apply (without giv-
ing effect to any use of the special tim-
ing rules under §1.415(c)–2(e) or of a safe
harbor definition of compensation under
§1.415(c)–2(d)); and certain rules regard-
ing the identification of specified employ-
ees after a merger of public service recip-
ients or an initial public offering or other
transaction involving a formerly nonpub-
lic service recipient becoming a public ser-
vice recipient will apply.
Alternatively, the final regulations also
provide that the service recipient may use
other permissible rules and definitions,
provided that such alternatives become
effective only in accordance with the
rules and deadlines set forth in the final
regulations. In addition, the final regu-
lations permit a service recipient to use
an alternative method for purposes of
identifying specified employees, with cer-
tain limitations, and to make an election
under §1.415(c)–2(g)(5)(i) regarding the
treatment as compensation of certain com-
pensation excludible from an employee’s
gross income due to the location of the ser-
vices or the identity of the employer. For
purposes of these rules, a service recipient
may use one of these alternatives when
all necessary corporate action has been
taken to make such alternative binding for
purposes of all affected deferred compen-
sation plans in which service providers
of the service recipient participate. Ac-
cordingly, as a practical matter, the service
recipient may find it expedient either to
specify the definition of specified em-
ployee in all of its nonqualified deferred
compensation plans or to retain the dis-
cretion in all such plans to make such
determinations and take any necessary
corporate action in accordance with each
such plan.
f.Application of the six-month delay rule
The final regulations reflect the statu-
tory language that a plan may provide
that a payment will be made, notwith-
standing the six-month delay, upon the
service provider’s death. A commentator
requested similar treatment for the occur-
rence of a disability, unforeseeable emer-
gency, or change in control event during
the six months following the separation
from service. The Treasury Department
and the IRS do not believe that the statute
permits such flexibility, but rather cate-
gorically prohibits any distribution due
to a separation from service during the
six months following the separation from
service except where the service provider
dies. Accordingly, where a payment on
account of a separation from service has
been delayed because the service provider
is a specified employee, the payment
may not be accelerated due to disability,
a change in control event, or an unfore-
seeable emergency. However, where a
payment is made to a specified employee
on account of disability, a change in con-
trol event, or an unforeseeable emergency
(as defined for purposes of section 409A),
the payment need not be delayed merely
because the specified employee separates
from service after incurring the disability
or unforeseeable emergency, or after the
change in control event.
Commentators further requested that
various types of periodic benefit pay-
ments be excluded from the six-month
delay requirement, even if such payments
constitute a payment of deferred com-
pensation. Commentators argued that
the requirement to delay such payments
would be excessively burdensome and im-
practicable, given the nature and amount
of benefits generally available under such
arrangements. The Treasury Department
and the IRS are not convinced that pe-
riodic payment or reimbursement plans
should be excluded from the six-month
delay rule; otherwise, deferred compen-
sation could simply be converted to such
programs to avoid the delay. However, as
clarified in the final regulations, certain
plans that provide for reimbursements or
in-kind benefits during the six months fol-
lowing a separation from service will not
2007–19 I.R.B.1155May 7, 2007

be treated as nonqualified deferred com-
pensation plans under the rules governing
separation pay plans. See section III.J.6 of
this preamble.
The final regulations also provide that
the required delay of a payment to a speci-
fied employee upon a separation of service
is not violated where the payment is made
before the end of the six-month period due
to an acceleration of a payment in compli-
ance with the provisions of the regulations
permitting accelerateddistributions due to
a domestic relations order, to satisfy a Fed-
eral, state, local, or foreign ethics law, or to
pay certain employment taxes (see section
VIII of this preamble).
5.Different times and forms of payment
on separation from service under specified
circumstances
The final regulations continue to pro-
vide that a time and form of payment must
be specified with respect to each permis-
sible payment event. Under the proposed
regulations, a second time and form of pay-
ment could be established for a payment
due to a permissible payment event where
the distinction was based upon the event
occurring before or after a certain date,
such as the service provider reaching a cer-
tain age. Commentators requested that dif-
ferent times and forms of payment be per-
mitted if based upon different types of sep-
arations from service. The final regula-
tions generally provide that the time and
form of payment upon a separation from
service may vary depending upon either or
both of the following: (1) whether the sep-
aration from service occurs during a lim-
ited period of time not to exceed two years
following a change in control event as de-
fined for purposes of section 409A; or (2)
whether the separation from service occurs
before or after a specified date (for exam-
ple, the attainment of a specified age), or
before or after a combination of a specified
date and a specified period of service de-
termined under a predetermined objective
formula or pursuant to the method for cred-
iting service under a qualified plan spon-
sored by the service recipient. The addi-
tion or deletion of such a different time and
form of payment applicable to an existing
deferral is subject to the subsequent defer-
ral election rules and the anti-acceleration
rules.
D.Disability
The final regulations generally adopt
the definition of disability and other provi-
sions related to the payment of an amount
upon a service provider becoming disabled
contained in the proposed regulations, sub-
ject to the modifications described in this
preamble. For this purpose, a participant
is disabled if the participant is unable to
engage in any substantial gainful activity
by reason of any medically determinable
physical or mental impairment that can be
expected to result in death or can be ex-
pected to last for a continuous period of
not less than 12 months, or is, by rea-
son of any medically determinable physi-
cal or mental impairment that can be ex-
pected to result in death or can be ex-
pected 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 par-
ticipant’s employer. The determination of
whether a service provider is disabled may
be made by any person, including the ad-
ministrator of a disability insurance pro-
gram, and the plan need not specify who
will make the determination. However, the
plan will be treated as complying with sec-
tion 409A only if the disability required for
a payment complies with the definition of
disability under the regulations, and a pay-
ment due to a disability will be deemed to
comply with section 409A only if the ser-
vice provider has actually suffered a quali-
fying disability. The final regulations also
provide that a plan may provide that a
service provider will be deemed disabled
if the service provider is determined to
be totally disabled by the Social Security
Administration or the Railroad Retirement
Board.
Commentators raised questions con-
cerning the ability to pay upon the occur-
rence of a disability that does not qualify
as a disability under the statute, where
as a result of the disability the service
provider has a separation from service.
Such a payment would not constitute a
payment due to a disability that complied
with section 409A. However, if the plan
provided for a payment due to the sep-
aration from service, a payment would
constitute a payment due to a separation
from service regardless of whether the
separation from service resulted from such
a disability and regardless of whether the
service provider’s right to receive such
payment was conditioned upon the ser-
vice provider being disabled under such
disability definition.
E.Death
Most of the comments with respect to
amounts that are payable due to the death
of a service provider related to whether a
beneficiary of the service provider could
be given the opportunity to elect a time
and form of payment under a plan without
violating section 409A. The final regula-
tions clarify that elections with respect to
the time and form of payment to a benefi-
ciary are subject to the general rules gov-
erning subsequent deferrals and acceler-
ated payments, including elections by ei-
ther the service provider or the beneficiary
(with an exception for amounts payable
under a domestic relations order). How-
ever, a change in a beneficiary will not be
treated as a change in the time and form of
payment, if the change in the time of pay-
ment stems solely from the different life
expectancy of the new beneficiary, such as
in the case of a joint and survivor annuity.
Commentators requested that beneficiaries
be permitted a limited period of time in
which to change the time and form of pay-
ment without being subject to the subse-
quent deferral and anti-acceleration provi-
sions. The Treasury Department and the
IRS do not believe that the statutory lan-
guage supports this type of late deferral
election or payment acceleration. Accord-
ingly, these suggestions are not adopted in
the final regulations.
F.Change in ownership or effective
controlofacorporation
The final regulations generally adopt
the provisions contained in the proposed
regulations with respect to the definition of
a change in control event, as well as cer-
tain special rules with respect to payments
upon a change in control event, subject to
the modifications described in this pream-
ble.
One commentator requested that the
threshold for a change in the effective
control of a corporation be lowered from
35 percent to 20 percent, especially for
a public corporation. The legislative his-
tory of section 409A indicates that the
definition of a change in control event
May 7, 200711562007–19 I.R.B.

is to be based upon, but more restrictive
than, the definition provided in section
280G. H.R. Conf. Rep. No. 108–755,
at 730 (2004). Given that §1.280G–1,
Q&A–28(a)(1) provides for a 20 percent
standard, the adoption of that standard is
not appropriate in light of the legislative
history. However, the final regulations
lowerthethresholdto30percent.
One commentator requested guidance
with respect to the application of the
change in control provisions to non-stock,
non-profit corporations. The Treasury
Department and the IRS are considering
whether such guidance is appropriate,
and if so what types of changes could be
treated as analogous to a change in control
event involving a stock corporation. Until
further guidance, a non-stock, non-profit
corporation may apply the change in effec-
tive control provisions in §1.409A–3(i)(5)
(relating to a change in the composition
of the board of directors) by analogy to
changes in the composition of its board
of directors, trustees, or other governing
body.
The final regulations continue to pro-
vide that in the case of a payment on ac-
count of certain change in control events
(a change in ownership of a corporation or
a change in the ownership of a substantial
portion of a corporation’s assets), com-
pensation payable pursuant to the service
recipient’s purchase of service recipient
stock or a service recipient stock right
held by a service provider, or payment of
amounts of deferred compensation calcu-
lated by reference to the value of service
recipient stock, generally may be treated
as complying with the requirements of
section 409A if paid under the terms and
conditions that govern the payments to
shareholders or the service recipient in
connection with the change in control
event. The final regulations continue to
require that such amounts be paid no later
than five years after the change in control
event. However, the final regulations also
provide that where such compensation is
made subject to a condition on payment
that constitutes a substantial risk of forfei-
ture under section 409A (without regard
to the prohibition on additions or exten-
sions of forfeiture conditions), and such
compensation is payable under the same
terms and conditions as apply to payments
made to shareholders generally with re-
spect to stock of the service recipient, or to
the service recipient itself, pursuant to the
change in control event, for purposes of
determining whether such compensation
is a short-term deferral the requirements
of the short-term deferral rule are applied
as if the legally binding right to such com-
pensation arose on the date that it became
subject to the substantial risk of forfeiture.
The regulations also provide rules under
which certain pre-existing forfeiture con-
ditions may be extended or modified in
connection with such a change in control
event.
G.Unforeseeable emergency
The final regulations apply the provi-
sions set forth in section 409A(a)(2)(B)(ii)
regarding payments upon an unforeseeable
emergency. The final regulations provide
that a distribution on account of unforesee-
able emergency may not be made to the ex-
tent that such emergency is or may be re-
lieved through reimbursement or compen-
sation from insurance or otherwise, by liq-
uidation of the service provider’s assets,
to the extent the liquidation of such assets
would not cause severe financial hardship,
or by cessation of deferrals under the plan.
The final regulations clarify that for these
purposes, the availability of payments un-
der any qualified plan (including any as-
sets available by obtaining a loan under a
qualified plan), or under any other non-
qualified deferred compensation plan due
to the unforeseeable emergency, including
plans that would be nonqualified deferred
compensation plans for purposes of sec-
tion 409A except due to the effective date
of the statute, need not be considered in de-
termining whether an emergency is or may
be relieved through other means. Accord-
ingly, a payment due to an unforeseeable
emergency may be made pursuant to a non-
qualifieddeferredcompensationplanthat
is subject to section 409A even though the
financial need could be satisfied through
an available distribution or loan from a
qualified plan, or from another nonquali-
fied deferred compensation plan (includ-
ing a grandfathered plan) due to the un-
foreseeable emergency.
Section 826 of the Pension Protection
Act of 2006, Public Law 109–280 (120
Stat. 780) modified the rules governing
payments upon an unforeseeable emer-
gency. Specifically, section 826 requires
that the Treasury Department and the IRS
modify the rules for determining whether
a service provider has had an unforesee-
able emergency for purposes of section
409A(a)(2)(B)(ii) to provide that if an
event would constitute a hardship under
the plan if it occurred with respect to the
service provider’s spouse or dependent,
such event will, to the extent permitted
under a plan, constitute a hardship if it
occurs with respect to a person who is a
beneficiary under the plan with respect to
the service provider. The final regulations
reflect this modification.
H.Multiple payment events
The final regulations provide that a plan
may provide for a payment based upon
the earlier of, or the later of, a series of
events, provided that each payment event
would otherwise satisfy the requirements
of section 409A. The final regulations also
provide that for purposes of the subse-
quent deferral and acceleration rules, each
payment event will be viewed separately
for purposes of analyzing the effect of a
change in the time and form of payment.
For a discussion of the effect of the addi-
tion or deletion of a permissible payment
event from such a list, see section IX.C of
this preamble.
I.Delay in payment by the service
recipient
Commentators requested that a service
recipient be permitted to delay a payment,
where the delay is due tobona fidebusi-
ness concerns such as cash flow consider-
ations. Where a payment is delayed due
to the operation of a pre-specified objec-
tive, nondiscretionary formula related to
the business performance of the service re-
cipient, the payment generally may be de-
layed (for example, where payments in any
given year are limited to a certain percent-
age of cash flow) provided that the time
for later payment is governed by the objec-
tive, nondiscretionary formula. See sec-
tion VII.B.3 of this preamble. In addi-
tion, the final regulations provide that if
at the time of a specified payment date
the making of the payment would jeopar-
dize the ability of the service recipient to
continue as a going concern, the payment
will be treated as made upon the speci-
fied payment date if the payment is made
during the first taxable year of the service
2007–19 I.R.B.1157May 7, 2007

provider in which the making of the pay-
ment would not have such effect. This pro-
vision is not required to be explicitly pro-
vided in the plan.
Because this provision permits the ser-
vice recipient to delay any payment the
making of which would jeopardize the
ability of the service recipient to continue
as a going concern, the provision in the
proposed regulations permitting a delay in
payment required to avoid a violation of a
loan covenant or similar contractual obli-
gation, where such violation would cause
material harm to the service recipient, has
not been adopted in the final regulations.
Rather, where the payment would result in
a violation of a loan covenant or similar
contractual obligation, and the violation
would jeopardize the ability of the service
recipient to continue as a going concern,
the payment can be delayed under the
general provision.
The final regulations adopt the pro-
vision of the proposed regulations that
permits a delay in payment necessary to
avoid the application of the deduction
limitation under section 162(m), subject
to the following modifications. First, a
plan is not required to provide explicitly
for such a delay. However, the final reg-
ulations require that where any payment
in a service recipient’s taxable year is de-
layed in accordance with this provision,
then all payments that could be delayed
in accordance with this provision must be
delayed (though some payments may be
delayed until after separation from service
and others until the earliest taxable year in
which the deduction limitation no longer
applies). Second, except as provided in the
next sentence, the regulations provide that
the payment must be made either during
the service provider’s first taxable year
in which the service recipient reasonably
anticipates, or reasonably should antici-
pate, that if the service recipient makes
such payment during such year such pay-
ment will not fail to be deductible because
of section 162(m) or, if later, during the
period beginning on the day the service
provider separates from service and end-
ingonthelaterofthelastdayoftheservice
provider’s taxable year in which the sepa-
ration from service occurs or the 15
th
day
of the third month following the separation
from service. Finally, the final regulations
provide that where the payment has been
delayed until the service provider’s sepa-
ration from service, the six-month delay
requirement for specified employees may
apply. Although commentators argued
that the six-month delay rule should not
apply because the original payment would
not have been subject to the rule, this same
argument could be made with respect to
any deferral election to have current com-
pensation paid instead at a separation from
service, and accordingly is not adopted in
the final regulations.
J.Disputed payments and refusals to pay
The final regulations adopt the provi-
sions in the proposed regulations with re-
spect to disputed payments and refusals to
pay, subject to certain modifications. If a
payment is not made due to a service recip-
ient’s refusal to pay an amount, the amount
generally will be treated as paid in a timely
manner if the service provider makes rea-
sonable, good faith efforts to collect the
payment. This provision is intended to ad-
dress not only intentional refusals to pay,
but also inadvertent delays (but, in either
case, only if there is no collusion between
the service provider and service recipient).
For example, where through oversight a
service recipient fails to make a payment
on the required payment date, the payment
will be treated as made on the specified
date if the service provider makes reason-
able, good faith efforts to collect the pay-
ment, generally through providing timely
notice to the service recipient that the pay-
ment is due and unpaid. For this purpose,
efforts to collect the payment will be pre-
sumed not to be reasonable, good faith ef-
forts if notice is not given to the service
recipient within 90 days of the latest date
upon which the payment could have been
timely made in accordance with the terms
of the plan and the regulations and, if not
paid, further measures to enforce the pay-
ment are not taken within 180 days af-
ter such date. For a discussion of pay-
ments that are accelerated due to a settle-
ment of abona fidedispute as to the service
provider’s right to the payment, see section
VIII.G of this preamble.
K.Back-to-back arrangements
The proposed regulations addressed
certain arrangements under which an en-
tity (the intermediate service recipient)
receives services froma service provider
and provides services to a client (the ulti-
mate service recipient), and the time the
intermediate service recipient is entitled to
receive a payment for services rendered to
the ultimate service recipient is controlled
by the date on which the intermediate
service recipient is obligated to make a
payment of deferred compensation to the
service provider. For example, assume an
intermediate service recipient provides in-
vestment management services for a group
of investors. Pursuant to a nonqualified
deferred compensation plan, the interme-
diate service recipient has agreed to pay
its employee a sum certain when the em-
ployee terminates employment. Under the
intermediate service recipient’s agreement
with the investor group, the investors will
pay the same sum certain to the interme-
diate service recipient when the employee
terminates employment. The proposed
regulations referred to these types of ar-
rangements as back-to-back arrangements.
The final regulations adopt the
proposed provisions that addressed
back-to-back nonqualified deferred com-
pensation arrangements, subject to the
modifications described in this section.
The final regulations clarify that the rules
addressing back-to-back arrangements
apply regardless of whether the arrange-
ment between the service provider and
the intermediate service recipient is actu-
ally subject to section 409A, as long as
each arrangement that is part of the over-
all back-to-back scheme complies with
the requirements of section 409A without
regard to whether such arrangement is
actually subject to section 409A. Accord-
ingly, the accommodations afforded to
back-to-back arrangements are only appli-
cable to the extent that each arrangement
satisfies the requirements of section 409A
as if those requirements applied to each
such arrangement (modified in accordance
with the back-to-back rules).
Commentators also requested that,
with respect to taxpayers providing man-
agement services that are not eligible for
the exception from coverage for indepen-
dent contractors with multiple unrelated
customers, the exception from the general
payment timing rules permitting certain
back-to-back arrangements be expanded
to include not only arrangements where
the payment from an ultimate service
recipient to the intermediate service re-
cipient is based upon the timing of a
required payment under a section 409A
May 7, 200711582007–19 I.R.B.

compliant plan from the intermediate ser-
vice recipient to a service provider (a
forward back-to-backarrangement), but
also where the payment to the service
provider is based upon a required payment
under a section 409A compliant arrange-
ment from the ultimate service recipient
to the intermediate service recipient (a
reverse back-to-back arrangement). For
example, a service recipientthatprovides
investment management services to an
investor group may have an arrangement
whereby the investors are required to pay
all amounts due to the investment man-
ager service recipient if the investor group
terminates the client relationship, and the
investment manager service recipient in
turn has an agreement with an employee
to pay the employee a certain percentage
of the amount the investor group pays to
the investment manager service recipient,
following termination of the client rela-
tionship. The final regulations do not pro-
vide an exception from the requirements
of section 409A for reverse back-to-back
arrangements, but the Treasury Depart-
ment and the IRS will continue to study
the matter.
VIII.Prohibition of Accelerated Payments
A.In general
Section 409A(a)(3) provides that a plan
may not permit the acceleration of the time
or schedule of any payment under the plan,
except as provided in regulations by the
Secretary. The final regulations retain the
provisions in the proposed regulations re-
lating to accelerated payments, subject to
the modifications described in this pream-
ble.
The final regulations generally provide
that a payment of an amount as a substitute
for a payment of deferred compensation
will be treated as a payment of the deferred
compensation, including for purposes of
the prohibition on accelerated payments.
Where a payment of an amount results in
an actual or potentialreduction of, or an
actual or potential current or future offset
to, an amount of deferred compensation, or
the service provider receives a loan the re-
payment of which is secured by or may be
accomplished through an offset of a non-
qualified deferred compensation benefit,
then the payment or loan is a substitute for
the deferred compensation and is treated as
a payment of the deferred compensation it-
self. If a service provider’s rights to de-
ferred compensation are subject to antic-
ipation, alienation, sale, transfer, assign-
ment, pledge, encumbrance, attachment,
or garnishment by creditors of the service
provider or the service provider’s benefi-
ciary, such amounts are treated as having
been paid to the service provider.
The receipt of a payment of compensa-
tion, or right to a payment of compensa-
tion, proximate to the purported forfeiture
or voluntary relinquishment of a right to
deferred compensation generally is treated
as a substituted payment for the payment
of the deferred compensation. For exam-
ple, where the right to an amount of de-
ferred compensation is purportedly relin-
quished or forfeited, and concurrently or
subsequently the service provider receives
a current bonus payment, the bonus pay-
ment will be presumed to be a substitute
payment for the amount of deferred com-
pensation. The presumption is rebuttable
by a showing that the compensation paid
would have been paid regardless of the re-
linquishment or forfeiture of the right to
the deferred compensation. For a discus-
sion of the application of this provision
to amounts forfeitable upon a separation
from service, see section III.J.1 of this pre-
amble.
A plan may not provide discretion to a
service provider regarding whether a pay-
ment will be accelerated under one of the
rules permitting the acceleration of pay-
ments under specified circumstances (for
example, to comply with a domestic re-
lations order), including through the pro-
vision of an election. However, where a
plan provides a servicerecipient discretion
to accelerate payments under one of the
rules permitting the acceleration of a pay-
ment, the failure to accelerate such a pay-
ment will not constitute a subsequent de-
ferral election.
B.Plan termination and liquidation
The proposed regulations contained
provisions permitting a service recipient
to terminate and liquidate a nonqualified
deferred compensation plan, including
when the service recipient has declared
bankruptcy, when the service recipient
has participated in certain change in con-
trol events, or at the discretion of the
service recipient, all subject to certain re-
strictions and limitations. Commentators
expressed concern over the restrictions
and limitations. Some comments reflected
confusionastothemeaningoftheseterms
in the context of section 409A. The termi-
nation and liquidation of a nonqualified
deferred compensation plan involves both
the amendment of the plan to cease de-
ferrals under the plan and provide for
payment of all benefits accrued under the
plan, and the accelerated payment of ben-
efits accrued under the plan.
Several comments suggested that the fi-
nal regulations expand the circumstances
under which a service recipient may ter-
minate and liquidate a nonqualified de-
ferred compensation plan. Generally these
comments requested discretion in case of
a change in business conditions or circum-
stances, resulting in the service recipient’s
desire to terminate and liquidate the plan.
The final regulations expand the circum-
stances under which a sale of assets of
a corporation will result in a separation
from service. See section VII.C.2.f of this
preamble. In addition, the final regula-
tions continue to allow the service recipi-
ent to terminate and liquidate a plan dur-
ing a defined period following a change
in control event. Outside of these partic-
ular business events, the comments failed
to provide an objective standard or cate-
gory of changes in business conditions or
circumstances that would provide a safe-
guard against the use of plan termination
and liquidation provisions to circumvent
the prohibition on accelerations. Accord-
ingly, the final regulations do not expand
the ability of a service recipient to exercise
its discretion to terminate and liquidate a
deferred compensation plan. However, the
period of time during which a service re-
cipient may not commence a new plan af-
ter terminating and liquidating a nonqual-
ified deferred compensation plan has been
shortened from five years to three years.
Also, the final regulations provide that a
discretionary plan termination and liquida-
tion will not qualify for this exception if it
is proximate to a downturn in the financial
health of the service recipient.
The final regulations clarify the rules
under which a deferred compensation plan
may be terminated and liquidated upon a
change in control event. Under the fi-
nal regulations, the service recipient must,
within the 30 days preceding or the 12
months following the change in control
2007–19 I.R.B.1159May 7, 2007

event, take all necessary action to termi-
nate and liquidate the plan and such action
must be irrevocable. In addition, for the
plan to be treated as terminated and liq-
uidated, all other arrangements that would
be classified with the plan as a single plan
if the same service provider participated
in the plan and all the other arrangements
must be terminated and liquidated, so that
all service providerswho are participants
in the plan and all such other arrangements
required to be terminated and liquidated
must receive all amounts of compensation
deferred under the terminated and liqui-
dated plan and other arrangements within
12 months of the date the service recipi-
ent takes such irrevocable action to termi-
nate and liquidate the arrangements. For
purposes of the rule, the entities compris-
ing the service recipient are determined
immediately following the change in con-
trol event, and the rule only applies with
respect to service providers for whom a
change in control hasoccurred. For ex-
ample, where the change in control event
consists of a sale of a subsidiary corpo-
ration such that the subsidiary corporation
is no longer treated as a single service re-
cipient with the (former) parent corpora-
tion, the requirement to terminate and liq-
uidate substantially similar arrangements
applies only to the purchaser service recip-
ient group of corporations that now owns
the subsidiary corporation. In addition,
the rule would apply only to the service
providers that had experienced a change
in control, generally consisting only of the
service providers of the subsidiary corpo-
ration. Where the change in control event
consists of an asset purchase, the applica-
ble service recipient with discretion to ter-
minate and liquidate the plan is deemed to
be the entity retaining the deferred com-
pensation liability after the transaction.
Some commentators asked whether the
plan termination and liquidation rules ap-
ply if a plan is terminated and liquidated
when the service provider has no vested
right to a payment, and all payments are
forfeited. Where the service recipient re-
tained the unfettered discretion to termi-
nate such a plan without paying benefits,
the service provider may not have obtained
a legally binding right to a payment. In ad-
dition, if a service provider forfeits bene-
fits under a nonqualified deferred compen-
sation plan in exchange for other taxable
benefits, those benefits may be treated as
a payment of amounts under the nonquali-
fied deferred compensation plan.
C.Conflicts of interest and ethics rules
The proposed regulations contained a
special accelerated payment rule to per-
mit accelerated payments required to be
made by a certificate of divestiture. No-
tice 2006–64, 2006–29 I.R.B. 88, see
§601.601(d)(2), expanded this exception
to address situations in which a letter is
received from the Office of Government
Ethics that divestiture of the deferred
compensation is required. Several com-
mentators requested an expansion of these
rules.
The final regulations provide that a pay-
ment may be accelerated where necessary
for a Federal officer or employee in the ex-
ecutive branch to comply with an ethics
agreement with the Federal government.
The final regulations also provide that a
payment may be accelerated where reason-
ably necessary to avoid the violation of a
Federal, state, local, or foreign conflict of
interest law or ethics law (including where
such payment is reasonably necessary to
permit the service provider to participate
in activities in the normal course of his or
her position in which the service provider
would otherwise not be able to participate
under an applicable law). For this purpose,
a payment will be reasonably necessary to
avoid such a violation if the making of the
payment is a necessary part of a combi-
nation of actions resulting in compliance
with the applicable law. A payment may
be considered necessary to avoid such a
violation even though actions other than
making the payment could also result in
compliance with the applicable law. For
example, as requested by several commen-
tators, this provision would provide a pub-
lic accounting firm the ability to accelerate
payments where reasonably necessary to
satisfy conflict of interest rules prescribed
by the Securities and Exchange Commis-
sion. This paragraph is intended to address
payments to service providers, as well as
payments to a spouse or minor children
where such payments are reasonably nec-
essary to comply with the applicable law.
For this purpose, foreign law is consid-
ered to be applicable only to foreign earned
income from sources within the foreign
country that promulgated such law.
D.State and local taxes, RRTA tax and
foreign taxes
Commentators stated that certain state
and local jurisdictions tax nonqualified de-
ferred compensation plans under a differ-
ent set of rules than the Federal income tax
rules, typically by reference to the rules
applicable to FICA taxes. Commentators
also requested that accelerations be per-
mitted to cover applicable RRTA taxes. Fi-
nally, commentators requested that accel-
erated payments be permitted to account
for the tax laws of foreign jurisdictions that
may not be consistent with the Federal in-
come tax rules. The final regulations adopt
the suggestions with respect to state and lo-
cal taxes, RRTA taxes, and foreign taxes.
E.Minimum distributions under section
280H(d)
One commentator suggested that accel-
eration be permitted to allow a personal
service corporation to make minimum
distributions to avoid taxation under sec-
tion 280H(d). The Treasury Department
and the IRS believe that such a provision
would give taxpayers excessive control
over the payment of deferred amounts that
would be inconsistent with the purposes of
section 409A. Therefore, this suggestion
was not adopted.
F.Top hat plan rules
Some commentators requested that the
final regulations permit a service recipient
to accelerate payments or cancel deferral
elections with respect to a service provider
who is not part of a select group of man-
agement or highly compensated employ-
ees for purposes of the exclusion from cov-
erage under certain provisions of the Em-
ployee Retirement Income Security Act of
1974 relating to top hat plans. See, for ex-
ample, 29 U.S.C. §1051(2). Given the cur-
rent lack of clarity with respect to the scope
of coverage of the top hat plan rules, and
the actions required when a plan partici-
pant no longer satisfies the requirement to
qualify for the top hat plan rules, the Trea-
sury Department and the IRS are not con-
fident that an exception to the anti-accel-
eration provisions based upon these rules
is feasible. Accordingly, the final regula-
tions do not adopt this suggestion.
May 7, 200711602007–19 I.R.B.

G.Settlements of bona fide disputes
regarding the right to a payment
Commentators requested relief for cer-
tain payments made as a settlement of a
dispute as to a service provider’s right to
a deferred amount. For example, assume
that a plan provides for a payment of de-
ferred compensation upon a termination
of an employee’s employment other than
for cause and the employee and employer
have abona fidedispute as to whether the
employee was terminated for cause, and
thus whether the service provider is enti-
tled to any payment under the plan. The fi-
nal regulations provide that payments may
be accelerated, including acceleration to
payment as a lump sum, where the right
to such payments arises as part of a set-
tlement between the service provider and
the service recipient of abona fidedis-
pute as to the service provider’s right to
the deferred amount. The provision ap-
plies only to a deferred amount, the right
to which is the subject of an arm’s length
settlement of abona fidedispute between
the service provider and the service recipi-
ent, and only to the portion of the deferred
amount that is the subject of thebona fide
dispute. The provision does not apply to
disputes that relate only to when (and not
whether) a payment is due. Whether a pay-
ment qualifies for the exception is based on
the particular facts and circumstances. A
payment will be presumed not to meet this
exception unless the payment is subject to
a substantial reduction in the value of the
payment made in relation to the amount
that would have been payable had there
been no dispute as to the service provider’s
right to the payment. For this purpose, a
reduction that is less than 25 percent of
the present value of the deferred amount
in dispute generally is not a substantial re-
duction. In addition, a payment will be
presumed not to meet this exception if the
payment is made proximate to a downturn
in the financial health of the service recip-
ient.
H.Cashout rules
Commentators requested various mod-
ifications to the cashout rules generally
expanding the conditions under which a
service recipient may exercise discretion
to cash out a service provider’s entire
amount deferred under a plan. The final
regulations generally provide that a service
recipient may exercise such discretion at
any time that a service provider’s amount
deferred under the plan is less than the
applicable dollar amount under section
402(g)(1)(B) for that calendar year. For
this purpose, the plan aggregation rules
apply, so a service recipient may not use
this rule to cash out an amount under one
arrangement but not another arrangement
where the two arrangements would be
treated as one plan. The final regula-
tions, unlike the proposed regulations, do
not require that a service provider have
separated from service for the service re-
cipient to cash out the amount deferred.
In addition, the plan does not need to be
amended to provide this discretion to the
service recipient. Finally, the amount has
been changed from $10,000 to the limit
on elective deferralsunder section 402(g)
to permit the amount to be adjusted for
changes in the cost of living.
The final regulations also provide that
a plan under which amounts are to be paid
in installments may provide for immediate
payment of all remaining installments if
the present value of the deferred amount to
be paid in the remaining installments falls
below a predetermined amount, and such
immediate payment will not constitute
an accelerated payment for purposes of
§1.409A–3(j)(1), provided that such fea-
ture (including the predetermined amount)
is established no later than the latest time
at which the time and form of payment
is otherwise required to be established,
and provided further that any change in
such feature including the predetermined
amount must comply with the require-
ments for a change in the time and form
of payment.
I.Other acceleration issues
Commentators requested that a service
recipient be permitted to cancel a service
provider’s deferral elections in two sit-
uations. First, commentators asked that
such a cancellation be allowed when the
service provider is transferred to a posi-
tion that is not eligible to participate in
the plan. The Treasury Department and
the IRS are not confident that a standard
can be established that would clearly dis-
tinguish abona fidetransfer to an ineli-
gible position from apro formatransfer
designed to avoid the prohibition on ac-
celerated payments, especially when the
underlying plan is specific to the service
provider, as in the case of an individual
employment agreement, and accordingly
the final regulations do not adopt this sug-
gestion. Second, commentators asked that
a service provider’sdeferral election be
cancelled if the service provider becomes
disabled. The final regulations permit the
cancellation of the service provider’s de-
ferral election due to a disability, provided
that for this purpose a disability is defined
as any medically determinable physical or
mental impairment resulting in the service
provider’s inability to perform the duties
of his or her position or any substantially
similar position, where such impairment
can be expected to result in death or can
be expected to last for a continuous period
of not less than six months.
IX.Subsequent Changes in the Time and
Form of Payment
A.In general
The final regulations clarify that the
rules governing changes in the time and
form of payment apply both to service
providers and service recipients. Accord-
ingly, a service provider, a service recipi-
ent, or both a service provider and a service
recipient may have and exercise discretion
to defer a deferred compensation payment
after the time and form of payment have
been specified, provided that such discre-
tion is limited to changes that comply with
the requirements of these regulations ad-
dressing subsequent changes in the time
and form of payment.
B.Annuities
Many commentators requested clarifi-
cation and expansion of the rules that al-
low taxpayers to treat actuarially equiva-
lent life annuities as one form of payment,
thereby allowing elections among such an-
nuity forms at any time before the ini-
tial annuity payment without regard to the
rules on subsequent deferral elections. The
final regulations clarify the circumstances
under which two actuarially equivalent life
annuities may be treated as one form of
payment.
The final regulations generally provide
that certain specifiedfeatures are ignored
for purposes of determining whether a par-
ticular annuity is treated as a life annu-
2007–19 I.R.B.1161May 7, 2007

ity for purposes of the form of payment
rules (but not for purposes of determining
whether a life annuity with such a feature
is actuarially equivalent to a life annuity
without such a feature). The specified fea-
tures include: (1) term certain features (un-
der which annuity payments continue for
the longer of the life of the annuitant or
a fixed period of time); (2) pop-up pro-
visions (under which payments increase
upon the death of the beneficiary or an-
other event that eliminates the right to a
survivor annuity); (3) cash refund features
(under which payment is provided upon
the death of the last annuitant in an amount
that is not greater than the excess of the
present value of the annuity at the annuity
starting date over the total of payments be-
fore the death of the last annuitant); (4) So-
cial Security or Railroad Retirement lev-
eling features (including leveling features
related to early retirement, survivor or dis-
ability benefits); and (5) features apply-
ing a permissible cost-of-living index. Ac-
cordingly, a life annuity with any of the
specified features may be treated as a life
annuity without regard to the fact that the
features cause the annuity to fail to satisfy
the general definition for life annuities, for
example, because the periodic payments
are not substantially equal. However, the
life annuity with such a feature may only
be treated as the same form of payment as
a life annuity without such a feature if the
two life annuities are actuarially equiva-
lent (taking into account the feature) and
have the same initial payment date.
Commentators also raised issues con-
cerning the availability of subsidized joint
and survivor annuities. The final regula-
tions provide that for purposes of the def-
inition of a time and form of payment,
a subsidized joint and survivor annuity is
treated as actuarially equivalent to a single
life annuity provided that, neither the an-
nual lifetime annuity benefit nor the annual
survivor benefit available under the joint
and survivor annuity is greater than the an-
nual lifetime annuity benefit available un-
der the single life annuity. For example, a
single life annuity providing $100 a month
for the lifetime of the service provider may
be treated as actuarially equivalent to a
joint and survivor annuity providing up to
$100 a month for the lifetime of the service
provider and up to $100 a month to the sur-
viving joint annuitant.
Commentators asked whether the actu-
arial assumptions and methods used to de-
termine actuarial equivalency must be ap-
plied consistently. The final regulations
clarify that in determining whether two
life annuities are actuarially equivalent, the
same actuarial assumptions and methods
must be used in valuing each life annu-
ity. This requirement applies over the en-
tire term of the service provider’s partici-
pation in the plan, such that the annuities
must be actuarially equivalent at all times
for the annuity options to be treated as one
time and form of payment. However, pro-
vided the actuarial methods and assump-
tions are reasonable, there is no require-
ment that consistent actuarial assumptions
and methods be used over the term of the
service provider’s participation in the plan.
Accordingly, the plan may change the ac-
tuarial assumptions and methods used to
determine the life annuity payments, pro-
vided that all of the actuarial assumptions
and methods are reasonable. In addition,
there is no requirement that the actuar-
ial assumptions and methods used under
a nonqualified deferred compensation plan
be the same as those used in a qualified
plan sponsored by the service recipient.
C.Application to multiple payment events
The final regulations continue to pro-
vide that the subsequent deferral and anti-
acceleration rules generally will apply to
the addition or deletion of a permissible
payment event. Commentators asked for
clarification of how these rules apply.
The Treasury Department and the IRS
believe that a failure to provide for a pay-
ment event at death, disability or an un-
foreseeable emergency generally will re-
sult from oversight, and that the addition
of such a provision generally would not
be abusive. Accordingly, the final regu-
lations provide that the addition of death,
disability, or an unforeseeable emergency
as a potentially earlier payment event is a
permissible acceleration. This provision
does not apply to the addition of death,
disability, or an unforeseeable emergency
as a potentially later payment event, such
as through the addition of death as a pay-
ment event to a plan providing for a pay-
ment of deferred compensation on a fixed
date, so that after the change the payment
would be due on the later of the fixed date
or death. Nor, for example, would it ap-
ply to an amendment of a plan to substi-
tute a service provider’s death as a new
payment event, instead of a fixed payment
date. In those cases, the rules governing
subsequent deferral elections apply. In ad-
dition, the substitution of death as a pay-
ment event for an amount that is deferred
compensation will not cause the plan to be
treated as a death benefit plan not subject
to section 409A, but the substitution or ad-
dition of a payment event other than death
as a payment event in a death benefit plan
may result in the plan being treated as pro-
viding for deferred compensation.
The anti-acceleration provisions apply
to the addition of a specified date or fixed
schedule, a change in control event, or sep-
aration from service asa potentially earlier
payment event, including the substitution
of one of these payment events for another
payment event. In addition, the anti-accel-
eration provisions apply where a payment
event is removed from a plan term requir-
ing payment upon the latest of two or more
payment events. The provisions govern-
ing subsequent deferral elections apply to
all changes in the time and form of pay-
ment, whether resulting from the addition,
deletion or substitution of another payment
event. Commentators requested clarifica-
tion of how this provision would apply
where the events were not specified dates,
such as the substitution of a change in con-
trol payment event for a separation from
service event. In such a situation, to satisfy
the rules governing subsequent deferrals,
this substitution would only be permissi-
ble if the change were not effective for one
year, and provided that the payment would
only occur upon the later of a change in
control event or at least five years follow-
ing a separation from service.
D.Application to domestic relations
orders
The final regulations provide that the
rules governing changes in the time and
form of payment do not apply to changes
in the time and form of payment under the
terms of a domestic relations order, to the
extent the change in the time and form of
payment applies to a payment that will be
made to the alternate payee and not the ser-
vice provider. Accordingly, for example,
a domestic relationsorder generally may
provide for a new time and form of pay-
ment to a spouse or former spouse of the
May 7, 200711622007–19 I.R.B.

service provider, or provide such spouse or
former spouse discretion to determine the
time and form of payment to such spouse
or former spouse.
X.Application to nonqualified deferred
compensation plans linked to qualified
plans and other arrangements
A.Plans linked to qualified plans and
certain broad-based foreign retirement
plans
The final regulations generally adopt
the relief provided in the proposed regu-
lations with respect to the election-timing
and the anti-acceleration rules for changes
in the amount of benefits under a nonqual-
ified deferred compensation plan that re-
sult from an election (or failure to elect) by
a service provider, or an amendment by a
service recipient, in respect of a subsidized
or ancillary benefit under a qualified plan.
In response to comments, this relief is sim-
ilarly extended to certain broad-based for-
eign retirement plans. In addition, this re-
lief is extended for benefit formulas that
include a reduction for amounts credited to
the service provider’s account under a tax-
qualified plan (which may include match-
ing contributions) or certain broad-based
foreign retirement plans that provide ben-
efits expressed as an account balance.
In response to comments, the final reg-
ulations also clarify that the linked plan
relief provided for elective deferrals (in-
cluding designated Roth contributions)
and matching type contributions is subject
to two separate, additive limits and not
a single, coordinated limit. In addition,
the final regulations clarify that the sec-
tion 402(g) dollar limits are increased by
the limit on catch-up contributions un-
der section 414(v) for any year in which
the service provider qualifies for such in-
crease.
Commentators raised issues concerning
other types of plans under which a service
provider must participate in a qualified
plan to receive nonqualified deferred com-
pensation. Specifically, commentators
asked whether a plan could comply with
section 409A if it provided that an em-
ployee must defer the maximum amount
permissible under a qualified plan in order
to defer any amount under a nonqualified
deferred compensation plan. Where the
service provider can change the service
provider’s election to defer the maximum
amount permissible under the qualified
plan during the taxable year, and thereby
change or discontinue deferrals under a
nonqualified deferred compensation plan,
the service provider can effectively make
a late election to defer (or not defer)
amounts under the nonqualified plan. The
final regulations generally do not pro-
vide any additional relief with respect to
this type of plan. However, where the
additional amounts deferred under the
nonqualified deferred compensation plan
reflect only matching contributions that
would be available under the qualified
plan absent the restrictions in the qualified
plan intended to reflect limits on qualified
plan contributions under sections 401(m)
and 401(a)(17), the final regulations pro-
vide relief but solely with respect to the
matching amount that could have been
contributed to the qualified plan absent
such limits.
Commentators also stated that the rules
in the proposed regulations did not ad-
equately address the impact of after-tax
contributions. Specifically, commentators
requested relief for service providers who
change their after-taxcontributions (other
than designated Roth contributions) under
a qualified plan during a year where such
decrease causes a corresponding change in
nonqualified plan elective deferrals. The
final regulations provide some additional
relief concerning matching or other con-
tributions contingent upon the making of
an after-tax contribution. However, other
suggestions were not adopted in the final
regulations, because the Treasury Depart-
ment and the IRS are concerned that such
plans may give the service provider exces-
sive control over amounts deferred under a
nonqualified deferred compensation plan,
contrary to the statutory intent.
B.Plans linked to cafeteria plans
Commentators expressed concern that
changes to elections under a section 125
cafeteria plan could change the amount of
eligible compensation used for purposes
of a benefit formula under a nonqualified
deferred compensation plan and thereby
create an impermissible deferral election
or acceleration of payment under the non-
qualified deferred compensation plan. The
final regulations provide relief from the
deferral election-timing and anti-accelera-
tion rules for changes to section 125 elec-
tions properly made in accordance with
the rules under section 125, to the extent
that the change in the amount deferred un-
der the nonqualified deferred compensa-
tion plan results solely from the applica-
tion of the change in amount of eligible
compensation resulting from the election
change under the cafeteria plan to a benefit
formula based upon the service provider’s
eligible compensation, and only to the ex-
tent that such change applies in the same
manner as any other increase or decrease
in the eligible compensation would apply
to such benefit formula.
C.Offsets
i.In general
Some commentators requested clari-
fication whether an arrangement under
which a specified amount paid by a ser-
vice recipient to a service provider reduces
or offsets an amount that is payable to the
service provider under a nonqualified de-
ferred compensationplan will be treated
as providing for an acceleration of a pay-
ment under the nonqualified deferred
compensation plan. As an example, one
commentator stated that a plan may re-
quire that any payout at separation from
service of accrued leave that is determined
to be in excess of the correct amount of
such payment will be deducted from the
amount due under a nonqualified deferred
compensation plan, rather than repaid
separately by the service provider. One
commentator suggested that offsets be per-
mitted for all service provider debts of a
kind and in amounts customarily incurred
in the ordinary course of the business rela-
tionship between the service provider and
the service recipient.
The Treasury Department and the IRS
believe that the unfettered discretion to set-
tle debts between a service recipient and a
service provider through offsets from pay-
ments of nonqualified deferred compensa-
tion is not consistent with the intent of the
statute, because it creates opportunities to
disguise accelerated payments of deferred
compensation. Accordingly, amounts that
currently or in the future may be offset
against nonqualified deferred compensa-
tion are treated as payments of deferred
compensation and may violate the anti-ac-
celeration rules under section 409A. See
2007–19 I.R.B.1163May 7, 2007

section VIII.A of this preamble. However,
the Treasury Department and the IRS agree
that the ability to offset small routine debts
against amounts payable under a nonqual-
ified deferred compensation plan is useful
so that service recipients can avoid the ad-
ministrative burden involved in paying de-
ferred compensation amounts to a service
provider while at the same time attempt-
ing to collect small amounts owed by the
same service provider. Accordingly, the
final regulations provide that payments of
deferred compensation may be offset by
amounts owed to the service recipient by
the service provider, where such debt is in-
curred in the ordinary course of the ser-
vice relationship, to the extent the entire
offset in any taxable year does not exceed
$5,000 and the offset is taken at the same
time and in the same amount as the debt
otherwise would have been due from the
service provider.
ii.Social security benefits and disability
benefits
Commentators requested clarification
of the treatment of nonqualified deferred
compensation plans thatoffsetbenefits
with payments received as Social Secu-
rity benefits and disability benefits. A
plan provision providing for a direct, dol-
lar-for-dollar reduction of payments due
under a nonqualified deferred compen-
sation plan by the amount of payments
received or receivable as Social Security
benefits will not fail to provide for a fixed
schedule of payments. However, the rule
relates solely to direct reductions in de-
ferred compensation benefits to reflect
eligibility for, or payment of, Social Se-
curity benefits, and does not permit other
changes in the time and form of benefit
based upon a service provider’s eligibil-
ity or elections related to Social Security
benefits. A reduction in a nonqualified
deferred compensation plan benefit equal
to the amount receivable under a service
recipient sponsored disability plan gener-
ally will be treated similarly, provided that
a substantial number of service providers
participate in the disability plan. How-
ever, to allow the payment schedule to
qualify as a fixed schedule, the disability
plan must be established before the date
the service provider becomes disabled. In
addition, any subsequent amendment to
the disability plan or other change in the
benefit payable under the disability plan
may result in an acceleration of a pay-
ment or a subsequent deferral under the
nonqualified deferred compensation plan
unless the facts and circumstances estab-
lish otherwise (for example, because the
amendment or change results from actions
taken by an independent third party, such
as an unrelated insurer that issued a dis-
ability insurance policy for such disability
plan, over which the service recipient and
service provider have no control, or an
action of the service recipient with respect
to the disability plan that is generally ap-
plicable to a substantial number of other
service providers who participate in such
disability plan and has a material effect on
the disability benefits of such other service
providers).
XI.Statutory Effective Dates
A.Effective dates – earned and vested
amounts
As provided in section 885(d) of the
American Jobs Creation Act of 2004,
section 409A generally is effective for
amounts deferred after December 31,
2004. The final regulations adopt the
definition set forth in the proposed regula-
tions of an amount deferred on or before
December 31, 2004, for purposes of the
effective date, subject to the modifica-
tions described in this preamble. The final
regulations clarify that the grandfathered
amount includes any account balance that
is earned and vested, as well as the present
value of any earned and vested right to fu-
ture account credits, even if such amounts
had not been credited to the account as
of December 31, 2004. For example,
if a service provider had a vested right
on December 31, 2004, to have a bonus
amount added to the service provider’s
account balance in a nonqualified deferred
compensation plan, the service provider’s
grandfathered amount would include the
amount of such bonus even though such
amount was not calculated and credited to
the account until some time in 2005.
B.Effective dates — calculation of
grandfathered amount
One commentator requested that the
grandfathered amount in a nonaccount
balance plan be expressed in terms of
the form of benefit under the plan. So,
for example, where the normal benefit
was expressed in the form of an annuity
payable at a certain age, that is how the
amount of the grandfathered benefit would
also be expressed. The final regulations
do not adopt this suggestion, but reach a
similar result by providing that any actu-
arial assumptions and methods that were
reasonable to use as of December 31,
2004, may continue to be used in subse-
quent years for purposes of determining
the grandfathered amount.
C.Material modifications
Section 885(d)(2) of the American Jobs
Creation Act of 2004 provides generally
that amounts deferred in taxable years be-
ginning before January 1, 2005, are treated
as amounts deferred in a taxable year be-
ginning on or after such date if the plan un-
der which the deferral is made is materially
modified after October 3, 2004. The final
regulations adopt the definition set forth
in the proposed regulations of a material
modification for these purposes, subject to
the changes described in this preamble.
For purposes of the definition of a ma-
terial modification under the effective date
rules, the final regulations incorporate the
exclusions from the definition of a modi-
fication for purposes of the rules govern-
ing stock rights. For example, a change
to a discounted grandfathered stock right
that could be covered by section 409A
if materially modified under the effective
date rules, will not be treated as materially
modified and subject to section 409A if
the change would not be treated under the
rules governing stock rights as a modifica-
tion resulting in treatment as a new grant
of a stock right or an extension resulting in
treatment of the stock right as having had
a deferral feature from the date of grant.
The final regulations provide that nei-
ther the amendment of a plan to include
a provision allowing for a payment to a
person other than the service provider due
to the application of a domestic relations
order, nor the making of a payment in
compliance with a domestic relations or-
der where a plan did not address the abil-
ity to make such a payment, is treated as
a material modification for purposes of the
grandfathering rules.
Commentators also requested that a
grandfathered plan be permitted to remove
a provision requiring a cancellation of
May 7, 200711642007–19 I.R.B.

deferrals for a prescribed period of time
under all nonqualified deferred compen-
sation plans to receive a distribution from
the grandfathered plan, without resulting
in a material modification. Commentators
argued that because the enforcement of
such a provision by cancelling a current
deferral election generally would result in
an immediate violation of section 409A,
the inability to remove the requirement
that the deferral election be cancelled ef-
fectively nullifies the grandfathered right.
Under the final regulations, an amendment
to a grandfathered plan that changes such
a provision to require a cancellation of
deferrals for the equivalent period of time
beginning with the first possible date that
such a cancellation would not result in a
prohibited accelerated payment (generally
the beginning of the subsequent calendar
year for a service provider with a calendar
year taxable year) will not constitute a
material modification. For example, tax-
payers may amend an early distribution
provision that requires the immediate ces-
sation of deferrals for 12 months to apply
only to deferrals over the first 12 month
period with respect to which the service
provider can make a timely deferral elec-
tion, for example, by prohibiting deferrals
of compensation attributable to services
performed during the service provider’s
next taxable year.
Commentators requested clarification
of the effect of a material modification
of a plan. The specific consequences of
a material modification of a plan are be-
ing considered as part of the anticipated
guidance related to income inclusion and
calculation. However, the final regula-
tions provide that for amounts deferred
in taxable years beginning before January
1, 2005, under a plan that is materially
modified after October 3, 2004, whether
the plan complies with the requirements
of section 409A is determined by refer-
ence to the terms of the plan in effect, and
any actions taken under the plan, on and
after the date of the material modifica-
tion. Accordingly, where the materially
modified plan is compliant with section
409A and these regulations immediately
following the material modification, the
material modification generally will not
itself result in a violation.
XII.Applicability date of final regulations
A.Existing transition relief.
Nothing in this preamble or the final
regulations is intended to restrict the oth-
erwise applicable transition relief. For a
description of the applicable transition re-
lief, see Notice 2006–79, 2006–43 I.R.B.
763 (extension of certain transition relief
through 2007), Notice 2006–64, 2006–29
I.R.B. 88 (transition relief applicable to
certain accelerated payments necessary
to comply with Federal ethics require-
ments), Notice 2006–33, 2006–15 I.R.B.
754 (transition rules with respect to sec-
tion 409A(b)), Notice 2006–4, 2006–3
I.R.B. 307 (transition relief with respect to
the valuation standards applicable to stock
rights issued on or before the effective date
of the final regulations for purposes of the
exclusion from coverage under section
409A for certain stock rights), the pream-
ble to the proposed regulations (extension
of certain transition relief through 2006),
and Notice 2005–1, 2005–1 C.B. 274 (ini-
tial transition relief). See §601.601(d)(2).
B.Application of final regulations
The final regulations are generally ap-
plicable January 1, 2008. For periods be-
fore January 1, 2008, the standards and
transition rules set forth in Notice 2006–79
continue to apply. For further information
regarding the transition relief for periods
before the applicability date of the final
regulations, see Notice 2006–79 and sec-
tion XI of the preamble to the proposed
regulations.
Commentators requested clarification
of the impact of the final regulations be-
coming applicable January 1, 2008, on
plans that continue to defer compensation
on or after January 1, 2008. Specifically,
commentators asked whether actions taken
with respect to nonqualified deferred com-
pensation plans that would not have re-
sulted in income inclusion under section
409A before 2008 because such actions
were consistent with applicable guidance,
but would not be consistent with the final
regulations, would need to be modified
to avoid income inclusion under section
409A in 2008 and later years. The follow-
ing sections discuss the effect of the final
regulations with respect to the require-
ments necessary to comply with section
409A, including the various requirements
necessary for a plan to be excluded from
coverage under section 409A.
C.Stock rights
Many of the comments related to stock
options and stock appreciation rights.
Some commentators requested that sec-
tion 409A not apply to any stock rights
issued before the applicability date of the
final regulations. Neither the statute nor
the legislative history indicates an intent
for such a broad exception. The Treasury
Department and the IRS understand that
certain aspects of the guidance on stock
rights have changed. However, the final
regulations generally expand the exclu-
sion from coverage under section 409A
for certain stock rights to eliminate many
issues raised by the proposed regulations.
In addition, with respect to certain types
of stock rights, such as discounted stock
options, the guidance has explicitly and
consistently indicated that either rights that
would be excluded from coverage under
section 409A must be substituted for such
rights or such rights must be modified to
comply with section 409A. Accordingly,
the final regulations do not adopt a cat-
egorical exclusion from coverage under
section 409A of all stock rights issued be-
fore the issuance of the final regulations.
Commentators also asked whether a
stock option must be repriced to avoid
coverage under section 409A if the ex-
ercise price would be treated as having
been set at fair market value under section
409A under the applicable guidance, but
would not be treated as having been set
at fair market value if the standard of the
final regulations had been applicable. For
this purpose, the guidance provided in
Notice 2006–4, 2006–3 I.R.B. 307, see
§601.601(d)(2), remains in effect. Notice
2006–4 provided certain standards appli-
cable to stock rights issued before January
1, 2005, for determining whether the ex-
ercise price of such stock right would be
treated as having been set at fair mar-
ket value for purposes of the exclusion
from coverage under section 409A for
certain stock rights. As provided in No-
tice 2006–4, for stock rights issued before
January 1, 2005, the standards applicable
to incentive stock options under section
422 are applicable. Generally this means
that where the sole reason the stock right
would fail to qualify for the exclusion from
2007–19 I.R.B.1165May 7, 2007

coverage under section 409A is due to the
exercise price not being set at or above fair
market value, the exercise price will be
treated as set at or above fair market value
if based upon a good faith attempt by the
issuer to set the exercise price at or above
fair market value. As further explained
in Notice 2006–4, for stock rights issued
on or after January 1, 2005, but before
January 1, 2008, the provisions of Notice
2005–1 will apply, generally requiring that
fair market value for purposes of setting
the exercise price of a stock right must be
determined using a reasonable valuation
method. In addition, for stock rights is-
sued on any date before January 1, 2008,
taxpayers may rely upon the provisions
of the proposed or final regulations with
regard to the determination of the fair
market value of the underlying stock.
Commentators requested that taxpay-
ers not be required to bring stock rights
granted before January 1, 2008, into com-
pliance with section 409A if such rights
were properly treated as not being subject
to section 409A under the applicable guid-
ance, but instead be permitted to keep such
rights outstanding and unmodified.
The final regulations significantly ex-
pand the permissible classes of stock and
the permissible issuers of stock under the
service recipient stock rule, and taxpay-
ers may rely on the final regulations for
periodsbeforetheeffectivedateofthe
final regulations. In addition, with re-
spect to stock rights issued before April 10,
2007, on stock that would have constituted
service recipient stock under a reasonable
good faith interpretation of the statute and
applicable guidance,but would not con-
stitute service recipient stock under the fi-
nal regulations, such stock will continue to
constitute service recipient stock for pur-
poses of applying section 409A to such
stock right until the exercise or termina-
tion of such right, or until the stock right
is modified in a manner that is treated as
the grant of a new right. However, for
a stock right issued on or after April 10,
2007, stock subject to such stock right will
not be treated as service recipient stock af-
ter December 31, 2007, unless such stock
satisfies the requirements of the final reg-
ulations, and if the stock does not satisfy
these requirements, such stock right will
be required to be modified either to be ex-
cluded from coverage under section 409A,
or to comply with the requirements of sec-
tion 409A and these regulations.
Commentators also expressed concerns
about modifications and extensions of
stock rights that occur before January 1,
2008. Different concerns and arguments
arise depending upon whether these mod-
ifications and extensions occurred on or
before the enactment of the statute (Octo-
ber 23, 2004), on or before the issuance
of Notice 2005–1 (December 20, 2004),
on or before the issuance of the proposed
regulations (September 30, 2005) or on
or before the applicability date of the fi-
nal regulations (January 1, 2008). The
final regulations significantly expand the
permissible types of modifications and
extensions that will not result in treatment
of the stock right as a new grant or as
having had a deferral feature from the
date of grant, and taxpayers may rely on
these regulations for periods before the
applicability date of the regulations. In
addition, any modifications or extensions
occurring before the enactment of the
statute (October 23, 2004) will not be con-
sidered in determining whether the right
is excluded from coverage under section
409A. Finally, any extension granted be-
fore April 10, 2007, solely in order to give
the holder of a stock right an additional
period of time within which to exercise
the stock right beyond the time originally
prescribed is disregarded for purposes of
the rules treating certain extensions as de-
ferral features from the time of grant. See
§1.409A–1(b)(5)(v)(C).
D.Initial deferral elections
Commentators asked whether and to
what extent the final regulations would
impact initial deferral elections made
before the applicability date of the final
regulations. If a deferral election made be-
fore January 1, 2008, was consistent with
the proposed regulations or the applicable
transition guidance, the initial deferral
election will be deemed to comply with
the provisions of section 409A, regardless
of whether the period of deferral extends
beyond December 31, 2007.
In addition, commentators asked
whether and to what extent the final regu-
lations would impact programs established
before the applicability date of the final
regulations, where initial deferral elec-
tions have not been made by January 1,
2008. For example, commentators asked
how section 409A would apply if a ser-
vice recipient has interpreted a program
as providing for performance-based com-
pensation and permitted deferral elections
to occur in 2008 or later in accordance
with the rules governing deferrals of per-
formance-based compensation, but such
compensation does not qualify as per-
formance-based compensation under the
final regulations. For a program estab-
lished before April 10, 2007, that under
a reasonable, good faith interpretation of
the statute and applicable guidance would
have permitted an initial deferral election
to be made after December 31, 2007, and
on or before December 31, 2008, an initial
deferral election will be deemed to comply
with the initial deferral election rules if
made by the deadline established in the
plan. For a program established before
April 10, 2007, that under a reasonable,
good faith interpretation of the statute and
applicable guidancewould have permitted
an initial deferral election be made after
December 31, 2008, an initial deferral
election will be deemed to comply with
the initial deferral election rules if made
by December 31, 2008.
E.Designation of time and form of
payment
Notice 2005–1 and the preamble to the
proposed regulations consistently provide
that elections as to the time and form of
payment of deferred compensation would
need to be compliant with the final regula-
tions by the time such regulations were ap-
plicable. Both Notice 2005–1 and the pre-
amble to the proposed regulations provide
detailed transition guidance, generally per-
mitting service providers and service re-
cipients to change the time and form of
payment at any time through the end of the
transition period. Accordingly, a payment
scheme that violates the provisions of the
final regulations will need to be brought
into compliance with the final regulations
in accordance with the transition relief.
F.Service providers in pay status
Commentators asked how the final reg-
ulations apply to service providers that are
already in pay status, where the payment
trigger is based upon a reasonable, good
faith interpretation of the statute and ap-
plicable guidance but is not in compliance
May 7, 200711662007–19 I.R.B.

with the final regulations. This may oc-
cur where the service provider has already
begun receiving payments before January
1, 2008, or where all events necessary to
receive the payment have occurred before
January 1, 2008. For example, a service
provider may have been treated as having
separated from service before January 1,
2008, under a reasonable, good faith inter-
pretation of the statute, but would not be
treated as having separated from service
under the final regulations. Where pay-
ments have commenced before January 1,
2008, the plan may continue to make such
payments consistent with the application
of the plan terms at the time the payments
commenced, or may halt such payments on
or before December 31, 2007, and amend
the time and form of any remaining pay-
ments to comply with the final regulations
in accordance with the transition guidance
provided. Where payments have not com-
menced by January 1, 2008, but all the
events necessary to receive the payment
have occurred, the plan may make pay-
ments in accordance with the application
of the plan terms on December 31, 2007,
or may amend the time and form of pay-
ments to comply with section 409A in ac-
cordance with the transition guidance pro-
vided. Similarly, where payments have
not commenced on or before December
31, 2007, because the service provider was
treated as not having separated from ser-
vice under a reasonable, good faith inter-
pretation, but under the final regulations
the service providerwould be treated as
having separated from service on or be-
fore December 31, 2007, the plan must
treat the service provider as having sep-
arated from service on a date on or after
April 10, 2007, and on or before Decem-
ber 31, 2007. Nothing in this paragraph
is to be construed to permit the continua-
tion of any payment schedule based upon
an application of section 409A on or before
December 31, 2007, that failed to meet
the requirements of the applicable transi-
tion guidance. In addition, nothing in this
paragraph is intended to waive the applica-
tion of the constructive receipt doctrine or
section 451 with respect to any discretion
provided to the service provider (or former
service provider) with respect to the appli-
cation of these provisions.
In addition, commentators asked how
the final regulations would apply in the
case of the six-month delay for specified
employees of public corporations. Where
a separation from service occurs on or be-
fore December 31, 2007, under circum-
stances that under a reasonable, good faith
interpretation of the statute and applicable
guidance would not result in application
of the six-month delay requirement for a
payment to a specified employee, the be-
ginning or continuation of payments of de-
ferred compensation on or after January
1, 2008, will not result in a violation of
the six-month delay requirement for a pay-
ment to a specified employee.
XIII.Additional Transition Relief
A.Collectively bargained plans
Consistent with Notice 2006–79, §3.05,
the final regulations provide that a non-
qualified deferred compensation plan
maintained pursuant to one or more col-
lective bargaining agreements in effect on
October 3, 2004, is not required to comply
with the provisions of section 409A on or
before the earlier of the date on which the
last of such collective bargaining agree-
ments terminates (determined without
regard to any extension of any agreement
after October 3, 2004) or December 31,
2009.
With respect to amounts deferred under
a nonqualified deferred compensation plan
maintained pursuant to one or more col-
lective bargaining agreements in effect on
October 3, 2004, the plan may provide, or
be amended to provide, for new payment
elections with respect to both the time
and form of payment of such amounts,
and the election or amendment will not be
treated as a change in the time or form of
payment under section 409A(a)(4) or an
acceleration of a payment under section
409A(a)(3), provided that the plan is so
amended and elections are made before
the date on which section 409A first ap-
plies to such plan. A deferral election may
be made with respect to an amount that
is a short-term deferral within the mean-
ing of §1.409A–1(b)(4), provided that the
election is made before the date on which
section 409A would apply to an amount
deferred under such plan and before Jan-
uary 1 of the calendar year in which the
amount would otherwise have been paid.
B.Requirement to amend plans on or
before December 31, 2007
Where there have been deferrals of
compensation under a plan as of January
1, 2008 but the deferred compensation
has not been paid, the plan must be made
compliant with section 409A on or be-
fore December 31, 2007, with respect
to such deferred compensation. These
amendments are required only to bring the
document into compliance effective Jan-
uary 1, 2008, and are not required to reflect
any amendments made or actions taken
under the transition rules to the extent such
amendments or actions do not affect the
plan’s compliance with section 409A and
these regulations for periods on or after
January 1, 2008. For example, if a plan
contains a haircut provision permitting an
immediate distribution contingent on the
forfeiture of a certain portion of a deferred
amount, the haircut provision need not
be removed retroactively for periods be-
fore January 1, 2008, where the plan has
been operated in compliance with the ap-
plicable transition guidance (and thus no
payment pursuant to the haircut provision
has been made after December 31, 2004).
In addition, a plan need not be amended
to be made compliant with section 409A
with respect to amounts deferred under
the plan that were paid on or before De-
cember 31, 2007, in compliance with the
transition guidance. However, the tax-
payer must be able to demonstrate that the
plan was operated in compliance with the
transition guidance, including demonstrat-
ing that amounts were deferred or paid
in compliance with the transition rules.
For example, where payments were made
in conjunction with elections of payment
dates by either the service recipient or ser-
vice provider during the transition period,
the taxpayer must be able to demonstrate
that the elections were provided and made
in accordance with the transition rules.
XIV.Calculation and Timing of Income
Inclusion Amounts, Reporting and
Withholding
A.In general
These regulations do not address the
calculation and timing of amounts re-
quired to be included in income under
section 409A(a). Nor do these regulations
address the reporting and withholding
2007–19 I.R.B.1167May 7, 2007

requirements applicable to service re-
cipients providing nonqualified deferred
compensation coveredbysection409A.
The Treasury Department and the IRS
intend to issue further guidance, includ-
ing such transition guidance as may be
appropriate with respect to the reporting
and withholding requirements. See Notice
2006–100, 2006–51 I.R.B. 1109, for tran-
sition rules applicable to the reporting and
withholding requirements for 2005 and
2006. See §601.601(d)(2).
B.Operational violations during the
transition period
Commentators on the proposed regula-
tions and Notice 2006–100 asked whether
a service provider whose nonqualified de-
ferred compensation plan violated section
409A in operation before January 1, 2008,
would be required to include an amount in
income under section 409A only in the tax-
able year of the service provider in which
the operational failure occurred (assuming
this was the only year of an operational
failure), or in such year and all prior years
beginning after December 31, 2004. Com-
mentators argued that for years before the
operational violation, the taxpayer could
be treated as operating the plan in rea-
sonable, good faith compliance with the
statute and Notice 2005–1, and therefore
should be required to include an amount
in income under section 409A only for the
year in which the operational violation oc-
curred. For example, where a taxpayer ex-
ercised a discounted stock option covered
by section 409A in 2006, commentators ar-
gued that the taxpayer should be treated
as operating the plan in reasonable, good
faith compliance with section 409A dur-
ing 2005, so that the taxpayer would be re-
quired to include an amount in income as
a result of the section 409A violation only
to 2006.
Where an operational failure occurs in
2006 or 2007, and no operational failures
occurred in any prior year, the taxpayer
(including the service recipient) may re-
port the amounts required to be included
in income under section 409A as taxable
income only in the year of the operational
failure. In addition, where the violation re-
sults from a payment, a taxpayer may in-
clude the required amount in income only
for the year in which such violation occurs,
regardless of whether the portion of the
deferred compensation plan under which
such payment was made is ever amended
to comply with the requirements of section
409A for periods before such payment.
For example, where a taxpayer exercises
a discounted stock option subject to sec-
tion 409A in 2006, and there was no oper-
ational violation in 2005, the taxpayer may
include an amount in income under section
409A for 2006, and the taxpayer will not
be required to include an amount in income
with respect to such stock option for 2005,
even if the taxpayer does not amend the
stock option to comply with section 409A
for 2005. However, where all or part of
the total amount deferred in the year of the
violation was also an amount deferred in
one or more prior years that was not sub-
ject to a substantial risk of forfeiture in
such year, taxpayers are also required to
calculate and pay any applicable tax under
section 409A(a)(1)(B)(i)(I) (based on the
amount of interest determined under sec-
tion 409A(a)(1)(B)(ii)). For example, if
the discounted stock right in the previous
example was not subject to a substantial
risk of forfeiture asof December 31, 2005,
the taxpayer would be required to compute
and report the additional tax under section
409A(a)(1)(B)(i)(I) on the taxpayer’s 2006
return. For purposes of this paragraph,
the service recipient should treat the appli-
cation of section 409A in the same man-
ner for purposes of income tax withhold-
ing and reporting obligations.
C.Application of plan aggregation rules
during the transition period
Notice 2006–100 provides that where
there is a required income inclusion un-
der section 409A in 2006, the plan ag-
gregation rules apply in determining the
amount includible in income. Commen-
tators asked whether the plan aggregation
rules would apply where the taxpayer vi-
olates section 409A in 2006 with respect
to one arrangement (the first arrangement),
but retains the right to modify another ar-
rangement (the second arrangement) to ex-
clude a right to an amount provided un-
der the second arrangement from coverage
under section 409A, where the second ar-
rangement would otherwise be aggregated
with the first arrangement. For this pur-
pose, if the legally binding right to the
amount under the secondarrangement ulti-
mately is modified (including, where per-
mitted by applicable guidance, by the sub-
stitution of another right for such right),
so that the right to the amount is excluded
from coverage under section 409A, then
the right to the amount is treated as al-
ways having been excluded from cover-
age under section 409A. Accordingly, the
amount payable under the second arrange-
ment would not be required to be aggre-
gated with the first arrangement for pur-
poses of determining the amount includi-
ble in income under section 409A. How-
ever, if the right to the amount under the
second arrangement is not timely modified
to be excluded from coverage under sec-
tion 409A, the right to the amount under
the second arrangement will remain sub-
ject to the plan aggregation rules regard-
less of whether the second arrangement
is, or is amended to be, compliant with
the requirements of section 409A. In such
a case, because the right to the amount
under the second arrangement could have
been modified to be excluded from cov-
erage under section 409A, and would not
have been subject to the plan aggregation
rules, the violation with respect to the sec-
ond arrangement is not treated as occur-
ring until the first taxable year of the ser-
vice provider during which the arrange-
ment could not have been so modified.
For example, assume a taxpayer with a
calendar year taxable year exercised a dis-
counted stock right during 2006 in viola-
tion of section 409A and that the taxpayer
held another unexercised discounted stock
right described in Notice 2006–79, §3.07
(relating to certain stock rights issued to
corporate insiders) that could have been
modified by December 31, 2006, to be ex-
cluded from coverage (by exchanging such
stock right for another stock right pursuant
to the preamble to the proposed regula-
tions). If the unexercised stock right was
not so modified by December 31, 2006, it
would violate section 409A on January 1,
2007. Alternatively, assume a second tax-
payer exercised a discounted stock right
in 2006 in violation of section 409A and
that taxpayer held another unexercised dis-
counted stock right (not described in No-
tice 2006–79, §3.07) that could have been
modified by December 31, 2007, to be ex-
cluded from coverage. If the second tax-
payerfailedtotimelymodifysuchunex-
ercised stock right, the unexercised stock
right would violate section 409A on Jan-
uary 1, 2008.
May 7, 200711682007–19 I.R.B.

D.Failures to amend during the transition
period to comply with the rules of section
409A
Commentators asked how section 409A
and these regulations would apply to a plan
that was operated in compliance with the
transition guidance through December 31,
2007, but is not amended to become com-
pliant with section 409A and these regu-
lations by December 31, 2007. For these
purposes, the plan will be treated as failing
to comply with the requirements of sec-
tion 409A and these regulations as of Jan-
uary 1, 2008, so that no amounts will be
required to be included in income under
section 409A with respect to such a vio-
lation for any taxableyear ending before
January 1, 2008. However, this does not
affect the application of the tax imposed
by section 409A(a)(1)(B)(i)(I) to amounts
that were deferred in taxable years ending
before January 1, 2008, to the extent that
such amounts were not subject to a sub-
stantial risk of forfeiture in one or more of
such earlier taxable years.
XV.Offshore Trusts and Arrangements
with Financial Triggers
These regulations do not address the
application of section 409A(b), gener-
ally prohibiting the use of offshore trusts
associated with nonqualified deferred
compensation plans, and the use of trig-
gers whereby amounts held in a trust or
other arrangement become restricted to
the use for payment of nonqualified de-
ferred compensation upon an event related
to the financial health of the service re-
cipient. For transition guidance related
to the application of section 409A(b) to
certain outstanding arrangements, see No-
tice 2006–33, 2006–15 I.R.B. 754. See
§601.601(d)(2). Taxpayers may continue
to rely upon Notice 2006–33 until further
guidance is issued.
Applicability Date
These regulationsare applicable for
taxable years beginning on or after Jan-
uary 1, 2008. Taxpayers may rely on the
provisions of these final regulations for
taxable years beginning before January 1,
2008.
Effect on Other Documents
Notice 2005–1, 2005–1 C.B. 274, is
obsoleted for taxable years beginning on
or after January 1, 2008, except for the
following sections of the guidance which
remain effective as modified by any other
applicable guidance: Q&A–6 (applica-
tion to arrangements covered by section
457); Q&A–7 (application to arrange-
ments between a partnership and a partner
of the partnership); and Q&A–24 through
Q&A–38 (information reporting and with-
holding guidance). For a discussion of
the effect of reliance upon Notice 2005–1
or the proposed regulations for taxable
years beginning before January 1, 2008,
for arrangements continuing into taxable
years beginning on or after January 1,
2008, see section XII of this preamble.
See §601.601(d)(2).
Notice 2006–4, 2006–3 I.R.B. 307,
addressing certain stock rights issued be-
fore January 1, 2008, is superseded by
these final regulations with respect to
stock rights issued in taxable years of the
service provider beginning on or after Jan-
uary 1, 2008. For a discussion of the effect
of reliance upon Notice 2005–1, Notice
2006–4, or the proposed regulations for
taxable years beginning before January 1,
2008, for stock rights remaining outstand-
ing on or after January 1, 2008, see section
XII of this preamble.
Notice 2006–33, 2006–15 I.R.B. 754,
Notice 2006–79, 2006–43 I.R.B. 763, and
Notice 2006–100, 2006–51 I.R.B. 1109,
are not affected by these final regulations.
Notice 2006–64, 2006–29 I.R.B. 88, is su-
perseded by the final regulations effective
for taxable years of a service provider be-
ginning on or after January 1, 2008. See
§601.601(d)(2).
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and
because the regulation does not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Code, the notice of pro-
posed rulemaking preceding these regula-
tions was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Stephen Tackney of the Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Enti-
ties). However, other personnel from the
IRS and the Treasury Department partici-
pated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Sections 1.409A–0 through
1.409A–6 are added to read as follows:
§1.409A–0 Table of contents.
This section lists captions contained
in §§1.409A–1, 1.409A–2, 1.409A–3,
1.409A–4, 1.409A–5 and 1.409A–6.
§1.409A–1 Definitions and covered plans.
(a) Nonqualified deferred compensa-
tion plan.
(1) In general.
(2) Qualified employer plans.
(3) Certain foreign plans.
(i) Participation addressed by treaty.
(ii) Participation by nonresident aliens,
certain resident aliens, andbona fideresi-
dents of possessions.
(iii) Participation by U.S. citizens and
lawful permanent residents.
(iv) Plans subject to a totalization agree-
ment and similar plans.
(v) Broad-based foreign retirement
plan.
(4) Section 457 plans.
(5) Certain welfare benefits.
(b) Deferral of compensation.
(1) In general.
(2) Earnings.
2007–19 I.R.B.1169May 7, 2007

(3) Compensation payable pursuant to
the service recipient’s customary payment
timing arrangement.
(4) Short-term deferrals.
(i) In general.
(ii) Certain delayed payments.
(iii) Examples.
(5) Stock options, stock appreciation
rights, and other equity-based compensa-
tion.
(i) Stock rights.
(A) Nonstatutory stock options not pro-
viding for the deferral of compensation.
(B) Stock appreciation rights not pro-
viding for the deferral of compensation.
(C) Stock rights that may provide for
the deferral of compensation.
(D) Feature for the deferral of compen-
sation.
(E) Rights to dividends.
(ii) Statutory stock options.
(iii) Service recipient stock.
(A) In general.
(B) American depositary receipts.
(C) Mutual company units.
(D) Other entities.
(E) Eligible issuer of service recipient
stock.
(1) In general.
(2) Investment vehicles.
(3) Corporate structures established or
transactions undertaken for purposes of
avoiding coverage under section 409A.
(4) Substitutions and assumptions by
reason of a corporate transaction.
(iv) Determination of the fair market
value of service recipient stock.
(A) Stock readily tradable on an estab-
lished securities market.
(B) Stock not readily tradable on an es-
tablished securities market.
(1) In general.
(2) Presumption of reasonableness.
(3) Use of alternative methods.
(v) Modifications, extensions, substitu-
tions, and assumptions of stock rights.
(A) Treatment of modified and ex-
tended stock rights.
(B) Modification in general.
(C) Extensions.
(1) In general.
(2) Certain extensions before April 10,
2007.
(3)Examples.
(D) Substitutions and assumptions of
stock rights by reason of a corporate trans-
action.
(E) Acceleration of date when exercis-
able.
(F) Discretionary added benefits.
(G) Change in underlying stock increas-
ing value.
(H) Change in the number of shares pur-
chasable.
(I) Rescission of changes.
(J) Successive modifications and exten-
sions.
(K) Modifications and extensions in ef-
fect on October 23, 2004.
(vi) Meaning and use of certain terms.
(A) Option.
(B) Date of grant of option.
(C) Stock.
(D) Exercise price.
(E) Exercise.
(F) Transfer.
(G) Readily tradable.
(H) Application to stock appreciation
rights.
(6) Restricted property, section 402(b)
trusts, and section 403(c) annuities.
(i) In general.
(ii) Promises to transfer property.
(7) Arrangements between partnerships
and partners. [Reserved]
(8) Certain foreign plans.
(i) Plans with respect to compensation
covered by treaty or other international
agreement.
(ii) Plans with respect to certain other
compensation.
(iii) Tax equalization agreements.
(iv) Certain limited deferrals of a non-
resident alien.
(v) Additional foreign plans.
(vi) Earnings.
(9) Separation pay plans.
(i) In general.
(ii) Collectively bargained separation
pay plans.
(iii) Separation pay due to involuntary
separation from service or participation in
a window program.
(iv) Foreign separation pay plans.
(v) Reimbursements and certain other
separation payments.
(A) In general.
(B) Medical benefits.
(C) In-kind benefits and direct service
recipient payments.
(D) Limited payments.
(E) Limited period of time.
(vi) Window programs – definition.
(10) Certain indemnification and liabil-
ity insurance plans.
(11) Legal settlements.
(12) Certain educational benefits.
(c) Plan.
(1) In general.
(2) Plan aggregation rules.
(i) In general.
(ii) Dual status.
(3) Establishment of plan.
(i) In general.
(ii) Initial deferralelection provisions.
(iii) Subsequent deferral election provi-
sions.
(iv) Payment accelerations.
(v) Six-month delay for specified em-
ployees.
(vi) Plan amendments.
(vii) Transition rule for written plan re-
quirement.
(viii) Plan aggregation rules.
(d) Substantial risk of forfeiture.
(1) In general.
(2) Stock rights.
(3) Enforcement of forfeiture condition.
(i) In general.
(ii) Examples.
(e) Performance-based compensation.
(1) In general.
(2) Payments based upon subjective
performance criteria.
(3) Equity-based compensation.
(f) Service provider.
(1) In general.
(2) Independent contractors.
(i) In general.
(ii) Related person.
(iii) Significant services.
(iv) Management services.
(v) Services provided to related per-
sons.
(g) Service recipient.
(h) Separation from service.
(1) Employees.
(i) In general.
(ii) Termination of employment.
(2) Independent contractors.
(i) In general.
(ii) Special rule.
(3) Definition of service recipient and
employer.
(4) Asset purchase transactions.
(5) Dual status.
(6) Collectively bargained plans cover-
ing multiple employers.
(i) Specified employee.
(1) In general.
(2) Definition of compensation.
(3) Specified employee identification
date.
May 7, 200711702007–19 I.R.B.

(4) Specified employee effective date.
(5) Alternative methods of satisfying
the six-month delay rule.
(6) Corporate transactions.
(i) Mergers and acquisitions of public
service recipients.
(ii) Mergers and acquisitions of non-
public service recipients.
(iii) Spinoffs.
(iv) Public offerings and other corpo-
rate transactions.
(v) Alternative methods of compliance.
(7) Nonresident alien employees.
(8) Elections affecting the identification
of specified employees.
(j) Nonresident alien.
(k) Established securities market.
(l) Stock right.
(m) Separation pay plan.
(n) Involuntary separation from service.
(1) In general.
(2) Separations from service for good
reason.
(i) In general.
(ii) Safe harbor.
(3) Special rule for certain collectively
bargained plans.
(o) Earnings.
(p) In-kind benefits.
(q) Application of definitions and rules.
§1.409A–2 Deferral elections.
(a) Initial elections as to the time and
form of payment.
(1) In general.
(2) Service recipient elections.
(3) General rule.
(4) Initial deferral election with respect
to short-term deferrals.
(5) Initial deferral election with respect
to certain forfeitable rights.
(6) Initial deferral election with respect
to fiscal year compensation.
(7) First year of eligibility.
(i) In general.
(ii) Eligibility to participate.
(iii) Application to excess benefit plans.
(8) Initial deferral election with respect
to performance-based compensation.
(9) Nonqualified deferred compensa-
tion plans linked to qualified employer
plans or certain other arrangements.
(10) Changes in elections under a cafe-
teria plan.
(11) Initial deferral election with re-
spect to certain separation pay.
(12) Initial deferral election with re-
spect to certain commissions.
(i) Sales commission compensation.
(ii) Investment commission compensa-
tion.
(iii) Commission compensation and re-
lated persons.
(13) Initial deferral election with re-
spect to compensation paid for final pay-
roll period.
(i) In general.
(ii) Transition rule.
(14) Elections to annualize recurring
part-year compensation.
(15) USERRA rights.
(b) Subsequent changes in time and
form of payment.
(1) In general.
(2) Definition of payments for purposes
of subsequent changes in the time and form
of payment.
(i) In general.
(ii) Life annuities.
(A) In general.
(B) Certain features disregarded.
(C) Subsidized joint and survivor annu-
ities.
(D) Actuarial assumptions and meth-
ods.
(iii) Installment payments.
(iv) Transition rule.
(3) Beneficiaries.
(4) Domestic relations orders.
(5) Coordination with prohibition
against acceleration of payments.
(6) Application to multiple payment
events.
(7) Delay of payments under certain cir-
cumstances.
(i) Payments subject to section 162(m).
(ii) Payments that would violate Federal
securities laws or other applicable law.
(iii) Other eventsand conditions.
(8) USERRA rights.
(9) Examples.
(c) Special rules for certain resident
aliens.
§1.409A–3 Permissible payments.
(a) In general.
(b) Designation of payment upon a per-
missible payment event.
(c) Designation of alternative specified
dates or payment schedules based upon
date of permissible event.
(d) When a payment is treated as made
upon the designated payment date.
(e) Designation of time and form of
payment with respect to earnings.
(f) Substitutions.
(g) Disputed payments and refusals to
pay.
(h) Special rule for certain resident
aliens.
(i) Definitions and special rules.
(1) Specified time or fixed schedule.
(i) In general.
(ii) Payment schedules with formula
and fixed limitations.
(A) Individual limitations.
(B) Limitations on aggregate payments
to all participants in substantially identical
plans.
(iii) Payment schedules determined by
timing of payments received by the service
recipient.
(iv) Reimbursement or in-kind benefit
plans.
(A) General rule.
(B) Medical reimbursement arrange-
ments.
(v) Tax gross-up payments.
(vi) Examples.
(2) Separation from service—required
delay in payment to a specified employee
pursuant to a separation from service.
(i) In general.
(ii) Application of payment rules to de-
layed payments.
(3) Unforeseeable emergency.
(i) Definition.
(ii) Amount of payment permitted upon
an unforeseeable emergency.
(iii) Payments due to an unforeseeable
emergency.
(4) Disability.
(i) In general.
(ii) Limited plan definition of disability.
(iii) Determination of disability.
(5) Change in the ownership or effec-
tive control of a corporation, or a change
in the ownership of a substantial portion of
the assets of a corporation.
(i) In general.
(ii) Identification of relevant corpora-
tion.
(A) In general.
(B) Majority shareholder.
(C) Example.
(iii) Attribution of stock ownership.
(iv) Special rules for certain delayed
payments pursuant to a change in control
event.
(A) Certain transaction-based compen-
sation.
2007–19 I.R.B.1171May 7, 2007

(B) Certain nonvested compensation.
(v) Change in the ownership of a corpo-
ration.
(A) In general.
(B) Persons acting as a group.
(vi) Change in the effective control of a
corporation.
(A) In general.
(B) Multiple change in control events.
(C) Acquisition of additional control.
(D) Persons acting as a group.
(vii) Change in the ownership of a sub-
stantial portion of a corporation’s assets.
(A) In general.
(B) Transfers to a related person.
(C) Persons acting as a group.
(6) Certain back-to-back arrangements.
(i) In general.
(ii) Example.
(j) Prohibition on acceleration of pay-
ments.
(1) In general.
(2) Application to multiple payment
events.
(3) Beneficiaries.
(4) Exceptions.
(i) In general.
(ii) Domestic relations order.
(iii) Conflicts of interest.
(A) Compliance with ethics agreements
with the Federal government.
(B) Compliance with ethics laws or
conflicts of interest laws.
(iv) Section 457 plans.
(v) Limited cashouts.
(vi) Payment of employment taxes.
(vii) Payment upon income inclusion
under section 409A.
(viii) Cancellation of deferrals follow-
ing an unforeseeable emergency or hard-
ship distribution.
(ix) Plan terminations and liquidations.
(x) Certain distributions to avoid a non-
allocation year under section 409(p).
(xi) Payment of state, local, or foreign
taxes.
(xii) Cancellation of deferral elections
due to disability.
(xiii) Certain offsets.
(xiv)Bona fidedisputes as to a right to
apayment.
(5) Nonqualified deferred compensa-
tion plans linked to qualified employer
plans or certain other arrangements.
(6) Changes in elections under a cafete-
ria plan.
§1.409A–4 Calculation of income
inclusion. [Reserved]
§1.409A–5 Funding. [Reserved]
§1.409A–6 Application of section 409A
and effective dates.
(a) Statutory application and effective
dates.
(1) Application to amounts deferred.
(i) In general.
(ii) Collectively bargained plans.
(2) Identification of date of deferral for
statutory effective date purposes.
(3)Calculationofamountofcompen-
sation deferred for statutory effective date
purposes.
(i) Nonaccount balance plans.
(ii) Account balance plans.
(iii) Equity-based compensation plans.
(iv) Earnings.
(v) Definition of plan.
(4) Material modifications.
(i) In general.
(ii) Adoptions of new plans.
(iii) Suspension or termination of a
plan.
(iv) Changes to investment measures –
account balance plans.
(v) Stock rights.
(vi) Rescission of modifications.
(vii) Definition of plan.
(b) Regulatory applicability date.
§1.409A–1 Definitions and covered plans.
(a)Nonqualified deferred compen-
sation plan—(1)In general. Except as
otherwise provided in this paragraph (a),
the termnonqualified deferred compen-
sation planmeans any plan (within the
meaning of paragraph (c) of this section)
that provides for the deferral of compensa-
tion (within the meaning of paragraph (b)
of this section). Whether a plan provides
for the deferral of compensation gener-
ally 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 com-
pensation. For example, amounts deferred
under a nonqualified deferred compen-
sation plan do not become an excluded
deathbenefitiftheplanisamendedsothat
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 compensa-
tion 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.Theterm
nonqualified deferred compensation plan
does not include a qualified employer plan.
The termqualified employer planmeans
any of the following plans:
(i) Any plan described in section 401(a)
and a trust exempt from tax under sec-
tion 501(a) or that is described in section
402(d).
(ii) Any annuity plan described in sec-
tion 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 compen-
sation plan (within the meaning of sec-
tion 457(b)).
(viii) Any plan described in sec-
tion 415(m).
(ix) Any plan described in §1022(i)(2)
of the Employee Retirement Income Secu-
rity Act of 1974, Public Law 93–406 (88
Stat. 829, 942) (Sept. 2, 1974) (ERISA).
(3)Certain foreign plans—(i)Partici-
pationaddressedbytreaty. With respect
to an individual for a taxable year, the
termnonqualified deferred compensation
plandoes not include any scheme, trust,
arrangement, or plan maintained with re-
spect to such individual, to the extent con-
tributions made by or on behalf of such
individual to such scheme, trust, arrange-
ment, or plan, or credited allocations, ac-
crued benefits, earnings, or other amounts
constituting income, of such individual un-
der such scheme, trust, arrangement, or
plan, are excludableby such individual
for Federal income tax purposes pursuant
to any bilateral income tax convention, or
other bilateral or multilateral agreement, 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
May 7, 200711722007–19 I.R.B.

during which such individual is a nonres-
ident alien, a resident alien classified
as a resident alien solely under sec-
tion 7701(b)(1)(A)(ii) (and not section
7701(b)(1)(A)(i)), or abona fideresident
of a possession (within the meaning of
section 937(a)), the termnonqualified de-
ferred compensation plandoes 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. cit-
izen or a resident alien classified as a resi-
dent alien under section 7701(b)(1)(A)(i),
other than an individual who is also a
bona fideresident 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 in-
come, 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 applica-
ble 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 pur-
poses of this paragraph (a)(3)(iii), the term
modified foreign earned incomemeans
foreign earned income as defined in sec-
tion 911(b)(1) without regard to section
911(b)(1)(B)(iv) and without regard to
the requirement that the income be attrib-
utable 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 par-
ticipate 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.Theterm
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
termnonqualified deferred compensation
plandoes not include a social security
system of a foreign jurisdiction to the
extent that benefits are provided under
or contributions are made to a govern-
ment-mandated plan as part of that foreign
jurisdiction’s social security system.
(v)Broad-based foreign retirement
plan.Thetermbroad-based foreign re-
tirement planmeans a scheme, trust, ar-
rangement, or plan (regardless of whether
sponsored by a U.S. person) that is written
and that, in the case of an employer-main-
tained plan, satisfies the following condi-
tions:
(A) The plan is nondiscriminatory in-
sofar as the employees who, under the
terms of the plan (alone or in combination
with other comparable plans) and with-
out 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)), orbona fideresidents
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 pro-
vides significant benefits for a substantial
majority of such covered employees.
(C) The benefits actually provided un-
der 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 retire-
ment or restrict access to plan benefits
before separation from service, including
(but not limited to), restricting in-ser-
vice distributions except in events sim-
ilar to an unforeseeable emergency (as
defined in §1.409A–3(i)(3)(i)) or hard-
ship (as defined for purposes of section
401(k)(2)(B)(i)(IV)), or for educational
purposes or the purchase of a primary res-
idence.
(4)Section 457 plans. A nonqualified
deferred compensation plan under sec-
tion 457(f) may constitute a nonqualified
deferred compensation plan for purposes
of this paragraph (a). The rules of sec-
tion 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 compensa-
tion of non-employees described in sec-
tion 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 termnonqualified de-
ferred compensation plandoes not include
a length of service award to abona fide
volunteer under section 457(e)(11)(A)(ii).
For purposes of the application of section
409A to a plan to which section 457 ap-
plies, a payment under the plan generally
means the provision of cash or property to
the service provider, provided that for pur-
poses 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.Theterm
nonqualified deferred compensation plan
does not include a plan, or a portion of
a plan, to the extent that the plan pro-
videsbona fidevacation leave, sick leave,
compensatory time, disability pay, or
death benefits. For these purposes, the
term “disability pay” and “death bene-
fits” have the same meanings as provided
2007–19 I.R.B.1173May 7, 2007

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 insur-
ance 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
termnonqualified deferred compensation
planalso 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, in-
cluding a health reimbursement arrange-
ment, that satisfies the requirements of
section 105 and section 106 such that the
benefits or reimbursements provided un-
der 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 circum-
stances, the service provider has a legally
binding right during a taxable year to com-
pensation 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 de-
ferred compensation for purposes of sec-
tion 409A, this section and §§1.409A–2
through 1.409A–6. A legally binding right
to an amount that will be excluded from in-
come when and if received does not con-
stitute a deferral of compensation, unless
the service provider has received the right
in exchange for, or has the right to ex-
change 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 com-
pensation to the extent that compensation
may be reduced unilaterally or eliminated
by the service recipient or other person af-
ter the services creating the right to the
compensation have been performed. How-
ever, if the facts and circumstances indi-
cate that the discretion to reduce or elim-
inate the compensation is available or ex-
ercisable only upon a condition, or the dis-
cretion to reduce or eliminate the compen-
sation lacks substantive significance, a ser-
vice provider will be considered to have
a legally binding right to the compensa-
tion. Whether the discretion to reduce or
eliminate the compensation lacks substan-
tive significance depends on all the rele-
vant facts and circumstances. However,
where the service provider to whom the
compensation may be paid has effective
control of the person retaining the discre-
tion to reduce or eliminate the compensa-
tion, or has effective control over any por-
tion of the compensation of the person re-
taining the discretion to reduce or elimi-
nate the compensation, or is a member of
the family (as defined in section 267(c)(4)
applied as if the family of an individual in-
cludes the spouse of any member of the
family) of the person retaining the discre-
tion to reduce or eliminate the compen-
sation, the discretion to reduce or elimi-
nate the compensation will not be treated
as having substantive significance. For
this purpose, compensation is not consid-
ered subject to unilateral reduction or elim-
ination merely because it may be reduced
or eliminated by operation of the objec-
tive terms of the plan, such as the applica-
tion of a nondiscretionary, objective pro-
vision creating a substantial risk of forfei-
ture. Similarly, a service provider does not
fail to have a legally binding right to com-
pensation merely because the amount of
compensation is determined under a for-
mula that provides for benefits to be off-
set by benefits provided under another plan
(including a plan that is qualified under
section 401(a)), or because benefits are re-
duced due to actual or notional investment
losses, or, in a final average pay plan, sub-
sequent decreases in compensation.
(2)Earnings. References to the defer-
ral of compensation or deferred compensa-
tion 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 defer-
ral of the compensation to which the earn-
ings 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 compensa-
tion, so that, provided that the rules of sec-
tion 409A are otherwise met, a plan may
provide that earnings will be paid at a sep-
arate 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 recipient’s customary pay-
ment timing arrangement. A deferral of
compensation does not occur solely be-
cause compensation is paid after the last
day of the service provider’s taxable year
pursuant to the timing arrangement un-
der which the service recipient normally
compensates service providers for ser-
vices performed during a payroll period
described in section 3401(b), or with re-
spect to a non-employee service provider,
a period not longer than the payroll pe-
riod described in section 3401(b) or if no
such payroll period exists, a period not
longer than the earlier of the normal tim-
ing arrangement under which the service
provider normally compensates non-em-
ployee service providers or 30 days after
the end of the service provider’s taxable
year.
(4)Short-term deferrals—(i)In gen-
eral. A deferral of compensation does not
occur under a plan with respect to any pay-
ment (as defined in §1.409A–2(b)(2)) that
is not a deferred payment, provided that
the service provider actually or construc-
tively receives such payment on or before
the last day of the applicable 2
1
/2month
period. The following rules apply for pur-
poses of this paragraph (b)(4)(i):
(A) The applicable 2
1
/2monthperiodis
the period ending on the later of the 15
th
day of the third month following the end of
the service provider’sfirst taxable year in
which the right to the payment is no longer
subject to a substantial risk of forfeiture or
the 15
th
day of the third month following
the end of the service recipient’s first tax-
able 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 pay-
ment is includible in income under section
83, the economic benefit doctrine, section
402(b), or section 457(f).
(C)Arighttoapaymentthatisnever
subject to a substantialrisk of forfeiture is
considered to be no longer subject to a sub-
stantial risk of forfeiture on the first date
the service provider has a legally binding
right to the payment.
(D) A payment is a deferred payment
if it is made pursuant to a provision of a
plan that provides for the payment to be
made or completed on or after any date, or
May 7, 200711742007–19 I.R.B.

upon or after the occurrence of any event,
that will or may occur later than the end
of the applicable 2
1
/2month period, such
as a separation from service, death, dis-
ability, change in control event, specified
time or schedule of payment, or unforesee-
able 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
1
/2month period. If
a plan provides that the service provider or
service recipient may make an election un-
der the plan (including an election under
§1.409A–2(a)(4)) of a different payment
date, schedule, or event, such right is dis-
regarded for this purpose. In such cases,
whether a plan provides for a deferred pay-
ment 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 recipi-
ent in fact elected.
(E) A stock right provides for a deferred
payment if such right includes any provi-
sion pursuant to which the holder of the
stock right will or may have the right to
exercise the stock right after the applica-
ble 2
1
/2month 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 un-
der 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 in-
stallment amounts treated as a single pay-
ment), the plan provides for a deferred pay-
ment with respect to the entire payment.
(ii)Certain delayed payments.Apay-
ment that otherwise qualifies as a short-
term deferral under paragraph (b)(4)(i) of
this section but is made after the appli-
cable 2
1
/2month period may continue to
qualify as a short-term deferral if the tax-
payer establishes that it was administra-
tively impracticable to make the payment
by the end of the applicable 2
1
/2month pe-
riod and, as of the date upon which the
legally binding right to the compensation
arose, such impracticability was unfore-
seeable, or the taxpayer establishes that
making the payment by the end of the
applicable 2
1
/2month period would have
jeopardized the ability of the service recip-
ient 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 provider’s control, such
as a failure to provide necessary informa-
tion or documentation, is not an unfore-
seeable event. In addition, a payment that
otherwise qualifies as a short-term defer-
ral under paragraph (b)(4)(i) of this sec-
tion but is made after the applicable 2
1
/2
month period may continue to qualify as
a short-term deferral if the taxpayer estab-
lishes that the servicerecipient reasonably
anticipated that the service recipient’s de-
duction with respect to such payment oth-
erwise would not be permitted by appli-
cation of section 162(m), and, as of the
date the legally binding right to the pay-
ment arose, a reasonable person would not
have anticipated the application of section
162(m) at the time of the payment, and pro-
vided 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 recipient’s deduction with
respect to such payment would no longer
be restricted due to the application of sec-
tion 162(m). For additional rules applica-
ble to certain transaction-based compensa-
tion, 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 other-
wise noted, each employee and each em-
ployer has a calendar year taxable year and
each employee is an individual who is em-
ployed 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 substan-
tial risk of forfeiture. The bonus plan does not pro-
vide 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 end-
ing 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 de-
ferral 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 contin-
ues performing services through December 31, 2010.
The right to the payment is subject to a substantial
risk of forfeiture through December 31, 2010. Em-
ployee 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 de-
ferral of compensation if the bonus is paid or made
available to Employee C on or before March 15, 2011.
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 De-
cember 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 alltimes 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 contin-
ues 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 spec-
ifying a payment date after the applicable 2
1
/2month
period, the bonus plan provides for a deferred pay-
ment. The bonus plan provides for a deferral of com-
pensation, and will not qualify as a short-term defer-
ral regardless of whether the bonus is paid or made
available on or before March 15, 2011 (and generally
any payment before June 1, 2011 would constitute an
impermissible acceleration of a payment).
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 substan-
tial risk of forfeiture. The bonus plan provides for
a lump sum payment upon Employee F’s separation
from service. Because the separation from service
is an event that may occur after the applicable 2
1
/2
month period, the bonus plan provides for a deferred
payment and therefore provides for a deferral of com-
pensation. Accordingly, the bonus plan will not qual-
ify as a short-term deferral regardless of whether Em-
2007–19 I.R.B.1175May 7, 2007

ployee 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 pay-
ment on November 1, 2013, provided that Employee
G continues performing services for Employer T con-
tinuously through November 1, 2013. Because the
life annuity is treated as a single payment, and be-
cause all payments of the life annuity may not occur
during the applicable 2
1
/2month period, the plan pro-
vides 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 re-
quiring services through November 1, 2010. The
stock right becomes exercisable when the substan-
tial risk of forfeiture lapses and expires on November
1, 2013. Employee H continues providing services
through November 1, 2010, at which time the sub-
stantial risk of forfeiture lapses. The stock right pro-
vides 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 compensa-
tion—(i)Stock rights—(A)Nonstatutory
stock options not providing for the deferral
of compensation. Anoptiontopurchase
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 underly-
ing 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 origi-
nal 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 fea-
ture 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 pur-
suant to the exercise of the option first be-
comes substantially vested (as defined in
§1.83–3(b)).
(B)Stock appreciation rights not pro-
viding for the deferral of compensation.A
right to compensation based on the appre-
ciation 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 apprecia-
tion 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 exer-
cise price may never be less than the fair
market value of the underlying stock (dis-
regarding 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 recipi-
ent stock, or a stock appreciation right with
respect to stock other than service recipi-
ent stock, generally will provide for the de-
ferral 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 exer-
cise 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 op-
tion generally will provide for the defer-
ral 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 (dis-
regarding 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 compen-
sation. To the extent a stock right pro-
vides a right other than the right to receive
cash or stock on the date of exercise and
such additional right would otherwise al-
low compensation to be deferred beyond
the date of exercise, the entire arrange-
ment (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 previ-
ously 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 dis-
tributions (other than stock dividends de-
scribed in paragraph (b)(5)(v)(H) of this
section) declared and paid on the number
of shares underlying the stock right be-
tween the date of grant and the date of ex-
ercise of the stock right constitutes an off-
set to the exercise price of the stock op-
tion or an increase in the amount payable
under the stock appreciation right (gener-
ally causing such stock right to be sub-
ject to section 409A). A plan providing a
right to dividends or other distributions de-
clared 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 compensa-
tion, but the existence of the right to re-
ceive such an amount will not be treated as
a reduction to the exercise price of (or an
increase to the compensation payable un-
der) the stock right. Thus, a right to such
dividends or distributions that is not con-
tingent, directly or indirectly, upon the ex-
ercise of a stock right will not cause the
related stock right to fail to satisfy the re-
quirements of the exclusion from the def-
inition of a deferral of compensation pro-
vided in paragraphs (b)(5)(i)(A) and (B) of
this section.
(ii)Statutory stock options.Thegrant
of an incentive stockoption as described
in section 422, or the grant of an op-
tion under an employee stock purchase
May 7, 200711762007–19 I.R.B.

plan described in section 423 (including
thegrantofanoptionwithanexercise
price discounted in accordance with sec-
tion 423(b)(6) andthe accompanying
regulations), does not constitute a deferral
of compensation. However, the exclu-
sion 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 op-
tion. See §1.424–1(e). In such event, the
option is treated for purposes of this para-
graph (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 termservice recipient
stockmeans a class of stock that, as of
the date of grant, is common stock for
purposes of section 305 and the regula-
tions 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 forego-
ing, the termservice recipient stockdoes
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 termservice recipient stockalso 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 re-
cipient stock, to the extent that the stock
traded on a foreign securities market to
which the American depositary receipt or
American depositary share relates quali-
fies as service recipient stock.
(C)Mutual company units.Mutual
company units may constitute service re-
cipient stock. For this purpose, the term
mutual company unitmeans a fixed per-
centage of the overall value of a non-stock
mutual company or association. For pur-
poses of determining the value of the
mutual company unit, the unit may be val-
ued 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 apprecia-
tion 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
basedupon10sharesofacorporation,
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.Aninterestinanen-
tity other than a corporation or non-stock
mutual company or association may con-
stitute service recipient stock to the extent
designated by the Commissioner in rev-
enue procedures, notices, or other guid-
ance published in the Internal Revenue
Bulletin (see §601.601(d)(2) of this chap-
ter).
(E)Eligible issuer of service recipient
stock—(1)In general.Thetermeligible
issuer of service recipient stockmeans
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 corporationinachainofcor-
porations or other entities in which each
corporation or other entity has a control-
ling interest in another corporation or other
entity in the chain, ending with the corpo-
ration 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 termcon-
trolling interesthas 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 termcon-
trolling interesthas 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 busi-
ness 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 le-
gitimate 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 require-
ments 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 ven-
turer. However, where a service provider
has no real nexus with a corporate ven-
turer, 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 in-
vestor corporation’s stock generally would
not be based upon legitimate business cri-
teria. Similarly, where a corporation holds
onlyaminorityinterestinanentitythatin
turn holds a minority interest in the entity
2007–19 I.R.B.1177May 7, 2007

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 corpora-
tion’s stock to the service provider.
(2)Investment vehicles. Notwith-
standing 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 corporation’s minority own-
ership 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 para-
graph (b)(5)(iii)(E)(1)ofthissection,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 establish-
ment 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
recipientgroup,itispresumedthatsuch
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.Ifthe
requirements of paragraph (b)(5)(v)(D) of
this section are met such that the substitu-
tion of a new stock right pursuant to a cor-
porate transaction for an outstanding stock
right, or the assumption of an outstanding
stock right pursuant to a corporate transac-
tion, 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 un-
derlying stock otherwise satisfies the re-
quirements 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 cor-
poration), a stock option to purchase dis-
tributing corporation stock is replaced with
a stock option to purchase distributing cor-
poration stock and a stock option to pur-
chase the spun off subsidiary corporation’s
stock (each otherwise satisfying the re-
quirements of paragraph (b)(5)(iii)(A) of
this section), and where such substitution
is not treated as a modification of the orig-
inal stock option pursuant to paragraph
(b)(5)(v)(D) of this section, both the dis-
tributing corporation stock and the sub-
sidiary corporation stock are treated as ser-
vice recipient stock for purposes of apply-
ing this paragraph (b)(5) to the replace-
ment stock options.
(iv)Determination of the fair market
value of service recipient stock—(A)Stock
readily tradable on an established secu-
rities market. For purposes of paragraph
(b)(5)(i) of this section, in the case of ser-
vice recipient stock that is readily tradable
on an established securities market, the fair
market value of the stock may be deter-
mined based upon the last sale before or
the first sale after the grant, the closing
price on the trading day before or the trad-
ing day of the grant, the arithmetic mean
of the high and low prices on the trad-
ing day before or the trading day of the
grant, or any other reasonable method us-
ing actual transactions in such stock as re-
ported by such market. The determina-
tion of fair market value also may be deter-
mined using an average selling price dur-
ing a specified period that is within 30 days
before or 30 days after the applicable val-
uation date, provided that the program un-
der which the stock right is granted, in-
cluding a program with a single partici-
pant, must irrevocably specify the commit-
ment to grant the stock right with an exer-
cise price set using such an average sell-
ing price before the beginning of the spec-
ified period. For this purpose, the term
average selling pricerefers to the arith-
metic mean of such selling prices on all
trading days during the specified period, or
the average of such prices over the speci-
fied period weighted based on the volume
of trading of such stock on each trading
day during such specified period. To sat-
isfy 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 exer-
cise price including the period over which
the averaging will occur, before the be-
ginning of the specified averaging period.
Notwithstanding the forgoing provisions
of this paragraph (b)(5)(iv)(A), where ap-
plicable foreign law requires that a com-
pensatory stock right be priced based upon
a specific price averaging method and pe-
riod, 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 gen-
eral. For purposes of paragraph (b)(5)(i)
of this section, in the case of service recip-
ient stock that is not readily tradable on an
established securities market, the fair mar-
ket value of the stock as of a valuation date
means a value determined by the reason-
able application of a reasonable valuation
method. The determination whether a val-
uation method is reasonable, or whether an
application of a valuation method is rea-
sonable, is made based on the facts and cir-
cumstances as of the valuation date. Fac-
tors 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 an-
ticipated future cash-flows of the corpora-
tion, 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 read-
ily determined through nondiscretionary,
objective means (such as through trading
prices on an established securities mar-
ket or an amount paid in an arm’s length
private transaction), recent arm’s 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 eco-
May 7, 200711782007–19 I.R.B.

nomic 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 con-
sideration in applying its methodology all
available information material to the value
of the corporation. Similarly, the use of a
value previously calculated under a valua-
tion method is not reasonable as of a later
date if such calculation fails to reflect in-
formation 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 is-
suance of a patent) or the value was cal-
culated with respect to a date that is more
than 12 months earlier than the date for
which the valuation is being used. The ser-
vice recipient’s consistent use of a valua-
tion method to determine the value of its
stock or assets for other purposes, includ-
ing for purposes unrelated to compensa-
tion of service providers, is also a factor
supporting the reasonableness of such val-
uation method.
(2)Presumption of reasonableness.For
purposes of this paragraph (b)(5)(iv)(B),
the use of any of the following methods
ofvaluationispresumedtoresultinarea-
sonable valuation, provided that the Com-
missioner 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 de-
termined 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 val-
uation 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 restric-
tion (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 val-
ued 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
possessingmorethan10percentoftheto-
tal combined voting power of all classes of
stock of the issuer (applying the stock attri-
bution rules of §1.424–1(d)), other than an
arm’s length transaction involving the sale
of all or substantially all of the outstand-
ing 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 ap-
ply with respect to stock subject to a stock
right payable in stock, where the stock ac-
quired 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 cor-
poration 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 se-
curities 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 unre-
lated to the service recipient or service
provider and other than a right or obliga-
tion 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 valua-
tion is applied, or make a public offering
of securities within the 180 days follow-
ing 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 corpora-
tion reasonably determines is qualified to
perform such a valuation based on the per-
son’s or persons’ significant knowledge,
experience, education, or training. Gener-
ally, 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 per-
son 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 expe-
rience in business valuation or appraisal,
financial accounting, investment bank-
ing, 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 dif-
ferent valuation method may be used for
each separate action for which a valuation
is relevant, provided that a single valua-
tion method is used for each separate ac-
tion and, once used, may not retroactively
be altered. For example, one valuation
method may be used to establish the ex-
ercise price of a stock option, and a dif-
ferent valuation method may be used to
determine the value at the date of the re-
purchase 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 af-
ter 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 trad-
able 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, sub-
stitutions, 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
sectionisconsideredtobethegrantof
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 hav-
ing had an additional deferral feature from
2007–19 I.R.B.1179May 7, 2007

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 termmodification
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 modifica-
tion 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.Anex-
tension of a stock right refers to the pro-
vision to the holder of an additional pe-
riod of time within which to exercise the
stock right beyond the time originally pre-
scribed under the terms of the stock right,
the conversion or exchange of a stock right
for a legally binding right to compensa-
tion in a future taxable year, or the ad-
dition 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 para-
graph (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
whentheexercisepriceofthestockright
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
stockusedtodeterminethepaymenttothe
service provider (in the case of a stock ap-
preciation 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 10
th
anniversary of the original date of
grant of the stock right. If the exercise pe-
riod 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
stockusedtodeterminethepaymenttothe
service provider (in the case of a stock ap-
preciation 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 ad-
dition, 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 vi-
olate an applicable Federal, state, local, or
foreign law, or would jeopardize the ability
of the service recipient to continue as a go-
ing concern, provided that the period dur-
ing 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 attribut-
able to services performed during the pe-
riod described in section 911(d)(1)(A) or
(B)) from sources within the foreign coun-
try that promulgated such law.
(2)Certain extensions before April 10,
2007. An extension of a stock right be-
fore April 10, 2007, solely in order to pro-
vide the holder of such stock right an addi-
tional period of time beyond the time orig-
inally 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)ofthissection. Forpur-
poses 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 ex-
ercise such stock right that was prescribed
under the terms of such stock right in ef-
fect 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 exam-
ples illustrate the provisions of this para-
graph (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 tax-
able 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 accor-
dance with paragraph (b)(5)(i)(A) of this section. The
terms of the nonstatutory stock option provide that the
exercise period of the stockoption expires on the ear-
lier of July 1, 2019, or 3 months after Employee A’s
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 be-
yond July 1, 2019, the change is not an extension for
purposes of this paragraph (b)(5)(v)(C).
Example 2.ThefactsarethesameasinExample
1except 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.ThefactsarethesameasinExample
2except 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 Ycommon stock that does
not provide for the deferral of compensation in ac-
cordance with paragraph (b)(5)(i)(B) of this section.
Upon exercise of the stock appreciation right, Em-
ployee 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 re-
spect to which Employee B is exercising the right.
The exercise period of the right expires on the ear-
lier of July 1, 2019, or 3 months after Employee B
May 7, 200711802007–19 I.R.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 em-
ployed 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 dur-
ing calendar year 2018, except that before January
1, 2017, Employee B may elect to designate calen-
dar 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 hav-
ing had an additional deferral feature from the origi-
nal date of grant (July 1, 2009) of the right, and there-
fore 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 pro-
visions of the stock appreciation right relating to the
time and form of payment did not satisfy the require-
ments of §1.409A–3(a). Therefore, the stock appre-
ciation 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 trans-
action. If the requirements of §1.424–1
(without regard to the requirement de-
scribed in §1.424–1(a)(2) that an eligible
corporation be the employer of the op-
tionee) 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 §1.424–1(a)(3))
for an outstanding stock right or the as-
sumption 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 cor-
poration 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 arith-
metic mean of the high and low prices on
the last trading day before or the trading
day of such specified date, or any other rea-
sonable method using actual transactions
insuchstockasreportedbysuchmarket
on a specified date, for the stock of the
distributing corporation and the stock dis-
tributed 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 be-
ginning 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 pre-
specified period.
(E)Acceleration of date when exercis-
able. 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 modifi-
cation 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 pay-
ment date under §1.409A–3(j) or a subse-
quent deferral under §1.409A–2(b).
(F)Discretionary added benefits.Ifa
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 exten-
sion, 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 in-
creasing value. A change in the terms
of the stock subject to a stock right that
increases the value of the stock is a mod-
ification of such stock right, except to
the extent that a new stock right is sub-
stituted 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 addi-
tional shares are subject. Notwithstand-
ing 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 apro rata
basis the number of shares owned by each
shareholder of the class of stock subject to
the stock right, then there is no modifica-
tion 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 aggre-
gate 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 exten-
sion of the stock right to the extent the
change in the terms of the stock right is re-
scinded by the earlier of the date the stock
right is exercised or the last day of the ser-
vice provider’s 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 re-
scinded 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 para-
graph (b)(5)(v).
(J)Successive modifications and exten-
sions. The rules of this paragraph (b)(5)(v)
apply as well to successive modifications
and extensions.
(K)Modifications and extensions in ef-
fect on October 23, 2004. For purposes of
the application of section 409A and these
2007–19 I.R.B.1181May 7, 2007

regulations to a stock right, if a legally
binding right to a modification or exten-
sion 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.Thetermoption
means the right or privilege of an individ-
ual to purchase stock from a corporation by
virtue of an offer of the corporation contin-
uing 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 un-
der 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 termoptionincludes 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)Thelan-
guage thedate of grant of the option,and
similar phrases, refer to the date when the
granting corporation completes the corpo-
rate action necessary to create the legally
binding right constituting the option. A
corporate action creating the legally bind-
ing right constituting the option is not con-
sidered complete until the date on which
the maximum number of shares that can be
purchased under the option and the min-
imum exercise price are fixed or deter-
minable, 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 pro-
vides 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 immedi-
ately, 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 condi-
tion on the granting of an option (as distin-
guished from a condition governing the ex-
ercise of the option), such condition gener-
ally 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 op-
tion will be determined as if the option had
not been subject to such approval. A con-
dition that does not require corporate ac-
tion, such as the approval of, or registra-
tion 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 corpo-
rate 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
corporation’s 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 A’s profits during
the fiscal year preceding the year of exer-
cise 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.Thetermstockmeans capi-
tal stock of any class, including voting or
nonvoting common or preferred stock. Ex-
cept as otherwise provided, the term stock
includes both treasury stock and stock of
original issue. Specialclasses of stock au-
thorized to be issued to and held by em-
ployees are within the scope of the term
stock for this purpose, provided such stock
otherwise possesses the rights and charac-
teristics of capital stock.
(D)Exercise price.Thetermexercise
pricemeans 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
termexercise pricedoes not include any
amounts paid as interest under a deferred
payment plan or treated as interest.
(E)Exercise.Thetermexercise,when
used in reference to an option, means the
act of acceptance by the holder of the op-
tion of the offer to sell contained in the op-
tion. In general, the time of exercise is the
time when there is a sale or a contract to
sell between the corporation and the indi-
vidual. A promise to pay the exercise price
does not constitute anexercise of the op-
tion unless the holder of the option is sub-
ject to personal liability on such promise.
An agreement or undertaking by the ser-
vice provider to make payments under a
stock purchase plan does not constitute the
exercise of an option to the extent the pay-
ments made remain subject to withdrawal
by or refund to the service provider.
(F)Transfer.Thetermtransfer,when
used in reference to the transfer to an indi-
vidual of a share of stock pursuant to the
exercise of an option, means the transfer
of ownership of such share, or the trans-
fer of substantially all the rights of own-
ership. Such transfer must, within a rea-
sonable time, be evidenced on the books
of the corporation. A transfer may occur
even if a share of stock is subject to a sub-
stantial 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 ar-
rangement, the individual may not dispose
of the share for a specified period of time,
or the share is subject to a right of first re-
fusal or a right to acquire the share at the
share’s 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 trad-
able 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 defini-
tions 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 main-
tained by a service recipient, there is no
deferral of compensation merely because
the value of the property is not includi-
ble in income by reason of the property
being substantially nonvested (as defined
in §1.83–3(b)), or is includible in income
May 7, 200711822007–19 I.R.B.

solely due to a valid election under sec-
tion 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 ex-
tent such a transfer is subject to section 83,
section 402(b) or section 403(c). In ad-
dition, for purposes of this paragraph (b),
a right to compensation income that will
be required to be included in income un-
der section 402(b)(4)(A) is not a deferral
of compensation.
(ii)Promises to transfer property.A
plan under which a service provider ob-
tains 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, ac-
cordingly, may constitute a nonqualified
deferred compensation plan. A legally
binding right to receive property in a fu-
ture 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 de-
ferral of compensation and, accordingly,
will not constitute a nonqualified deferred
compensation plan unless offered in con-
junction with another legally binding right
that constitutes a deferral of compensa-
tion.
(7)Arrangements between partnerships
and partners. [Reserved.]
(8)Certain foreign plans—(i)Plans
with respect to compensation covered
by treaty or other international agree-
ment. A plan in which a service provider
participates does not provide for a defer-
ral of compensation for purposes of this
paragraph (b) to the extent that the com-
pensation 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 bind-
ing 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 com-
pensation under the plan would not have
been includible in gross income for Fed-
eral 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 nonres-
ident alien at such time and the compen-
sation would not have been includible in
gross income under section 872.
(B) The service provider was a qualified
individual (as definedin section 911(d)(1))
at such time, the compensation would
have been foreign earned income within
the meaning of section 911(b)(1) (with-
out 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 exclu-
sion 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 indi-
vidual for such taxable year under section
911(a)(1).
(C) The compensation would have been
excludible from gross income under sec-
tion 893.
(D) The compensation would have been
excludible from gross income under sec-
tion 931 or section 933.
(iii)Tax equalization agreements.A
tax equalization agreement does not pro-
vide for a deferral ofcompensation if pay-
ments 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
provider’s U.S. Federal income tax return
is required to be filed (including any exten-
sions) for the year to which the compen-
sation subject to the tax equalization pay-
ment relates, or, if later, the second tax-
able year of the service provider begin-
ning after the latest such taxable year in
which the service provider’s foreign tax re-
turn or payment is required to be filed or
made for the year to which the compen-
sation subject to the tax equalization pay-
ment relates. Where such payments arise
due to an audit, litigation or similar pro-
ceeding, the right to the payments will not
be treated as resulting in a deferral of com-
pensation if the payments are scheduled
and made in accordance with the provi-
sions of §1.409A–3(i)(1)(v) (timing of tax
gross-up payments). For purposes of this
paragraph (b)(8)(iii), the termtax equal-
ization agreementrefers to an agreement,
method, program, or other arrangement
that provides payments intended to com-
pensate the service provider for some or all
of the excess of the taxes actually imposed
by a foreign jurisdiction on the compen-
sation paid by the service recipient to the
service provider over the taxes that would
be imposed if the compensation were sub-
ject 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 im-
posed on the compensation paid by the ser-
vice to the service provider over the taxes
that would be imposed if the compensa-
tion were subject solely to taxes in the for-
eign jurisdiction, provided that the pay-
ment made under such agreement, method,
program, or other arrangement may not ex-
ceed such excess and the amount neces-
sary 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 non-
resident 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 ser-
vices performed by the nonresident alien
in the United States exceed the applicable
dollar amount, an amount of such defer-
rals equal to such amount is treated as not
deferred under a nonqualified deferred
compensation plan. For purposes of this
paragraph (b)(8)(iv), the termforeign plan
means a plan that, together with all sub-
stantially 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
2007–19 I.R.B.1183May 7, 2007

section 7701(b)(1)(A)(ii) (and not section
7701(b)(1)(A)(i)).
(v)Additional foreign plans.Aplanin
which a service provider participates does
not provide for a deferral of compensa-
tion for purposes of this paragraph (b) to
the extent designated by the Commissioner
in revenue procedures, notices, or other
guidance published in the Internal Rev-
enue Bulletin (see §601.601(d)(2) of this
chapter).
(vi)Earnings. Earnings on compensa-
tion excluded from the definition of defer-
ral of compensation pursuant to this para-
graph (b)(8) are also not treated as a defer-
ral of compensation.
(9)Separation pay plans—(i)In gen-
eral. A plan that otherwise provides for a
deferral of compensation under this para-
graph (b) does not fail to provide a deferral
of compensation merely because the right
to payment of the compensation is con-
ditioned upon a separation from service.
However, paragraphs (b)(9)(ii), (iii), (iv),
and (v) of this section provide rules con-
cerning the extent to which certain separa-
tion pay plans do not provide for the defer-
ral of compensation. The exceptions con-
tained in paragraphs (b)(9)(ii), (iii), (iv),
and (v) of this section may be used in
combination, such that compensation un-
der a plan that would be excepted under
one of those paragraphs may be treated
as excepted under another of those para-
graphs, so that other compensation under
a plan may be treated as excepted under
the first of such paragraphs. Notwithstand-
ing any other provision of this paragraph
(b)(9), any payment or benefit, or entitle-
ment 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 compensa-
tion plan constitutes a payment or a de-
ferral of compensation under the separate
nonqualified deferred compensation plan,
and does not constitute a payment or defer-
ral of compensation under a separation pay
plan. If a service provider receives a pay-
ment at separation from service and also
has a legally binding right to an amount of
deferred compensation that would be for-
feited upon the separation from service,
whether the payment acts as an accelera-
tion of vesting and substitute payment for
the amount of deferred compensation for-
feited, or whether the deferred compensa-
tion is treated as forfeited and the amount
paid is treated as a separate payment of cur-
rent compensation, is determined based on
the facts and circumstances, provided that,
where the separation from service is vol-
untary, it is presumed that the payment re-
sults from an acceleration of vesting fol-
lowed by a payment of the deferred com-
pensation that is subject to section 409A.
Accordingly, any change in the payment
schedule to accelerate or defer the pay-
ments would be subject to the rules of sec-
tion 409A. The presumption that a right
to a payment is not a new right, but is in-
stead a right substituted for a pre-existing
forfeited right, may be rebutted by demon-
strating that the service provider would
have obtained the right to the payment re-
gardless 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 de-
nominator 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 fu-
ture 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 pre-
sumption 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 non-
vested 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 bar-
gained separation pay plan that provides
for separation pay only upon an involun-
tary separation from service or pursuant to
a window program. Only the portion of the
separation pay plan attributable to employ-
ees covered by abona fidecollective bar-
gaining agreement is considered to be pro-
vided under a collectively bargained sep-
aration pay plan. A collectively bargained
separation pay plan is a separation pay plan
that meets the following conditions:
(A) The separation pay plan is con-
tained within an agreement that the Secre-
tary of Labor determines to be a collective
bargaining agreement.
(B) The separation pay provided by the
collective bargaining agreement was the
subject of arm’s length negotiations be-
tween 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 separa-
tion pay to be provided under the agree-
ment.
(iii)Separation pay due to involuntary
separation from service or participation in
a window program. A separation pay plan
that is not described inparagraph (b)(9)(ii)
of this section and thatprovides for separa-
tion pay only upon an involuntary separa-
tion 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 separa-
tion pay, or portion of the separation pay,
provided under the plan meets the follow-
ing 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 provider’s
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 ser-
vice with such service recipient (adjusted
for any increase during that year that was
expected to continue indefinitely if the ser-
vice provider had not separated from ser-
vice); 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 separa-
tion from service.
May 7, 200711842007–19 I.R.B.

(B) The plan provides that the sep-
aration pay described in paragraph
(b)(9)(iii)(A) of this section must be paid
no later than the last day of the second tax-
able 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 pro-
viding payments upon a voluntary sepa-
ration from service) does not provide for
deferred compensation to the extent the
plan provides for amounts of separation
payrequiredtobeprovidedundertheap-
plicable law of a foreign jurisdiction. For
this purpose, a provision of foreign law
shall be considered applicable only to for-
eign earned income (as defined under sec-
tion 911(b)(1) without regard to section
911(b)(1)(B)(iv) and without regard to the
requirement that the income be attribut-
able to services performed during the pe-
riod described in section 911(d)(1)(A) or
(B)) from sources within the foreign coun-
try 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 vol-
untary 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 in-
curred in connection with the performance
of services (ignoring any applicable limi-
tation based on adjusted gross income), or
of reasonable outplacement expenses and
reasonable moving expenses actually in-
curred by the serviceprovider 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 lim-
ited period of time (regardless of whether
such rights extend beyond the limited
period of time). For purposes of this para-
graph (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 provider’s
entitlement to in-kind benefits from the
service recipient, or a payment by the ser-
vice recipient directly to the person pro-
viding 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 reimburse-
ment 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 pay-
ment 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 pur-
poses 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 sepa-
ration from service occurred.
(vi)Window programs — definition.
The termwindow programrefers to a pro-
gram 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 ser-
vice 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 sim-
ilar separation pay in similar situations
for substantially consecutive, limited pe-
riods of time. Whether the recurrence
of these programs constitutes a pattern
is determined based on the facts and cir-
cumstances. 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 employer’s
business.
(10)Certain indemnification and liabil-
ity insurance plans. A plan in which a ser-
vice 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 indemnifica-
tion of, or the purchase of an insurance pol-
icy providing for payments of, all or part
of the expenses incurred or damages paid
or payable by a service provider with re-
spect to abona fideclaim against the ser-
vice provider or service recipient, includ-
ing amounts paid or payable by the service
provider upon the settlement of abona fide
claim against the service provider or ser-
vice 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 compensa-
tion for purposes of this paragraph (b) to
the extent that the agreement provides for
2007–19 I.R.B.1185May 7, 2007

amounts paid as settlements or awards
resolvingbona fidelegal claims based
on wrongful termination, employment
discrimination, the Fair Labor Standards
Act, or worker’s compensation statutes,
including claims under applicable Fed-
eral, state, local, or foreign laws, or for
reimbursements or payments of reason-
able attorneys feesor other reasonable
expenses incurred by the service provider
relatedtosuchbona fidelegal claims,
regardless of whether such settlements,
awards, or reimbursement or payment
of expenses pursuant to such claims are
treated as compensation or wages for Fed-
eral 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 actualbona
fideclaim 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 fideclaim for damages under ap-
plicable law, such asamounts 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 fideclaim. For this purpose, a pro-
vision of foreign law shall be considered
applicable only to foreign earned income
(as defined under section 911(b)(1) with-
out regard to section 911(b)(1)(B)(iv) and
without regard to the requirement that the
income be attributable to services per-
formed during the period described in
section 911(d)(1)(A) or (B)) from sources
within the foreign country that promul-
gatedsuchlaw.
(12)Certain educational benefits.A
plan in which a service provider partic-
ipates does not provide for a deferral of
compensation to the extent the plan pro-
vides for taxable educational benefits. For
purposes of this paragraph (b)(12), the
termeducational benefitsrefers 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 ac-
companying regulations, and does not
refer to any benefits provided for the edu-
cation of any other person, including any
spouse, child, or other family member of
the service provider.
(c)Plan—(1)In general.Thetermplan
includes any agreement, method, program,
or other arrangement, including an agree-
ment, method, program, or other arrange-
ment that applies to one person or individ-
ual. A plan may be adopted unilaterally
by the service recipient or may be negoti-
ated or agreed to by the service recipient
and one or more service providers or ser-
vice provider representatives. An agree-
ment, method, program, or other arrange-
ment may constitute a plan regardless of
whether it is an employee benefit plan un-
dersection3(3)ofERISA,asamended
(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 gen-
eral. 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 compen-
sation 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 ex-
tent that the plan is described in paragraph
(c)(2)(i)(D),(E),(F),(G),or(H)ofthis
section, are treated as deferred under a sin-
gle plan. For purposes of this paragraph,
the termaccount balance planmeans—
(1) An agreement, method, pro-
gram, 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)ofthissection
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 re-
spect 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 sin-
gle plan. For purposes of this paragraph
(c)(2)(i)(C), the termnonaccount balance
planmeans—
(1) An agreement, method, pro-
gram, or other arrangement that is a
nonaccount balance plan as defined in
§31.3121(v)(2)–1(c)(2)(i) of this chap-
ter, including mandatorily bifurcating the
agreement, method, program, or other ar-
rangement 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 para-
graph (m) of this section) of the service
recipient to the extent an amount deferred
under the plans is not described in para-
graph (c)(2)(i)(E) of this section and is
payable solely upon an involuntary sepa-
ration 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 reimburse-
ments 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 forperforming services
for the service recipient or the overall
compensation received due to a separation
May 7, 200711862007–19 I.R.B.

from service, are treated as deferred under
asingleplan.
(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 com-
pensation is governed by §1.61–22 or
§1.7872–15 (split-dollar life insurance ar-
rangements), or the taxation of such com-
pensation 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 recip-
ient 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 partici-
pate 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 ar-
rangement), are treated as deferred under
asingleplan.
(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 (l) of this section) subject to sec-
tion 409A, are treated as deferred under a
single plan.
(I) All deferrals of compensation with
respect to that service provider under all
plans of the service recipient to the extent
such plans are not described in paragraph
(c)(2)(i)(A),(B),(C),(D),(E),(F),(G),or
(H) of this section are treated as deferred
under a single plan.
(ii)Dual status. Agreements, meth-
ods, programs, and other arrangements
in which a service provider participates
are not aggregated with other agreements,
methods, programs,and other arrange-
ments to the extent the service provider
participates in one set of agreements,
methods, programs,and other arrange-
ments due to status as an employee of the
service recipient (employee arrangements)
and another set of agreements, methods,
programs, and other arrangements due to
status as an independent contractor of the
service recipient (independent contractor
arrangements). For example, where a
service provider deferred amounts under
an independent contractor arrangement
while providing services as an indepen-
dent contractor, and then becomes eligible
for and defers amounts under a separate
employee arrangement after being hired
as an employee, the two arrangements
will not be aggregated for purposes of this
paragraph (c)(2). Where an employee also
is a member of the board of directors of
the service recipient (or a similar position
with respect to a non-corporate service re-
cipient), the arrangements under which the
employee participates as a director (direc-
tor arrangements) are not aggregated with
employee arrangements, provided that the
director arrangements are substantially
similar to arrangements provided to ser-
vice providers providing services only as
directors (or similar positions with respect
to non-corporate service recipients). For
example, an employee director who par-
ticipates in an employee arrangement and
a director arrangement generally may treat
the two arrangements as separate plans,
provided that the director arrangement is
substantially similar to arrangements pro-
viding benefits to non-employee directors.
To the extent a plan in which an employee
director participates is not substantially
similar to arrangements in which non-em-
ployee directors participate, such plan is
treated as an employee plan for purposes
of this paragraph (c)(2). Director plans
and independent contractor plans are ag-
gregated for purposes of this paragraph
(c)(2).
(3)Establishment of plan—(i)In gen-
eral. A plan does not satisfy the require-
ments of section 409A and this section
and §§1.409A–2 through 1.409A–3 and
§§1.409A–5 through 1.409A–6, unless the
plan is established and maintained by a
service recipient in accordance with the
requirements of this section, §§1.409A–2
through 1.409A–3 and §§1.409A–5
through 1.409A–6. For purposes of this
paragraph (c)(3), a plan is established on
the latest of the date on which it is adopted,
the date on which it is effective, and the
date on which the material terms of the
plan are set forth in writing. The mate-
rial terms of the plan may be set forth in
writing in one or more documents. For
purposes of this paragraph (c)(3)(i), a plan
will be deemed to be set forth in writing
if it is set forth in any other form that is
approved by the Commissioner. The ma-
terial terms of the plan include the amount
(or the method or formula for determining
the amount) of deferred compensation to
be provided under the plan and the time
and form of payment. Notwithstanding
the foregoing, a plan will be deemed to be
established as of the date the participant
obtains a legally binding right to a deferral
of compensation, provided that the plan
is otherwise established under the rules
of this paragraph (c)(3)(i) by the end of
the taxable year of the service provider in
which the legally binding right arises, or
with respect to an amount not payable in
the year immediately following the tax-
able year of the service provider in which
the legally binding right arises (the sub-
sequent year), the 15th day of the third
month of the subsequent year.
(ii)Initial deferral election provisions.
If a plan provides a service provider or
a service recipient with an initial defer-
ral election, the plan satisfies the require-
ments of this paragraph (c)(3) if the plan
sets forth in writing, on or before the date
the applicable election is required to be
irrevocable to satisfy the requirements of
§1.409A–2(a), the conditions under which
such election may be made.
(iii)Subsequent deferral election provi-
sions. If a plan permits a subsequent de-
ferral election described in §1.409A–2(b),
the plan satisfies the requirements of this
paragraph (c)(3) if the plan sets forth in
writing, on or before the date the election
is required to be irrevocable to meet the
requirements of §1.409A–2(b), the condi-
tions under which such election may be
made.
(iv)Payment accelerations. Except as
explicitly provided in §1.409A–3, a plan
isnotrequiredtosetforthinwritingthe
conditions under which a payment may be
accelerated if such acceleration is permit-
ted under §1.409A–3(j)(4).
2007–19 I.R.B.1187May 7, 2007

(v)Six-month delay for specified em-
ployees. A plan must provide that distri-
butions to a specified employee may not
be made before the date that is six months
after the date of separation from service or,
if earlier, the date of death (the six-month
delay rule). The six-month delay rule, re-
quired for payments due to the separation
from service of a specified employee, must
be written in the plan. A plan does not fail
to be established and maintained merely
because it does not contain the six-month
delay rule when the service provider who
has a right to compensation deferred un-
der such plan is not a specified employee.
However, such provision must be set forth
in writing on or before the date such ser-
vice provider first becomes a specified em-
ployee. In general, this means the provi-
sion must be set forth in writing on or be-
fore the specified employee effective date
(as defined in paragraph (i)(3) of this sec-
tion) for the first listof specified employ-
ees that includes such service provider.
(vi)Plan amendments. In the case of
an amendment that increases the amount
deferred under a nonqualified deferred
compensation plan, the plan is not con-
sidered established with respect to the
additional amount deferred until the plan,
as amended, is established in accordance
with paragraph (c)(3)(i) of this section.
(vii)Transition rule for written plan re-
quirement. For purposes of this paragraph
(c)(3), a legally enforceable unwritten plan
that was adopted and effective before De-
cember 31, 2007, is treated as established
under this section as of the later of the date
on which it was adopted or became effec-
tive, provided that the material terms of the
plan are set forth in writing on or before
December 31, 2007.
(viii)Plan aggregation rules. The plan
aggregation rules of paragraph (c)(2)(i) of
this section do not apply to the require-
ments of this paragraph (c)(3). Accord-
ingly, deferrals of compensation under an
agreement, method, program, or other ar-
rangement that fails to meet the require-
ments of section 409A solely due to a fail-
ure to meet the requirements of this para-
graph (c)(3) are not aggregated with de-
ferrals of compensation under other agree-
ments, methods, programs, or other ar-
rangements that meet such requirements.
(d)Substantial risk of forfeiture—(1)In
general. Compensation is subject to a sub-
stantial risk of forfeiture if entitlement to
the amount is conditioned on the perfor-
mance of substantial future services by any
person or the occurrence of a condition re-
lated to a purpose of the compensation, and
the possibility of forfeiture is substantial.
For purposes of this paragraph (d), a con-
dition related to a purpose of the compen-
sation must relate to the service provider’s
performance for the service recipient or
the service recipient’s business activities
or organizational goals (for example, the
attainment of a prescribed level of earn-
ings or equity value or completion of an
initial public offering). For purposes of
this paragraph (d), if a service provider’s
entitlement to the amount is conditioned
on the occurrence of the service provider’s
involuntary separation from service with-
out cause, the right is subject to a sub-
stantial risk of forfeiture if the possibility
of forfeiture is substantial. An amount is
not subject to a substantial risk of forfei-
ture merely because the right to the amount
is conditioned, directly or indirectly, upon
the refraining from the performance of ser-
vices. Except as provided with respect
to certain transaction-based compensation
under §1.409A–3(i)(5)(iv), the addition of
any risk of forfeiture after the legally bind-
ing right to the compensation arises, or any
extension of a period during which com-
pensation is subject to a risk of forfeiture,
is disregarded for purposes of determining
whether such compensation is subject to a
substantial risk of forfeiture. An amount
will not be considered subject to a sub-
stantial risk of forfeiture beyond the date
or time at which the recipient otherwise
could have elected to receive the amount
of compensation, unless the present value
of the amount subject to a substantial risk
of forfeiture (disregarding, in determining
the present value, the risk of forfeiture) is
materially greater than the present value of
the amount the recipient otherwise could
have elected to receive absent such risk
of forfeiture. For this purpose, compen-
sation that the service provider would re-
ceive for continuing to perform services
regardless of whether the service provider
elected to receive the amount that is sub-
ject to a substantial risk of forfeiture is not
taken into account in determining whether
the present value of the right to the amount
subject to a substantial risk of forfeiture is
materially greater than the amount the re-
cipient otherwise could have elected to re-
ceive absent such risk of forfeiture. For
example, a salary deferral generally may
not be made subject to a substantial risk
of forfeiture. But, for example, where a
bonus plan provides an election between a
cash payment or restricted stock units with
a present value that is materially greater
(disregarding the risk of forfeiture) than
the present value of such cash payment and
that will be forfeited absent continued ser-
vices for a period of years, the right to
the restricted stock units generally will be
treated as subject to a substantial risk of
forfeiture.
(2)Stock rights. A stock right is not
subject to a substantialrisk of forfeiture at
the earlier of the first date the holder may
exercise the stock right and receive cash or
property that is substantially vested (as de-
fined in §1.83–3(b)) or the first date that
the stock right is not subject to a forfeiture
condition that would constitute a substan-
tial risk of forfeiture. Accordingly, a stock
option that the service provider may exer-
cise immediately and receive substantially
vested stock is not subject to a substantial
risk of forfeiture, even if the stock option
automatically terminates upon the service
provider’s separation from service.
(3)Enforcement of forfeiture con-
dition—(i)In general. In determining
whether the possibility of forfeiture is
substantial in the case of rights to com-
pensation granted by a service recipient
to a service provider that owns a signifi-
cant amount of the total combined voting
powerorvalueofallclassesofequityof
the service recipient(wheretheservice
provider’s ownership is determined with
application of the attribution rules under
section 318 if the service recipient is a cor-
poration, or if the service recipient is an
entity that is not a corporation, with appli-
cation by analogy of the attribution rules
under section 318), all relevant facts and
circumstances will be taken into account
in determining whether the probability of
the service recipient enforcing such con-
dition is substantial, including—
(A) The service provider’s relationship
to other equity holders and the extent of
their control, potential control and possible
loss of control of the service recipient;
(B) The position of the service provider
in the service recipient and the extent to
which the service provider is subordinate
to other service providers;
(C) The service provider’s relationship
to the officers and directors of the service
May 7, 200711882007–19 I.R.B.

recipient (or similar positions with respect
to a noncorporate service recipient);
(D) The person or persons who must
approve the service provider’s discharge;
and
(E) Past actions of the service recipient
in enforcing the restrictions.
(ii)Examples. The following examples
illustrate the rules of paragraph (d)(3)(i) of
this section:
Example 1. A service provider would be con-
sidered as having deferred compensation subject to
a substantial risk of forfeiture, but for the fact that the
service provider owns 20 percent of the single class of
stock in the transferor corporation. If the remaining
80 percent of the class of stock is owned by an unre-
lated individual (or members of such an individual’s
family) so that the possibility of the corporation en-
forcing a restriction on such rights is substantial, then
such rights are subject to a substantial risk of forfei-
ture.
Example 2. A service provider would be con-
sidered as having deferred compensation subject to
a substantial risk of forfeiture, but for the fact that
the service provider, who ispresident of the corpora-
tion, also owns 4 percent of the voting power of all
the stock of a corporation. If the remaining stock is
so diversely held by the public that the president, in
effect, controls the corporation, then the possibility
of the corporation enforcing a restriction on the right
to deferred compensation of the president is not sub-
stantial, and such rights are not subject to a substantial
risk of forfeiture.
(e)Performance-based compensa-
tion—(1)In general.Thetermperfor-
mance-based compensationmeans com-
pensation the amount of which, or the
entitlement to which, is contingent on the
satisfaction of preestablished organiza-
tional or individual performance criteria
relating to a performance period of at least
12 consecutive months. Organizational
or individual performance criteria are
considered preestablished if established
in writing by not later than 90 days af-
ter the commencement of the period of
service to which the criteria relates, pro-
vided that the outcome is substantially
uncertain at the time the criteria are estab-
lished. Performance-based compensation
may include payments based on perfor-
mance criteria that are not approved by a
compensation committee of the board of
directors (or similar entity in the case of a
non-corporate servicerecipient) or by the
stockholders or members of the service
recipient. Performance-based compen-
sation does not include any amount or
portion of any amount that will be paid
either regardless of performance, or based
upon a level of performance that is sub-
stantially certain to be met at the time
the criteria is established. In addition,
except as provided in paragraph (e)(3)
of this section, compensation is not per-
formance-based compensation merely
because the amount of such compensation
is determined by reference to the value of
the service recipient or the stock of the
service recipient. Where a portion of an
amount of compensation would qualify
as performance-based compensation if the
portion were the sole amount available un-
der the plan, that portion of the award will
not fail to qualify as performance-based
compensation if that portion is designated
separately or otherwise separately iden-
tifiable under the terms of the plan, and
the amount of each portion is determined
independently of the other. Compensation
may be performance-based compensation
where the amount will be paid regardless
of satisfaction of the performance criteria
due to the service provider’s death, dis-
ability, or a change in control event (as
defined in §1.409A–3(i)(5)(i)), provided
that a payment made under such circum-
stances without regard to the satisfaction
of the performance criteria will not con-
stitute performance-based compensation.
For purposes of this paragraph (e)(1), a
disability refers to any medically deter-
minable physical or mental impairment
resulting in the service provider’s inability
to perform the duties of his or her posi-
tion or any substantially similar position,
where such impairment can be expected to
result in death or can be expected to last
for a continuous period of not less than six
months.
(2)Payments based upon subjective
performance criteria.Thetermperfor-
mance-based compensationincludes pay-
ments based upon subjective performance
criteria, provided that—
(i) The subjective performance criteria
arebona fideand relate to the performance
of the participant service provider, a group
of service providers that includes the par-
ticipant service provider, or a business unit
for which the participant service provider
provides services (which may include the
entire organization); and
(ii) The determination that any sub-
jective performance criteria have been
met is not made by the participant ser-
vice provider or a family member of the
participant service provider (as defined in
section 267(c)(4) applied as if the family
of an individual includes the spouse of any
member of the family), or a person under
the effective control of the participant ser-
vice provider or such a family member,
and no amount of the compensation of
the person making such determination is
effectively controlled in whole or in part
by the service provider or such a family
member.
(3)Equity-based compensation.Com-
pensation is performance-based compen-
sationifitisbasedsolelyonanincreasein
the value of the service recipient, or a share
of stock in the service recipient, after the
date of a grant or award. However, com-
pensation payable for a service period that
is equal to the value of a predetermined
number of shares of stock, and is variable
only to the extent that the value of such
shares appreciates or depreciates, gener-
ally will not be performance-based com-
pensation. Notwithstanding the foregoing,
the attainment of a prescribed value for the
service recipient (or a portion thereof), or a
share of stock in the service recipient, may
be used as a preestablished organizational
criterion for purposes of providing perfor-
mance-based compensation, provided that
the other requirements of paragraph (e)(1)
of this section are satisfied. In addition, an
award of equity-based compensation may
constitute performance-based compensa-
tion if entitlement to the compensation is
subject to a condition that would cause
the award to otherwise qualify as perfor-
mance-based compensation, such as a per-
formance-based vesting condition. A pro-
vision that allows a service provider to de-
fer compensation that would be realized
upon the exercise of a stock right generally
constitutes an additional deferral feature
for purposes of the definition of a deferral
of compensation under paragraph (b)(5) of
this section.
(f)Service provider—(1)In general.
The termservice providerincludes an indi-
vidual, corporation, subchapter S corpora-
tion, partnership, personal service corpo-
ration (as defined in section 269A(b)(1)),
noncorporate entity that would be a per-
sonal service corporation if it were a cor-
poration, qualified personal service cor-
poration (as defined in section 448(d)(2)),
and noncorporate entity that would be a
qualified personal service corporation if it
were a corporation, for any taxable year
in which such individual, corporation,
subchapter S corporation, partnership, or
other entity accounts for gross income
2007–19 I.R.B.1189May 7, 2007

from the performance of services un-
der the cash receipts and disbursements
method of accounting. The termservice
providergenerally includes a person who
has separated from service (a former ser-
vice provider).
(2)Independent contractors—(i)In
general. Except as otherwise provided in
paragraph (f)(2)(iv) of this section, sec-
tion 409A does not apply to an amount
deferred under a plan between a service
provider and service recipient with respect
to a particular trade or business in which
the service provider participates, including
earnings credited to such deferred amount,
if during the service provider’s taxable
year in which the service provider obtains
a legally binding right to the payment of
the amount deferred each of the following
applies:
(A) The service provider is actively en-
gaged in the trade or business of providing
services, other than as an employee or as a
member of the board of directors of a cor-
poration (or similar position with respect
to an entity that is not a corporation).
(B) The service provider provides sig-
nificant services to two or more service re-
cipients to which the service provider is
not related and that are not related to one
another (as defined in paragraph (f)(2)(ii)
of this section).
(C) The service provider is not related
to the service recipient, applying the defi-
nition of related person contained in para-
graph (f)(2)(ii) of this section subject to
the modification that the language “20 per-
cent” is not used instead of “50 percent”
each place “50 percent” appears in sections
267(b) and 707(b)(1).
(ii)Related person. For purposes of
this paragraph (f)(2), a person is related
to another person if the persons bear a re-
lationship to each other that is specified
in section 267(b) or 707(b)(1), subject to
the modifications that the language “20
percent” is used instead of “50 percent”
each place it appears in sections 267(b) and
707(b)(1), and section 267(c)(4) is applied
as if the family of an individual includes
the spouse of any member of the family; or
the persons are engaged in trades or busi-
nesses under common control (within the
meaning of section 52(a) and (b)). In addi-
tion, an individual is related to an entity if
the individual is an officer of an entity that
is a corporation, or holds a position sub-
stantially similar to an officer of a corpora-
tion with an entity that is not a corporation.
(iii)Significant services. Whether a ser-
vice provider is providing significant ser-
vices depends on the facts and circum-
stances of each case. However, for pur-
poses of paragraph (f)(2)(i) of this section,
a service provider who provides services
to two or more service recipients to which
the service provider is not related and that
are not related to one another is deemed
to be providing significant services to two
or more of such service recipients for a
given taxable year, if the revenues gen-
erated from the services provided to any
service recipient or group of related ser-
vice recipients during such taxable year do
not exceed 70 percent of the total revenue
generated by the service provider from the
trade or business of providing such ser-
vices. In addition, in the case of a service
provider who has been providing services
in a trade or business for a period of not
less than three consecutive years, for pur-
poses of paragraph (f)(2)(i) of this section,
a service provider who provides services
to two or more service recipients to which
the service provider is not related and that
are not related to one another is deemed to
be providing significant services to two or
more of such service recipients for a given
taxable year if in each of the prior three
taxable years the revenues generated from
the services provided to any service recip-
ient or group of related service recipients
during such prior taxable years did not ex-
ceed 70 percent of the total revenue gener-
ated by the service provider from the trade
or business of providing such services and,
at the time an amount is deferred, the ser-
vice provider does not know or have rea-
son to anticipate that the revenues gener-
ated from the services provided to any ser-
vice recipient or group of related service
recipients during the current year will ex-
ceed 70 percent of the total revenue gener-
ated by the service provider from the trade
or business of providing such services.
(iv)Management services. This para-
graph (f)(2) does not apply to a service
provider to the extent the service provider
provides management services to a service
recipient. For purposes of this paragraph
(f)(2)(iv), the termmanagement services
means services that involve the actual orde
factodirection or control of the financial
or operational aspects of a trade or busi-
ness of the service recipient, or investment
management or advisory services provided
to a service recipient whose primary trade
or business includes the investment of fi-
nancial assets (including investments in
real estate), such as a hedge fund or a real
estate investment trust.
(v)Services provided to related per-
sons. Section 409A does not apply to an
amount deferred under a plan that is abona
fideagreement, method, program, or other
arrangement between a service provider
and a related service recipient arising in
the ordinary course of a particular trade or
business in which the service provider is
engaged to the extent that—
(A) The service provider provides ser-
vices to the service recipient as an indepen-
dent contractor;
(B) During the service provider’s tax-
able year in which the amount is deferred,
the service provider qualifies for the safe
harbor provided in paragraph (f)(2)(iii) of
this section with respect to such trade or
business; and
(C) Such agreement, method, program,
or other arrangement and the practices
thereunder (includingbilling and collec-
tion practices), are substantially similar
to the agreements, methods, programs,
or other arrangements and practices ap-
plicable to one or more unrelated service
recipients to whom the service provider
provides substantial services and that pro-
duce a majority of the total revenue that
the service provider earns from the trade
or business of providing such services
during the taxable year.
(g)Service recipient. Except as other-
wise specifically provided in these regu-
lations, the termservice recipientmeans
the person for whom the services are per-
formed and with respect to whom the
legally binding right to compensation
arises, and all persons with whom such
person would be considered a single em-
ployer under section 414(b) (employees
of controlled group of corporations), and
all persons with whom such person would
be considered a single employer under
section 414(c) (employees of partnerships,
proprietorships, etc., under common con-
trol). For example, if the service provider
is an employee, the service recipient gener-
ally is the employer (including all persons
treated as a single employer under section
414(b) or (c)). Notwithstanding the fore-
going, section 409A applies to a plan that
provides for the deferral of compensation,
May 7, 200711902007–19 I.R.B.

even if the payment of the compensation is
not made by the person for whom services
are performed.
(h)Separation from service—(1)Em-
ployees—(i)In general.Anemployeesep-
arates from service with the employer if
the employee dies, retires, or otherwise has
a termination of employment with the em-
ployer. However, for purposes of this para-
graph (h)(1), the employment relationship
is treated as continuing intact while the in-
dividual is on military leave, sick leave,
or otherbona fideleave of absence if the
period of such leave does not exceed six
months, or if longer, so long as the indi-
vidual retains a right to reemployment with
the service recipient under an applicable
statute or by contract. For purposes of this
paragraph (h)(1), a leave of absence con-
stitutes abona fideleave of absence only
if there is a reasonable expectation that the
employee will return to perform services
for the employer. If the period of leave ex-
ceeds six months and the individual does
not retain a right to reemployment under an
applicable statute or by contract, the em-
ployment relationship is deemed to termi-
nate on the first date immediately follow-
ing such six-month period. Notwithstand-
ing the foregoing, where a leave of absence
is due to any medically determinable phys-
ical or mental impairment that can be ex-
pected to result in death or can be expected
to last for a continuous period of not less
than six months, where such impairment
causes the employee to be unable to per-
form the duties of his or her position of
employment or any substantially similar
position of employment, a 29-month pe-
riod of absence may be substituted for such
six-month period.
(ii)Termination of employment.
Whether a termination of employment has
occurred is determined based on whether
the facts and circumstances indicate that
the employer and employee reasonably
anticipated that no further services would
be performed after a certain date or that the
level ofbona fideservices the employee
would perform after such date (whether
as an employee or as an independent con-
tractor) would permanently decrease to no
more than 20 percent of the average level
ofbona fideservices performed (whether
as an employee or an independent con-
tractor) over the immediately preceding
36-month period (or the full period of ser-
vices to the employer if the employee has
been providing services to the employer
less than 36 months). Facts and circum-
stances to be considered in making this
determination include, but are not lim-
ited to, whether the employee continues
to be treated as an employee for other
purposes (such as continuation of salary
and participation in employee benefit pro-
grams), whether similarly situated service
providers have been treated consistently,
and whether the employee is permitted,
and realistically available, to perform ser-
vices for other service recipients in the
same line of business. An employee is
presumed to have separated from service
where the level ofbona fideservices per-
formed decreases to a level equal to 20
percent or less of the average level of ser-
vices performed by the employee during
the immediately preceding 36-month pe-
riod. An employee will be presumed not
to have separated from service where the
level ofbona fideservices performed con-
tinues at a level that is 50 percent or more
of the average level of service performed
by the employee during the immediately
preceding 36-month period. No presump-
tion applies to a decrease in the level of
bona fideservicesperformedtoalevel
that is more than 20 percent and less than
50 percent of the average level ofbona
fideservices performed during the imme-
diately preceding 36-month period. The
presumption is rebuttable by demonstrat-
ing that the employer and the employee
reasonably anticipated that as of a certain
date the level ofbona fideservices would
be reduced permanently to a level less
than or equal to 20 percent of the average
level ofbona fideservices provided dur-
ing the immediately preceding 36-month
period or full period of services provided
to the employer if the employee has been
providing services to the service recipient
for a period of less than 36 months (or that
the level ofbona fideservices would not
be so reduced). For example, an employee
may demonstrate that the employer and
employee reasonably anticipated that the
employee would cease providing services,
but that, after the original cessation of
services, business circumstances such as
termination of the employee’s replace-
ment caused the employee to return to
employment. Although the employee’s
return to employment may cause the em-
ployee to be presumed to have continued
in employment because the employee is
providing services at a rate equal to the
rate at which the employee was providing
services before the termination of employ-
ment, the facts and circumstances in this
case would demonstrate that at the time
the employee originally ceased to provide
services, the employee and the service
recipient reasonably anticipated that the
employee would not provide services in
the future. Notwithstanding the foregoing
provisions of this paragraph (h)(1)(ii), a
plan may treat another level of reasonably
anticipated permanent reduction in the
level ofbona fideservices as a separation
from service, provided that the level of
reduction required must be designated in
writing as a specific percentage, and the
reasonably anticipated reduced level of
bona fideservices must be greater than 20
percent but less than 50 percent of the av-
erage level ofbona fideservices provided
in the immediately preceding 36 months.
The plan must specify the definition of
separation from service on or before the
date on which a separation from service
is designated as a time of payment of the
applicable amount deferred, and once des-
ignated, any change to the definition of
separation from service with respect to
such amount deferred will be subject to
the rules regarding subsequent deferrals
and the acceleration of payments. For
purposes of this paragraph (h)(1)(ii), for
periods during which an employee is on a
paidbona fideleave of absence (as defined
in paragraph (h)(1)(i) of this section) and
has not otherwise terminated employment
pursuant to paragraph (h)(1)(i) of this sec-
tion, the employee is treated as providing
bona fideservices at a level equal to the
level of services that the employee would
have been required to perform to receive
the compensation paid with respect to such
leave of absence. Periods during which
an employee is on an unpaidbona fide
leave of absence (as defined in paragraph
(h)(1)(i) of this section) and has not oth-
erwise terminated employment pursuant
to paragraph (h)(1)(i) of this section, are
disregarded for purposes of this paragraph
(h)(1)(ii) (including for purposes of de-
termining the applicable 36-month (or
shorter) period).
(2)Independent contractors—(i)In
general. An independent contractor is
considered to have a separation from ser-
vice with the service recipient upon the
expiration of the contract (or in the case
2007–19 I.R.B.1191May 7, 2007

of more than one contract, all contracts)
under which services are performed for
the service recipient if the expiration
constitutes a good-faith and complete ter-
mination of the contractual relationship.
An expiration does not constitute a good
faith and complete termination of the con-
tractual relationship if the service recipient
anticipates a renewal of a contractual re-
lationship or the independent contractor
becoming an employee. For this pur-
pose, a service recipient is considered to
anticipate the renewal of the contractual
relationship with an independent contrac-
tor if it intends to contract again for the
services provided under the expired con-
tract, and neither the service recipient nor
the independent contractor has eliminated
the independent contractor as a possible
provider of services under any such new
contract. Further, a service recipient is
considered to intend to contract again for
the services provided under an expired
contract if the service recipient’s doing so
is conditioned only upon incurring a need
for the services, the availability of funds,
or both.
(ii)Special rule. Notwithstanding para-
graph (h)(2)(i) of this section, a plan is
considered to satisfy the requirement de-
scribed in §1.409A–3(a)(1) with respect to
an amount payable upon a separation from
service if, with respect to amounts payable
to a service provider who is an independent
contractor, the plan provides that—
(A) No amount will be paid to the
service provider before a date at least 12
months after the day on which the contract
expires under which the service provider
performs services for the service recipient
(or, in the case of more than one contract,
all such contracts expire); and
(B) No amount payable to the service
provider on that date will be paid to the
service provider if, after the expiration of
the contract (or contracts) and before that
date, the service provider performs ser-
vices for the service recipient as an inde-
pendent contractor or an employee.
(3)Definition of service recipient and
employer. For purposes of this paragraph
(h), the termservice recipientoremployer
means the service recipient as defined
in paragraph (g) of this section, pro-
videdthatinapplyingsection1563(a)(1),
(2), and (3) for purposes of determin-
ing a controlled group of corporations
under section 414(b), the language “at
least 50 percent” is used instead of “at
least 80 percent” each place it appears in
section 1563(a)(1), (2), and (3), and in
applying §1.414(c)–2 for purposes of de-
termining trades or businesses (whether or
not incorporated) that are under common
control for purposes of section 414(c),
“at least 50 percent” is used instead of
“at least 80 percent” each place it ap-
pears in §1.414(c)–2. A plan may provide
with respect to a deferral of compen-
sation under the plan that in applying
sections 1563(a)(1), (2), and (3) for pur-
poses of determining a controlled group
of corporations under section 414(b), an-
other defined percentage greater than 50
percent, but not greater than 80 percent, is
used instead of “at least 80 percent” at each
place it appears in sections 1563(a)(1), (2),
and (3), and in applying §1.414(c)–2 for
purposes of determining trades or busi-
nesses (whether or not incorporated) that
are under common control for purposes of
section 414(c), another defined percentage
greater than 50 percent, but not greater
than 80 percent, is used instead of “at
least 80 percent” at each place it appears
in §1.414(c)–2. In addition, where the
use of such definition of service recipient
for purposes of determining a separation
from service is based upon legitimate
business criteria, the plan may provide
that for purposes of a deferral of com-
pensation under the plan that in applying
sections 1563(a)(1), (2), and (3) for pur-
poses of determining a controlled group
of corporations under section 414(b), the
language “at least 20 percent” or another
defined percentage not less than 20 per-
cent but not greater than 50 percent is used
instead of “at least 80 percent” at each
place it appears in sections 1563(a)(1),
(2), and (3), and in applying §1.414(c)–2
for purposes of determining trades or busi-
nesses (whether or not incorporated) that
are under common control for purposes
of section 414(c), the language “at least
20 percent” or another defined percentage
not less than 20 percent but not greater
than 50 percent is used instead of “at least
80 percent” at each place it appears in
§1.414(c)–2. Where a definition of ser-
vice recipient or employer other than the
definition provided in the first sentence
of this paragraph (h)(3) (the 50 percent
standard) is used, the plan must designate
in writing the alternate definition no later
than the last date at which the time and
form of payment of the applicable amount
deferred must be elected in accordance
with §1.409A–2(a), and any change in the
definition for such amounts deferred will
constitute a change in the time and form
of payment subject to the rules govern-
ing subsequent deferral elections under
§1.409A–2(b) and the acceleration of pay-
ments under §1.409A–3(j).
(4)Asset purchase transactions.Where
as part of a sale or other disposition of as-
sets by one service recipient (seller) to an
unrelated service recipient (buyer), a ser-
vice provider of the seller would otherwise
experience a separation from service with
the seller, the seller and the buyer may
retain the discretion to specify, and may
specify, whether a service provider provid-
ing services to the seller immediately be-
fore the asset purchase transaction and pro-
viding services to the buyer after and in
connection with the asset purchase trans-
action has experienced a separation from
service for purposes of this paragraph (h),
provided that the asset purchase transac-
tion results frombona fide, arm’s length
negotiations, all service providers provid-
ing services to the seller immediately be-
fore the asset purchase transaction and pro-
viding services to the buyer after and in
connection with the asset purchase trans-
action are treated consistently (regardless
of position at the seller) for purposes of
applying the provisions of any nonquali-
fied deferred compensation plan, and such
treatment is specified in writing no later
than the closing date of the asset purchase
transaction. For purposes of this paragraph
(h)(4), references to a sale or other dispo-
sition of assets, or an asset purchase trans-
action, refer only to a transfer of substan-
tial assets, such as a plant or division or
substantially all the assets of a trade or
business. For purposes of this paragraph
(h)(4), whether a service recipient is re-
lated to another service recipient is deter-
mined under the rules provided in para-
graph (f)(2)(ii) of this section.
(5)Dual status.Ifaserviceprovider
provides services both as an employee of
a service recipient and as an independent
contractor of a service recipient, the ser-
vice provider must separate from service
both as an employee and as an indepen-
dent contractor to be treated as having sep-
arated from service.If a service provider
ceases providing services as an indepen-
dent contractor and begins providing ser-
May 7, 200711922007–19 I.R.B.

vices as an employee, or ceases providing
services as an employee and begins pro-
viding services as an independent contrac-
tor, the service provider will not be consid-
ered to have a separation from service until
the service provider has ceased providing
services in both capacities. Notwithstand-
ing the foregoing, if a service provider
provides services both as an employee of
a service recipient and a member of the
board of directors of a corporate service re-
cipient (or an analogous position with re-
spect to a non-corporate service recipient),
the services provided as a director are not
taken into account in determining whether
the service provider has a separation from
service as an employee for purposes of a
nonqualified deferred compensation plan
in which the service provider participates
as an employee that is not aggregated with
any plan in which the service provider
participates as a director under paragraph
(c)(2)(ii) of this section. In addition, if
a service provider provides services both
as an employee of a service recipient and
a member of the board of directors of a
corporate service recipient (or an analo-
gous position with respect to a non-cor-
porate service recipient), the services pro-
vided as an employee are not taken into ac-
count in determining whether the service
provider has a separation from service as a
director for purposes of a nonqualified de-
ferred compensation plan in which the ser-
vice provider participates as a director that
is not aggregated with any plan in which
the service provider participates as an em-
ployee under paragraph (c)(2)(ii) of this
section.
(6)Collectively bargained plans cover-
ing multiple employers. Notwithstanding
the foregoing provisions of this paragraph
(h), to the extent a plan is established pur-
suant to abona fidecollective bargaining
agreement covering services performed
by employees for multiple employers,
such plan may define a separation from
service in a reasonable manner that treats
the employee as not having separated
from service during periods in which the
employee is not providing services but is
available to perform services covered by
the collective bargaining agreement for
one or more employers, provided that the
definition also provides that the employee
must be deemed to have separated from
service at a specified date not later than
the end of any period of at least 12 consec-
utive months during which the employee
has not provided any services covered by
the collective bargaining agreement to any
participating employer. This paragraph
(h)(6) applies only if the definition of
separation from service provided by the
collective bargaining agreement was the
subject of arm’s length negotiations be-
tween employee representatives and two
or more employers, the agreement be-
tween employee representatives and such
employers satisfies section 7701(a)(46),
and the circumstances surrounding the
agreement evidence good faith bargaining
between adverse parties over such defini-
tion.
(i)Specified employee—(1)In general.
The termspecified employeemeans a ser-
vice provider who, as of the date of the
service provider’s separation from service,
is a key employee of a service recipient
any stock of which is publicly traded on an
established securities market or otherwise.
For purposes of this paragraph (i)(1), a
service provider is a key employee if the
service provider meets the requirements
of section 416(i)(1)(A)(i), (ii), or (iii)
(applied in accordance with the regula-
tions thereunder and disregarding section
416(i)(5)) at any time during the 12-month
period ending on a specified employee
identification date. If a service provider is
a key employee as of a specified employee
identification date, the service provider is
treated as a key employee for purposes of
this paragraph (i) for the entire 12-month
period beginning on the specified em-
ployee effective date.
(2)Definition of compensation.For
purposes of identifying a specified em-
ployee by applying the requirements of
section 416(i)(1)(A)(i), (ii), and (iii),
the definition of compensation under
§1.415(c)–2(a) is used, applied as if the
service recipient were not using any safe
harbor provided in §1.415(c)–2(d), were
not using any of the elective special timing
rules provided in §1.415(c)–2(e), and were
not using any of the elective special rules
provided in §1.415(c)–2(g). Notwith-
standing the foregoing, a service recipient
may elect to use any available definition
of compensation under section 415 and
the regulations thereunder in accordance
with the election requirements set forth in
paragraph (i)(8) of this section, including
any available safe harbor and any avail-
able election under the timing rules or
special rules, provided that the definition
is applied consistently to all employees of
the service recipient for purposes of iden-
tifying specified employees. A service
recipient may elect to use such an alter-
native definition regardless of whether
another definition of compensation is be-
ing used for purposes of a qualified plan
sponsored by the service recipient. How-
ever, once a list of specified employees
has become effective, the service recipient
cannot change the definition of compensa-
tion for purposes of identifying specified
employees for the period with respect to
which such list is effective.
(3)Specified employeeidentification
date. Unless another date is designated
in accordance with the requirements of
this paragraph (i)(3) and paragraph (i)(8)
of this section, the specified employee
identification date is December 31. A
service recipient may designate in accor-
dance with the requirements of paragraph
(i)(8) of this section any other date as the
specified employee identification date,
provided that a service recipient must use
the same specified employee identifica-
tion date with respect to all nonqualified
deferred compensation plans, and any
change to the specified employee iden-
tification date may notbeeffectivefora
period of at least 12 months. The service
recipient may designate a specified em-
ployee identification date in each plan or
in a separate document applicable to all
plans, provided that the service recipient
will not be treated as having designated
a specified employee identification date
before the designation is legally binding
on the service recipient and all affected
service providers. Any designation of
a specified employee identification date
made on or before December 31, 2007,
may be applied to any separation from ser-
vice occurring on or after January 1, 2005,
unless and until subsequently changed
pursuant to this paragraph (i)(3).
(4)Specified employee effective date.
Unless another date is designated in ac-
cordance with the requirements of this
paragraph (i)(4) and paragraph (i)(8) of
this section, the specified employee effec-
tive date is the first day of the fourth month
following the specified employee identi-
fication date. A service recipient may
designate in accordance with the require-
ments of paragraph (i)(8) of this section
any date following the specified employee
2007–19 I.R.B.1193May 7, 2007

identification date as the specified em-
ployee effective date, provided that such
date may not be later than the first day of
the fourth month following the specified
employee identification date, and provided
further that a service recipient must use
the same specified employee effective date
with respect to all nonqualified deferred
compensation plans, and any change to
the specified employee effective date may
not be effective for a period of at least 12
months. The service recipient may desig-
nate a specified employee effective date
through inclusion in each plan document
or through a separate document applica-
ble to all plans, provided that the service
recipient will not be treated as having
designated a specified employee effective
date on any date before the designation
is legally binding on the service recipient
and all affected service providers. Any
designation of a specified employee effec-
tive date made on or before December 31,
2007, may be applied to any separation
from service occurring on or after January
1, 2005, unless and until subsequently
changed pursuant to this paragraph (i)(4).
(5)Alternative methods of satisfying
the six-month delay rule.Aplanmay
provide, in accordance with the require-
ments of paragraph (i)(8) of this section,
for an alternative method to identify ser-
vice providers who will be subject to the
six-month delay rule provided in section
409A(a)(2)(B)(i), provided that the alter-
native method is reasonably designed to
include all specified employees (deter-
mined without respect to any available
service recipient elections), the alternative
method is an objectively determinable
standard providing no direct or indirect
election to any service provider regarding
its application, and the alternative method
results in either all service providers or
no more than 200 service providers being
identified in the class as of any date. Use
of such an alternative method will not be
treated as a change in the time and form
of payment for purposes of §1.409A–2(b)
(the subsequent deferral rules), even if
the service provider is not a specified em-
ployee when the payment is delayed.
(6)Corporate transactions—(i)Merg-
ers and acquisitions of public service re-
cipients. If as a result of a corporate trans-
action, two or more separate service recipi-
ents, more than one of which has stock out-
standing that is publicly traded on an estab-
lished securities market or otherwise im-
mediately before the transaction, become
one service recipient, any stock of which
is publicly traded onan established secu-
rities market or otherwise immediately af-
ter the transaction (resulting public service
recipient), the resulting public service re-
cipient’s next specified employee identifi-
cation date and specified employee effec-
tive date following the corporate transac-
tion are the specifiedemployee identifi-
cation date and specified employee effec-
tive date that the acquiring service recip-
ient would have been required to use ab-
sent such transaction. For this purpose, in
the case of a corporate merger, the acquir-
ing service recipient is the service recip-
ient that included the surviving corpora-
tion in such merger, in the case of an ac-
quisition by a corporation of the stock of
another corporation, the acquiring service
recipient is the service recipient that in-
cluded the corporation that acquired such
stock, and in all other cases, the surviving
service recipient is determined on the basis
of all of the facts and circumstances. For
the period between the transaction and the
next specified employeeeffective date, the
list of specified employees of the resulting
public service recipient is determined by
combining the lists of specified employees
of all service recipients participating in the
transaction that were in effect at the date
of the corporate transaction, ranking such
specified employees in order of the amount
of compensation used to determine each
specified employee’s status as a specified
employee, and treating the top 50 of such
specified employees, plus any employees
described in section 416(i)(1)(ii) or section
416(i)(1)(iii) and the regulations thereun-
der (relating to 1-percent and 5-percent
owners) who are not included in such top
50 specified employees, as specified em-
ployees for the period between the corpo-
rate transaction and the next specified em-
ployee effective date. Alternatively, the re-
sulting service recipient may elect in ac-
cordance with the requirements of para-
graph (i)(8) of this section to use any rea-
sonable method to determine the specified
employees of the resulting service recip-
ient, including the use of an alternative
method of compliance described in para-
graph (i)(5) of this section, provided that
such method is adopted no later than 90
days after the corporate transaction and
applied prospectively from the date the
method is adopted.
(ii)Mergers and acquisitions of non-
public service recipients. Ifaspartofa
corporate transaction a service recipient
that does not have outstanding stock that
is publicly traded on an established se-
curities market or otherwise immediately
before the transaction (initial private ser-
vice recipient), and a service recipient with
stock outstanding that is publicly traded
on an established securities market or oth-
erwise immediately before the transaction
(initial public servicerecipient), become a
single service recipient having stock that
is publicly traded on an established secu-
rities market or otherwise immediately af-
ter the transaction (resulting public service
recipient), the resulting public service re-
cipient’s next specified employee identifi-
cation date and specified employee effec-
tive date following the corporate transac-
tion are the specified employee identifica-
tion date and specified employee effective
date that the initial public service recipi-
ent would have been required to use ab-
sent such transaction. For the period after
the date of the corporate transaction and
before the next specified employee effec-
tive date, the specified employees of the
initial public service recipient immediately
before the transaction continue to be the
specified employees ofthe resulting public
service recipient, and no service providers
of the initial private service recipient are
required to be treated as specified employ-
ees.
(iii)Spinoffs. Ifaspartofacorpo-
rate transaction, a service recipient with
stock outstanding that is publicly traded
on an established securities market or oth-
erwise immediately before the transaction
(initial public service recipient), becomes
two or more separate service recipients,
each with stock outstanding that is publicly
traded on an established securities market
or otherwise immediately after the transac-
tion (post-transaction public service recip-
ients), the next specified employee identi-
fication date of each of the post-transaction
public service recipients is the specified
employee identification date that the initial
public service recipient would have been
required to use absent such transaction.
For the period after the date of the corpo-
rate transaction and before the next speci-
fied employee effective date, the specified
employees of the initial public service re-
May 7, 200711942007–19 I.R.B.

cipient immediately before the transaction
continue to be the specified employees of
the post-transaction public service recipi-
ents.
(iv)Public offerings and other corpo-
rate transactions. Ifaspartofaninitial
public offering or corporate transaction not
described in paragraph (i)(6)(ii) or (iii) of
this section, a service recipient with no out-
standing stock that is publicly traded on an
established securities market or otherwise
immediately before such offering or other
transaction (initial private service recipi-
ent), becomes one or more service recipi-
ents with stock outstanding that is publicly
traded on an established securities market
or otherwise immediately after such offer-
ing or other transaction (post-transaction
public service recipient), each post-trans-
action public service recipient has a spec-
ified employee identification date of De-
cember 31 and a specified employee ef-
fective date of April 1, effective retroac-
tively to the December 31 and April 1 next
preceding the offering or other transaction
for purposes of identifying the specified
employees between the corporation trans-
action and the next December 31. Al-
ternatively, a post-transaction public ser-
vice recipient may elect in accordance with
the requirements of paragraph (i)(8) of this
section, a specified employee identifica-
tion date and specified employee effective
date on or before the date of the offering
or other transaction. If a public service re-
cipient makes such an election, for the pe-
riod after the offering or other transaction
and before the next specified employee ef-
fective date, the specified employees of
the post-transaction public service recipi-
ent consist of the service providers that at
the time of the offering or other transac-
tion would have been classified as spec-
ified employees of the initial private ser-
vice recipient, had theinitial private ser-
vice recipient elected the same specified
employee identification date and specified
employee effective date as selected by the
post-transaction public service recipient,
and had such initial private service recip-
ient had stock publicly traded on an estab-
lished securities market or otherwise as of
the specified employee identification date
preceding the transaction.
(v)Alternative methods of compliance.
For purposes of this paragraph (i)(6), ref-
erences to specified employees as of a cor-
porate transaction or offering include any
specified employees identified through the
use of an alternative method described in
paragraph (i)(5) of this section, where the
use of such alternative method was estab-
lished and effective at the time of the cor-
porate transaction or offering.
(7)Nonresident alien employees.For
purposes of determining whether an em-
ployee meets the requirements of section
416(i)(1)(A)(i), (ii), or (iii) (applied in ac-
cordance with the regulations thereunder
and disregarding section 416(i)(5)), and
therefore is a key employee, the incorpo-
ration of the rules of §1.415(c)–2(g)(5)
regarding the definition of compensa-
tion applies. Accordingly, the rule of
§1.415(c)–2(g)(5)(i), generally requiring
the treatment as compensation of certain
compensation excludible from an em-
ployee’s gross income due to the location
of the services or the identity of the em-
ployer, applies. In addition, a service
recipient may elect in accordance with
paragraph (i)(8) of this section to apply the
rule of §1.415(c)–2(g)(5)(ii) to not treat
as compensation certain compensation ex-
cludible from an employee’s gross income
on account of the location of the services
or the identity of the employer that is not
effectively connectedwith the conduct of a
trade or business within the United States.
A service recipient may elect to apply the
rule of §1.415–2(g)(5)(ii) regardless of
whether the service recipient has elected
to apply the rule to a qualified plan spon-
sored by the service recipient; however,
once a list of specified employees has be-
come effective, any election of the rule for
that period may not be changed. Notwith-
standing the foregoing, any election of the
rule made before January 1, 2008, may
be effective with respect to any specified
employee identification date on or before
December 31, 2007.
(8)Elections affecting the identifica-
tion of specified employees. The elections
described in paragraphs (i)(2) through (7)
of this section are effective only as of the
date that all necessary corporate action
has been taken to make such elections
binding for purposes of all affected non-
qualified deferred compensation plans in
which the service providers of the service
recipient that would become a specified
employee due to the application of such
election participate. Where a taxpayer
attempts to make an election under para-
graph (i)(2), (3), (4), (5), (6), or (7) of this
section but such election is not binding
on all the affected nonqualified deferred
compensation plans and applied consis-
tently to all such service providers, the
election is not effective and the rule under
paragraph (i)(2), (3), (4), (5), (6), or (7)
of this section, as applicable, that would
apply absent an election is applicable for
identifying specified employees.
(j)Nonresident alien. (1) Except as pro-
vided in paragraph (j)(2) of this section, the
termnonresident alienmeans an individ-
ual who is—
(i) A nonresident alien within the mean-
ing of section 7701(b)(1)(B); or
(ii) A dual resident taxpayer within the
meaning of §301.7701(b)–7(a)(1) of this
chapter with respect to any taxable year in
which such individual is treated as a non-
resident alien for purposes of computing
the individual’s U.S. income tax liability.
(2) The termnonresident aliendoes not
include—
(i) A nonresident alien with respect
to whom an election is in effect for the
taxable year under section 6013(g) to be
treated as a resident of the United States;
(ii) A former citizen or long-term
resident (within the meaning of section
877(e)(2)) who expatriated after June 3,
2004, and has not complied with the re-
quirements of section 7701(n); or
(iii) An individual who is treated as a
citizen or resident of the United States for
the taxable year under section 877(g).
(k)Established securities market.The
termestablished securities marketmeans
an established securities market within the
meaning of §1.897–1(m).
(l)Stock right.Thetermstock right
means a stock option (other than an in-
centive stock option described in section
422oranoptiongrantedpursuanttoan
employee stock purchase plan described in
section 423) or a stock appreciation right.
(m)Separation pay plan.Thetermsep-
aration pay planmeans any plan that pro-
vides separation pay or, where a plan pro-
vides both amounts that are separation pay
and that are not separation pay, that por-
tion of the plan that provides separation
pay. The termseparation paymeans any
deferral of compensation (before the appli-
cation of the exclusions from the definition
of a deferral of compensation set forth in
paragraph (b)(9) of this section) that will
not be paid under any circumstances un-
less the service provider has had a separa-
2007–19 I.R.B.1195May 7, 2007

tion from service, whether voluntary or in-
voluntary, including payments in the form
of reimbursements of expenses incurred,
and the provision of in-kind benefits. A
deferral of compensation that the service
provider may receive without a separation
from service does not become separation
pay merely because the service provider
elects to receive or receives the payment
after or upon a separation from service.
A deferral of compensation does not fail
to be separation pay merely because the
payment is conditioned upon the execu-
tion of a release of claims, noncompeti-
tion or nondisclosure provisions, or other
similar requirements. Notwithstanding the
foregoing, any amount, or entitlement to
any amount, that acts as a substitute for,
or replacement of, amounts deferred by
the service recipient under a nonqualified
deferred compensation plan constitutes a
payment of compensation or deferral of
compensation under such nonqualified de-
ferred compensation plan.
(n)Involuntary separation from ser-
vice—(1)In general. An involuntary
separation from service means a separa-
tion from service due to the independent
exercise of the unilateral authority of the
service recipient to terminate the service
provider’s services, other than due to the
service provider’s implicit or explicit re-
quest, where the service provider was
willing and able to continue performing
services. An involuntary separation from
service may include theservice recipient’s
failure to renew a contract at the time such
contract expires, provided that the service
provider was willing and able to execute
a new contract providing terms and con-
ditions substantially similar to those in
the expiring contract and to continue pro-
viding such services. The determination
of whether a separation from service is
involuntary is based on all the facts and
circumstances. Any characterization of
the separation from service as voluntary
or involuntary by the service provider and
the service recipient in the documentation
of the separation from service is presumed
to properly characterize the nature of the
separation from service. However, the pre-
sumption may be rebutted where the facts
and circumstances indicate otherwise. For
example, if a separation from service is
designated as a voluntary separation from
service or resignation, but the facts and
circumstances indicate that absent such
voluntary separation from service the ser-
vice recipient would have terminated the
service provider’s services, and that the
service provider had knowledge that the
service provider would be so terminated,
the separation from service is involuntary.
(2)Separations from service for good
reason—(i)In general. Notwithstanding
paragraph (n)(1) of this section, a service
provider’s voluntary separation from ser-
vice will be treated for purposes of this sec-
tion and §§1.409A–2 through 1.409A–6
as an involuntary separation from service
if the separation from service occurs un-
der certain limitedbona fideconditions,
where the avoidance of the requirements
of section 409A is not a purpose of the
inclusion of these conditions in the plan
or of the actions by the service recipi-
ent in connection with the satisfaction of
these conditions, and a voluntary separa-
tion from service under such conditions ef-
fectively constitutesan involuntary sepa-
ration from service. Generally such condi-
tions will be prespecified under an agree-
ment to provide compensation upon a sep-
aration from service for good reason. Such
a good reason (or a similar condition) must
be defined to require actions taken by the
service recipient resulting in a material
negative change to the service provider in
the service relationship, such as the du-
ties to be performed, the conditions un-
der which such duties are to be performed,
or the compensation to be received for
performing such services. Other factors
taken into account in determining whether
a separation from service for good rea-
son effectively constitutes an involuntary
separation from service include the extent
to which the payments upon a separation
from service for good reason are in the
same amount and are to be made at the
sametimeandinthesameformaspay-
ments available upon an actual involuntary
separation from service, and whether the
service provider is required to give the ser-
vice recipient notice of the existence of the
condition that would result in treatment as
a separation from service for good reason
and a reasonable opportunity to remedy the
condition.
(ii)Safe harbor. For purposes of
this section and §§1.409A–2 through
1.409A–6, if a plan provides that a volun-
tary separation from service will be treated
as an involuntary separation from service
if the separation from service occurs under
certain express conditions, a separation
from service satisfying the conditions set
forth in the plan will be treated as an invol-
untary separation from the service if the
necessary conditions (or set of conditions)
require the following:
(A) The separation from service must
occur during a pre-determined limited pe-
riod of time not to exceed two years fol-
lowing the initial existence of one or more
of the following conditions arising without
the consent of the service provider:
(1) A material diminution in the service
provider’s base compensation.
(2) A material diminution in the service
provider’s authority, duties, or responsibil-
ities.
(3) A material diminution in the author-
ity, duties, or responsibilities of the super-
visor to whom the service provider is re-
quired to report, including a requirement
that a service provider report to a corporate
officer or employee instead of reporting di-
rectly to the board of directors of a corpo-
ration (or similar governing body with re-
spect to an entity other than a corporation).
(4) A material diminution in the budget
over which the service provider retains au-
thority.
(5) A material change in the geographic
location at which the service provider must
perform the services.
(6) Any other action or inaction that
constitutes a material breach by the service
recipient of the agreement under which the
service provider provides services.
(B) The amount, time, and form of
payment upon the separation from ser-
vice must be substantially identical to
the amount, time and form of payment
payable due to an actual involuntary sep-
aration from service, to the extent such a
right exists.
(C) The service provider must be re-
quired to provide notice to the service re-
cipient of the existence of the condition de-
scribed in paragraph (n)(2)(ii)(A) of this
section within a period not to exceed 90
days of the initial existence of the condi-
tion, upon the notice of which the service
recipient must be provided a period of at
least 30 days during which it may remedy
the condition and not be required to pay the
amount.
(3)Special rule for certain collectively
bargained plans.Notwithstanding the
foregoing, for purposes of this paragraph
(n), to the extent a plan is subject to a
May 7, 200711962007–19 I.R.B.

bona fidecollective bargaining agreement
covering services performed for multiple
employers under which an employee must
separate from service with all such em-
ployers in order to receive a payment, such
plan may use any reasonable definition of
involuntary separation from service, pro-
vided that such definition is consistent
with any definition of a separation from
service adopted under paragraph (h)(6)
of this section, and provided further that
the definition of an involuntary separation
from service provided by the collective
bargaining agreement was the subject of
arm’s length negotiations between em-
ployee representatives and two or more
employers, the agreement between em-
ployee representatives and such employ-
ers satisfies section 7701(a)(46), and the
circumstances surrounding the agreement
evidence good faith bargaining between
adverse parties over such definition.
(o)Earnings. Whether a deferred
amount constitutes earnings on an amount
deferred, or actual or notional income
attributable to an amount deferred, is de-
termined under the principles defining
income attributable to the amount taken
into account under §31.3121(v)(2)–1(d)(2)
of this chapter. Accordingly, with respect
to an account balance plan, earnings on
an amount deferred generally include an
amount credited on behalf of a service
provider under the terms of the plan that
reflects a rate of return that does not
exceed either the rate of return on a pre-
determined actual investment or, if the
income does not reflect the rate of return
on a predetermined actual investment, a
reasonable rate of interest. With respect
to nonaccount balance plans, earnings
on an amount deferred generally include
an increase, due solely to the passage of
time, in the present value of the future
payments to which the service provider
has obtained a legally binding right, the
present value of which constituted the
amount deferred (determined as of the
date such amount was deferred), but only
if the amount deferred was determined us-
ing reasonable actuarial assumptions and
methods. A right to earnings on an amount
deferred generally is treated as a right to
a deferral of compensation for purposes
of this section and §§1.409A–2 through
1.409A–6. However, for purposes of any
provision of this section and §§1.409A–2
through 1.409A–6 referring to earnings on
deferred compensation (or similar terms),
the use of an unreasonable rate of return,
or unreasonable actuarial assumptions
and methods, generally will result in the
treatment of some or all of such a right to
deferred compensation as a right only to
deferred compensation, and not a right to
earnings on deferred compensation, so that
the provision will not be applicable. With
respect to plans that are neither account
balance plans nor nonaccount balance
plans, these rules apply by analogy.
(p)In-kind benefits.Thetermin-kind
benefitsrefers to services provided to or on
behalf of a service provider, such as finan-
cial planning services, or tangible personal
or real property made available for use by
or on behalf of the service provider, such as
the use of an aircraft or vehicle, and does
not refer to a transfer of property within the
meaning of section 83 and the regulations
thereunder, or a promise to transfer, or an
option to purchase or receive, property in
the future.
(q)Application of definitions and rules.
The definitions and rules set forth in para-
graphs (a) through (p) of this section apply
for purposes of section 409A, this section,
and §§1.409A–2 through 1.409A–6.
§1.409A–2 Deferral elections.
(a)Initial elections as to the time and
form of payment—(1)In general.Aplan
that is, or constitutes part of, a nonqual-
ifieddeferredcompensationplanmeets
the requirements of section 409A(a)(4)(B)
only if under the terms of the plan, com-
pensation for services performed during
a service provider’s taxable year (the ser-
vice year) may be deferred at the service
provider’s election only if the election
to defer such compensation is made and
becomes irrevocable not later than the
latest date permitted in this paragraph
(a). An election will not be considered to
be revocable merely because the service
provider or service recipient may make
an election to change the time and form
of payment pursuant to paragraph (b) of
this section, or the service recipient may
accelerate the time of payment pursuant
to §1.409A–3(j)(4) (exceptions to prohi-
bition on accelerated payments). Whether
a plan provides a service provider an
opportunity to elect the time or form of
payment of compensation is determined
based upon all the facts and circumstances
surrounding the determination of the time
and form of payment of the compensation.
For purposes of this section, an election to
defer includes an election as to the time
ofthepayment,anelectionastotheform
of the payment or an election as to both
the time and the form of the payment,
but does not include an election as to
the medium of payment (for example, an
election between a payment of cash or a
payment of property). Except as other-
wise expressly provided in this section,
an election will not be considered made
until such election becomes irrevocable
under the terms of the applicable plan.
Accordingly, a plan may provide that an
election to defer may be changed at any
time before the last permissible date for
making such an election. Where a plan
provides the service provider a right to
make an initial deferral election, and fur-
ther provides that the election remains
in effect until terminated or modified by
the service provider, the election will be
treated as made as of the date such election
becomes irrevocableas to compensation
for services performed during the relevant
service year. For example, where a plan
provides that a serviceprovider’s election
to defer a set percentage will remain in
effect until changed or revoked, but that
as of each December 31 the election be-
comes irrevocable with respect to salary
payable in connection with services per-
formed in the immediately following year,
the initial deferral election with respect to
salary payable with respect to services per-
formed in the immediately following year
will be deemed to have been made as of
the December 31 upon which the election
became irrevocable. For purposes of this
paragraph (a), the reference to a service
period or a performance period refers to
the period of service for which the right
to the compensation arises, and may in-
clude periods before the grant of a legally
binding right to the compensation. For
example, where a service recipient grants
a bonus based upon services performed
in the calendar year 2010, but retains the
discretion to rescind the bonus until 2011
such that the promise of the bonus is not
a legally binding right, the period of ser-
vice or performance period to which the
compensation relates is the calendar year
2010.
(2)Service recipient elections.Aplan
that provides for a deferral of compensa-
2007–19 I.R.B.1197May 7, 2007

tion for services performed during a ser-
vice provider’s taxable year that does not
provide the service provider with an oppor-
tunity to elect the time or form of payment
of such compensation must designate the
time and form of payment by no later than
thelaterofthetimetheserviceprovider
first has a legally binding right to the com-
pensation or, if later, the time the service
provider would be required under this sec-
tion to make such an election if the service
provider were provided such an election.
Such designation is treated as an initial de-
ferral election for purposes of this section.
Where a plan permits a service recipient to
exercise discretion to disregard a service
provider election as to the time or form of
a payment, any service provider election
that is subject to such discretion will be
treated as revocable so long as such discre-
tion may be exercised.
(3)General rule. A plan that is, or
constitutes part of, a nonqualified deferred
compensation plan meets the requirements
of section 409A(a)(4)(B) if under the terms
of the plan, compensation for services per-
formed during a service provider’s taxable
year (the service year) may be deferred
at the service provider’s election only if
the election to defer such compensation is
made not later than the close of the service
provider’s taxable year next preceding the
service year.
(4)Initial deferral election with re-
spect to short-term deferrals.Ifaservice
provider has a legally binding right to
a payment of compensation in a sub-
sequent taxable year that, absent a de-
ferral election, would be treated as a
short-term deferral within the meaning of
§1.409A–1(b)(4), an election to defer such
compensation may be made in accordance
with the requirements of paragraph (b) of
this section, applied as if the amount were
a deferral of compensation and the sched-
uled payment date for the amount were
the date the substantial risk of forfeiture
lapses. Notwithstanding the requirements
of paragraph (b) of this section, such a
deferral election may provide that the
deferred amounts will be payable upon
a change in control event (as defined in
§1.409A–3(i)(5)) without regard to the
five-year additional deferral requirement
in paragraph (b) of this section.
(5)Initial deferral election with re-
spect to certain forfeitable rights.Ifa
service provider has a legally binding
right to a payment in a subsequent year
that is subject to a condition requiring
the service provider to continue to pro-
vide services for a period of at least 12
monthsfromthedatetheserviceprovider
obtains the legally binding right to avoid
forfeiture of the payment, an election to
defer such compensation may be made
on or before the 30th day after the ser-
vice provider obtains the legally binding
right to the compensation, provided that
the election is made at least 12 months in
advance of the earliest date at which the
forfeiture condition could lapse. For pur-
poses of this paragraph (a)(5), a condition
will not be treated as failing to require
the service provider to continue to pro-
vide services for a period of at least 12
monthsfromthedatetheserviceprovider
obtains the legally binding right merely
because the condition immediately lapses
upon the death or disability (as defined in
§1.409A–3(i)(4)) of the service provider,
or upon a change in control event (as de-
fined in §1.409A–3(i)(5)), provided that
if death, disability, or a change in con-
trol event occurs and the condition lapses
before the end of such 12-month period,
a deferral election may be given effect
only if the deferral election is permitted
under this section without regard to this
paragraph (a)(5).
(6)Initial deferral election with respect
to fiscal year compensation. In the case
of a service recipient with a taxable year
that is not the same as the taxable year of
the service provider, a plan may provide
that fiscal year compensation may be de-
ferred at the service provider’s election if
the election to defer such compensation is
made not later than the close of the ser-
vice recipient’s taxable year immediately
preceding the first taxable year of the ser-
vice recipient in which any services are
performed for which such compensation is
payable. For purposes of this paragraph
(a)(6), the termfiscal year compensation
means compensation relating to a period
of service coextensive with one or more
consecutive taxable years of the service
recipient, of which no amount is paid or
payable during the service recipient’s tax-
able year or years constituting the period
of service. For example, fiscal year com-
pensation generally would include a bonus
to an individual employee with a calendar
year taxable year that is based on a ser-
vice period consisting of the service recip-
ient’s two consecutive taxable years end-
ing September 30, 2011, where the amount
will be paid after the end of the second of
such taxable years, but would not include
either a bonus based on a service period
consisting of one or more calendar years or
salary that would otherwise be paid during
such taxable years of the service recipient.
(7)First year of eligibility—(i)In gen-
eral. In the case of the first year in which
a service provider becomes eligible to par-
ticipate in a plan, the service provider may
make an initial deferral election within 30
days after the date the service provider be-
comes eligible to participate in such plan,
with respect to compensation paid for ser-
vices to be performed after the election. In
the case of a plan that does not provide for
service provider elections with respect to
thetimeorformofapayment,thetimeand
form of the payment must be specified on
or before the date that is 30 days after the
date the service provider first becomes eli-
gible to participate in such plan. For com-
pensation that is earned based upon a spec-
ified performance period (for example, an
annual bonus), where a deferral election is
made in the first year of eligibility but after
the beginning of the performance period,
the election must apply only to the com-
pensation paid for services performed after
the election. For this purpose, an election
will be deemed to apply to compensation
paid for services performed after the elec-
tion if the election applies to no more than
an amount equal to the total amount of the
compensation for the performance period
multiplied by the ratio of the number of
days remaining in the performance period
after the election over the total number of
days in the performance period.
(ii)Eligibility to participate.Forpur-
poses of this paragraph (a)(7), a service
provider is eligible to participate in a plan
at any time during which, under the plan’s
terms and without further amendment or
action by the service recipient, the service
provider is eligible to accrue an amount
of deferred compensation under the plan
other than earnings on amounts previously
deferred, even if the service provider has
elected not to accrue (or has not elected to
accrue) an amount of deferred compensa-
tion. Where a service provider has been
paid all amounts deferred under a plan,
and on and before the date of the last pay-
ment was not eligible to continue (or to
elect to continue) to participate in the plan
May 7, 200711982007–19 I.R.B.

for periods after the last payment (other
than through an election of a different time
and form of payment with respect to the
amounts paid), the service provider may
be treated as initially eligible to partici-
pate in a plan as of the first date follow-
ing such payment that the service provider
becomes eligible to accrue an additional
amount of deferred compensation. Where
a service provider has ceased being eligi-
ble to participate in a plan (other than the
accrual of earnings), regardless of whether
all amounts deferred under the plan have
been paid, and subsequently becomes eli-
gible to participate in the plan again, the
service provider may be treated as being
initially eligible to participate in the plan
if the service provider had not been eligi-
ble to participate in the plan (other than
the accrual of earnings) at any time during
the 24-month period ending on the date the
service provider again becomes eligible to
participate in the plan.
(iii)Application to excess benefit plans.
For purposes of this paragraph (a)(7), a
service provider is treated as initially eligi-
ble to participate in an excess benefit plan
as of the first day of the service provider’s
taxable year immediately following the
first year the service provider accrues a
benefit under the excess benefit plan; and
anyelectionmadewithin30daysfollow-
ing such date is treated as applying to
benefits accrued under such plan for ser-
vices performed before the election. For
purposes of this paragraph (a)(7), the term
excess benefit planmeans all nonqualified
deferred compensation plans in which a
service provider participates, to the extent
such plans do not provide for an election
between current compensation (includ-
ing a short-term deferral) and deferred
compensation and solely provide deferred
compensation equal to the excess of the
benefits the service provider would have
accrued under a qualified employer plan
(as defined in §1.409A–1(a)(2)) in which
the service provider also participates, in
the absence of one or more of the limits
incorporated into the plan to reflect one or
more of the limits on contributions or ben-
efits applicable to the qualified employer
plan under the Internal Revenue Code,
over the benefits the service provider actu-
ally accrues under the qualified employer
plan. For purposes of this paragraph
(a)(7), once a service provider has accrued
a benefit or deferred compensation under a
plan in any year, the service provider will
not become eligible for an initial deferral
election based upon an accrual or deferral
under an excess benefit plan in a subse-
quent year, even if the benefit or deferred
compensation accrued in a previous year
is forfeited or eliminated.
(8)Initial deferral election with respect
to performance-based compensation.In
the case of any performance-based com-
pensation (as defined in §1.409A–1(e)),
an initial deferral election may be made
with respect to such performance-based
compensation on or before the date that
is six months before the end of the per-
formance period, provided that the ser-
vice provider performs services continu-
ously from the later of the beginning of the
performance period or the date the perfor-
mance criteria are established through the
date an election is made under this para-
graph (a)(8), and provided further that in
no event may an election to defer perfor-
mance-based compensation be made after
such compensation has become readily as-
certainable. For purposes of this paragraph
(a)(8), if the performance-based compen-
sation is a specified or calculable amount,
the compensation is readily ascertainable
if and when the amount is first substan-
tially certain to be paid. If the perfor-
mance-based compensation is not a spec-
ified or calculable amount because, for ex-
ample, the amount may vary based upon
the level of performance, the compensa-
tion, or any portion of the compensation,
is readily ascertainable when the amount
is first both calculable and substantially
certain to be paid. For this purpose, the
performance-based compensation is bifur-
cated between the portion that is readily as-
certainable and the amount that is not read-
ily ascertainable. Accordingly, in general
any minimum amount that is both calcula-
ble and substantially certain to be paid will
be treated as readily ascertainable.
(9)Nonqualified deferred compensa-
tion plans linked to qualified employer
plans or certain other arrangements.If
a nonqualified deferred compensation
plan provides that the amount deferred
under the plan is determined under the
formula for determining benefits under
a qualified employer plan (as defined
in §1.409A–1(a)(2)) or a broad-based
foreign retirement plan (as defined in
§1.409A–1(a)(3)(v)) maintained by the
service recipient but applied without
regard to one or more limitations ap-
plicable to the qualified employer plan
under the Internal Revenue Code or to
the broad-based foreign retirement plan
under other applicable law, or that the
amount deferred under the nonqualified
deferred compensation plan is determined
as an amount offset by some or all of
the benefits provided under the qualified
employer plan or the broad-based foreign
retirement plan, an increase in amounts
deferred under the nonqualified deferred
compensation plan that results directly
from changes in benefit limitations appli-
cable to the qualified employer plan or the
broad-based foreign retirement plan under
the Internal Revenue Code or other ap-
plicable law does not constitute a deferral
election under the nonqualified deferred
compensation plan, provided that such
operation does not otherwise result in a
change in the time or form of a payment
under the nonqualified deferred compen-
sation plan, and provided further that such
change in the amounts deferred under
the nonqualified deferred compensation
plan does not exceed that change in the
amounts deferred under the qualified em-
ployer plan or the broad-based foreign
retirement plan, as applicable. In addi-
tion, with respect to such a nonqualified
deferred compensation plan, the following
actions or failures to act will not constitute
a deferral election under the nonquali-
fied deferred compensation plan even if
in accordance with the terms of the non-
qualified deferred compensation plan, the
actions or inactions result in an increase
in the amounts deferred under the plan,
provided that such actions or inactions do
not otherwise affect the time or form of
payment under the nonqualified deferred
compensation plan and provided further
that with respect to actions or inactions
described in paragraphs (a)(9)(i) or (ii),
the change in the amount deferred under
the nonqualified deferred compensation
plan does not exceed the change in the
amounts deferred under the qualified em-
ployer plan or the broad-based foreign
retirement plan, as applicable:
(i) A service provider’s action or inac-
tion under the qualified employer plan or
broad-based foreign retirement plan with
respect to whether to elect to receive a
subsidized benefit or an ancillary bene-
fit under the qualified employer plan or
broad-based foreign retirement plan.
2007–19 I.R.B.1199May 7, 2007

(ii) The amendment of a qualified em-
ployer plan or broad-based foreign retire-
ment plan to add or remove a subsidized
benefit or an ancillary benefit, or to freeze
or limit future accruals of benefits under
the qualified plan or freeze or limit future
accruals of benefits or reduce existing ben-
efits under the broad-based foreign retire-
ment plan.
(iii) A service provider’s action or in-
action under a qualified employer plan
with respect to elective deferrals and other
employee pre-tax contributions subject to
the contribution restrictions under section
401(a)(30) or section 402(g), including
an adjustment to a deferral election under
such qualified employer plan, provided
that for any given taxable year, the service
provider’s action or inaction does not re-
sult in an increase in the amounts deferred
under all nonqualified deferred compen-
sation plans in whichthe service provider
participates (other than amounts described
in paragraph (a)(9)(iv) of this section) in
excess of the limit with respect to elective
deferrals under section 402(g)(1)(A), (B),
and (C) in effect for the taxable year in
which such action or inaction occurs.
(iv) A service provider’s action or in-
action under a qualified employer plan
with respect to elective deferrals and other
employee pre-tax contributions subject to
the contribution restrictions under section
401(a)(30) or section402(g), and after-tax
contributions by the service provider to
a qualified employer plan that provides
for such contributions, that affects the
amounts that are credited under one or
more nonqualified deferred compensation
plans as matching amounts or other sim-
ilar amounts contingent on such elective
deferrals, employee pre-tax contributions,
or after-tax contributions, provided that
the total of such matching or contingent
amounts, as applicable, never exceeds
100 percent of the matching or contingent
amounts that would be provided under
the qualified employer plan absent any
plan-based restrictions that reflect limits
on qualified plan contributions under the
Internal Revenue Code.
(10)Changes in elections under a cafe-
teria plan. A change in an election under
a cafeteria plan does not constitute a defer-
ral election with respect to an amount de-
ferred under a nonqualified deferred com-
pensation plan to the extent that the change
in the amount deferred under the nonqual-
ified deferred compensation plan results
solely from the application of the change
in amount eligible to be treated as com-
pensation under the terms of the nonqual-
ified deferred compensation plan resulting
from the election change under the cafe-
teria plan, to a benefit formula under the
nonqualified deferred compensation plan
based upon the service provider’s eligible
compensation, and onlytotheextentthat
such change applies in the same manner
as any other increase or decrease in com-
pensation would apply to such benefit for-
mula.
(11)Initial deferral election with re-
spect to certain separation pay.Inthe
case of separation pay (as defined in
§1.409A–1(m)), where such separation
pay is the subject ofbona fide, arm’s
length negotiations at the time of the sep-
aration from service,an initial deferral
election may be made at any time up
to the time the service provider obtains
a legally binding right to the payment.
This paragraph (a)(11) does not apply
to any separation pay to which the ser-
vice provider obtained a legally binding
right before the negotiations at the time of
the separation from service, including a
right to a payment subject to a condition
such as that the service provider separate
from service other than for cause. In the
case of separation pay due to participa-
tion in a window program (as defined in
§1.409A–1(b)(9)(vi)), an initial deferral
election may be made at any time before
the time the election to participate in the
window program becomes irrevocable.
(12)Initial deferral election with re-
spect to certain commissions—(i)Sales
commission compensation. For purposes
of this paragraph (a), a service provider
earning sales commission compensation is
treated as providing the services to which
such compensation relates only in the ser-
vice provider’s taxable year in which the
customer remits payment to the service
recipient or, if applied consistently to all
similarly situated service providers, the
service provider’s taxable year in which
the sale occurs. For purposes of this
paragraph (a)(12), the termsales commis-
sion compensationmeans compensation
or portions of compensation earned by a
service provider if a substantial portion
of the services provided by such service
provider to a service recipient consist of
the direct sale of a product or service to
an unrelated customer, the compensation
paid by the service recipient to the service
provider consists of either a portion of the
purchase price for the product or service
or an amount substantially all of which
is calculated by reference to the volume
of sales, and payment of the compensa-
tion is either contingent upon the service
recipient receiving payment from an unre-
lated customer for the product or services
or, if applied consistently to all similarly
situated service providers, is contingent
upon the closing of the sales transaction
and such other requirements as may be
specified by the service recipient before
the closing of the sales transaction. For
this purpose, a customer is treated as an
unrelated customer only if the customer is
not related to either the service provider or
the service recipient. A person is treated
as related to another person if the person
would be treated as related to the other
person under §1.409A–1(f)(2)(ii) or the
person would be treated as providing man-
agement services to the other person under
§1.409A–1(f)(2)(iv).
(ii)Investment commission compensa-
tion. For purposes of this paragraph (a), a
service provider earning investment com-
mission compensation is treated as provid-
ing the services to which such compensa-
tion relates over the 12 months preceding
the date as of which the overall value of the
assets or asset accounts is determined for
purposes of the calculation of the invest-
ment commission compensation. For pur-
poses of this paragraph (a)(12), the termin-
vestment commission compensationmeans
the compensation or the portion of com-
pensation earned by a service provider if
a substantial portion of the services pro-
vided by such service provider to a service
recipient to which such compensation re-
lates consists of sales of financial products
or other direct customer services to an un-
related customer with respect to customer
assets or customer asset accounts, the cus-
tomer retains the right to terminate the cus-
tomer relationship and may move or liq-
uidate the assets or asset accounts without
undue delay (which may be subject to a
reasonable notice period), such compensa-
tion consists of a portion of the value of
the overall assets or asset account balance,
an amount substantially all of which is cal-
culated by reference to the increase in the
value of the overall assets or account bal-
ance during a specified period, or both, and
May 7, 200712002007–19 I.R.B.

the value of the overall assets or account
balance and investment commission com-
pensation is determined at least annually.
For this purpose, a customer is treated as
an unrelated customer only if the customer
is not related to eitherthe service provider
or the service recipient. A person is treated
as related to another person if the person
would be treated as related to the other per-
son under §1.409A–1(f)(2)(ii) or the per-
son would be treated as providing man-
agement services to the other person under
§1.409A–1(f)(2)(iv).
(iii)Commission compensation and
related persons. The rules of paragraphs
(a)(12)(i) and (ii) of this section apply
to sales commission compensation and
investment commission compensation in-
volving a related customer, provided that
substantial sales from which commission
compensation arises are made, or sub-
stantial services from which commission
compensation arises are provided, to un-
related customers by the service recipient,
the sales and service arrangement and
the commission arrangement with respect
to the related customer arebona fide,
arise from the service recipient’s ordinary
course of business, and are substantially
the same, both in terms and in practice,
as the terms and practices applicable to
unrelated customers (as defined in such
paragraphs) to which individually or in
the aggregate substantial sales are made
or substantial services provided by the
service recipient.
(13)Initial deferral election with re-
spect to compensation paid for final pay-
roll period—(i)In general. Unless a plan
provides otherwise, compensation payable
after the last day of the service provider’s
taxable year solely for services performed
during the final payroll period described
in section 3401(b) containing the last day
of the service provider’s taxable year
or, with respect to a non-employee ser-
vice provider, a period not longer than
the payroll period described in section
3401(b), where such amount is payable
pursuant to the timing arrangement un-
der which the service recipient normally
compensates service providers for ser-
vices performed during a payroll period
described in section 3401(b), or with re-
spect to a non-employee service provider,
a period not longer than the payroll period
described in section 3401(b), is treated as
compensation for services performed in
the subsequent taxable year in which the
payment is made. The preceding sentence
does not apply to any compensation paid
during such period for services performed
during any period other than such final
payroll period, such as a payment of an
annual bonus. Any amendment of a plan
after December 31, 2007, to add a provi-
sion providing for a differing treatment of
such compensation may not be effective
for 12 months from the date the amend-
ment is executed and enacted.
(ii)Transition rule. For purposes of
this paragraph (a)(13), a plan that was
adopted and effective before December
31, 2007, whether written or unwritten,
will be treated as designating such com-
pensation for services performed in the
taxable year in which the payroll period
ends, unless otherwise set forth in writing
before December 31, 2007.
(14)Elections to annualize recurring
part-year compensation. In the case of a
service provider receiving recurring part-
year compensation, anelection to defer all
or a portion of the recurring part-year com-
pensation to be earned during a particular
service period is considered to meet the
requirements of this paragraph (a) if the
election is made before the services for
which the recurring part-year compensa-
tion is paid begin, and the election does
not defer payment of any of the recurring
part-year compensation to a date beyond
the last day of the 13
th
month following the
first date of the service period. For pur-
poses of this paragraph (a)(14), the term
recurring part-year compensationmeans
compensation paid for services rendered
in a position that the service recipient and
service provider reasonably anticipate will
continue on similar terms and conditions
in subsequent years, and will require ser-
vices to be provided during successive ser-
vice periods each of which comprises less
than 12 months (for example, a teacher
providing services during a school year
comprised of 10 consecutive months), and
each of which periods begins in one tax-
able year of the service provider and ends
in the next such taxable year. The rules of
this paragraph (a)(14) apply to a particular
amount of compensation only once, so that
an amount deferred under this rule may
not again be treated as recurring part-year
compensation for purposes of this para-
graph and subject to a second deferral elec-
tion under this paragraph (a)(14).
(15)USERRA rights. The requirements
of this paragraph (a) are deemed satisfied
to the extent an initial deferral election
is provided to satisfy the requirements of
the Uniformed Service Employment and
Reemployment Rights Act of 1994, as
amended, 38 U.S.C. 4301–4334.
(b)Subsequent changes in time and
form of payment—(1)In general.Aplan
that permits under a subsequent election
a delay in a payment or a change in the
form of payment (a subsequent deferral
election), including a subsequent deferral
election made by a service provider or
a service recipient, satisfies the require-
ments of section 409A(a)(4)(C) only if the
conditions of this paragraph (b) are met.
For purposes of this paragraph (b), except
as otherwise expressly provided in this
section, a subsequent deferral election is
not considered made until such election
becomes irrevocable under the terms of
the plan. Accordingly, a plan may provide
that a subsequent deferral election may be
changed at any time before the last permis-
sible date for making such a subsequent
deferral election. Where a plan permits a
subsequent deferral election, the require-
ments of this paragraph are satisfied only
if the following conditions are met:
(i) The plan requires that such election
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 §1.409A–3(a)(2)
(payment on account of disability),
§1.409A–3(a)(3) (payment on account
of death), or §1.409A–3(a)(6) (payment
on account of the occurrence of an unfore-
seeable emergency), the plan requires that
the payment with respect to which such
election is made be deferred for a period
of not less than five years from the date
such payment would otherwise have been
paid (or in the case of a life annuity or
installment payments treated as a single
payment, five years from the date the first
amount was scheduled to be paid).
(iii) The plan requires that any elec-
tion related to a payment described in
§1.409A–3(a)(4) (payment at a speci-
fied time or pursuant to a fixed schedule)
be made not less than 12 months before
the date the payment is scheduled to be
paid (or in the case of a life annuity or
installment payments treated as a single
payment, 12 months before the date the
first amount was scheduled to be paid).
2007–19 I.R.B.1201May 7, 2007

(2)Definition of payments for purposes
of subsequent changes in the time or form
of payment—(i)In general. Except as pro-
vided in paragraphs (b)(2)(ii) and (iii) of
this section, the termpaymentrefers to
each separately identified amount to which
a service provider is entitled to payment
under a plan on a determinable date, and
includes amounts applied for the benefit of
the service provider. An amount is sepa-
rately identified only if the amount may be
objectively determined under a nondiscre-
tionary formula. For example, an amount
identified as 10 percent of the account bal-
ance as of a specified payment date would
be a separately identified amount. A pay-
ment includes the provision of any tax-
able benefit, including payment in cash or
in kind. In addition, a payment includes,
but is not limited to, the transfer, cancella-
tion, or reduction of an amount of deferred
compensation in exchange for benefits un-
der a welfare benefit plan, a fringe ben-
efit excludible under section 119 or sec-
tion 132, or any other benefit that is ex-
cludible from gross income. For addi-
tional rules relating to the application of
this paragraph (b) to amounts payable at a
fixed time or pursuant to a fixed schedule,
see §1.409A–3(i)(1).
(ii)Life annuities—(A)In general.The
entitlement to a life annuity is treated as the
entitlement to a single payment. Accord-
ingly, an election to delay payment of a life
annuity, or to change the form of payment
ofalifeannuity,mustbemadeatleast12
months before the scheduled commence-
ment of the life annuity, and must defer
the payment for a period of not less than
five years from the originally scheduled
commencement of the life annuity. For
purposes of §1.409A–1, this section, and
§§1.409A–3 through 1.409A–6, the term
life annuitymeans a series of substantially
equal periodic payments, payable not less
frequently than annually, for the life (or
life expectancy) of the service provider,
or a series of substantially equal periodic
payments, payable not less frequently than
annually, for the life (or life expectancy)
of the service provider, followed upon the
death or end of the life expectancy of the
service provider by a series of substantially
equal periodic payments, payable not less
frequently then annually, for the life (or life
expectancy) of the service provider’s des-
ignated beneficiary (if any). A change in
designated beneficiary before any annuity
payment has been made under the plan is
not a change in the time or form of pay-
ment. A change in the form of a payment
before any annuity payment has been made
under the plan, from one type of life an-
nuity to another type of life annuity with
the same scheduled date for the first annu-
ity payment, is not considered a change in
the time and form of a payment, provided
that the annuities are actuarially equiva-
lent applying reasonable actuarial meth-
ods and assumptions. For purposes of this
paragraph (b)(2)(ii), a requirement that a
service provider obtain the consent of a
spouse or other potential recipient of a sur-
vivor annuity to change a beneficiary or
form of payment is disregarded, so that
any annuity form that the service recipient
could elect to receive with such consent is
considered currently available.
(B)Certain features disregarded.
Notwithstanding the foregoing provisions
of this paragraph (b)(2)(ii), the follow-
ing features are disregarded for purposes
of determining whether a payment form
is a life annuity within the meaning of
this paragraph (b)(2)(ii), but are not dis-
regarded for purposes of determining
whether a life annuity is the actuarial
equivalent of another life annuity except
as otherwise provided in this paragraph
(b)(2)(ii):
(1) Term certain features under which
annuity payments continue for the longer
of the life of the annuitant or a fixed period
of time.
(2) Pop-up features under which pay-
ments increase upon the death of the bene-
ficiary or another event that eliminates the
right to a survivor annuity.
(3) Cash refund features under which
payment is provided upon the death of
the last annuitant in an amount that is not
greater than the excess of the present value
of the annuity at the annuity starting date
over the total of payments before the death
of the last annuitant.
(4) Features under which an annuity
form of payment provides higher periodic
payments before the expected commence-
ment of benefits under the Social Secu-
rityAct(42U.S.C.ch. 7)ortheRailroad
Retirement Act (45 U.S.C. 231et. seq.)
and lower periodic payments after such ex-
pected commencement date, so that the
combined periodic payments under the ar-
rangement and the Social Security Act or
the Railroad Retirement Act, as applicable,
are approximately level before and after
such expected commencement date (So-
cial Security or Railroad Retirement lev-
eling features).
(5) Features providing for an increase in
the annuity payment in a manner described
in §1.401(a)(9)–6, Q&A–14(a)(1) or (2)
(eligible cost-of-living adjustments).
(C)Subsidized joint and survivor an-
nuities. For purposes of this paragraph
(b)(2)(ii), a joint and survivor annuity will
not fail to be treated asactuarially equiva-
lent to a single life annuity due solely to
the value of a subsidized survivor annu-
ity benefit, provided that the annual life-
time annuity benefit available to the ser-
vice provider under the joint and survivor
annuity is not greater than the annual life-
time annuity benefit available to the ser-
vice provider under the single life annuity
alternative, and provided that the annual
survivor annuity benefit is not greater than
the annual lifetime annuity benefit avail-
able to the service provider under the joint
and survivor annuity.
(D)Actuarial assumptions and meth-
ods. For purposes of this paragraph
(b)(2)(ii), at any given time the same
actuarial assumptions and methods must
be used in valuing each annuity payment
option, in determining whether the pay-
ments are actuarially equivalent and such
assumptions must be reasonable. This re-
quirement applies over the entire term of
the service provider’s participation in the
plan, such that the annuity payment must
be actuarially equivalent at all times for
the annuity payment options to be treated
as one time and form of payment. There
is no requirement that the same actuarial
methods and assumptions be used over the
term of a service provider’s participation
in a plan. Accordingly, a plan may change
the actuarial assumptions and methods
used to determine the life annuity pay-
ments provided that all of the actuarial
assumptions and methods are reasonable.
(iii)Installment payments. The entitle-
ment to a series of installment payments
that is not a life annuity is treated as the
entitlement to a single payment, unless the
plan provides at all times with respect to
the amount deferred that the right to the se-
ries of installment payments is to be treated
as a right to a series of separate payments.
For purposes of §1.409A–1, this section,
and §§1.409A–3 through 1.409A–6, a se-
ries of installment payments refers to an
May 7, 200712022007–19 I.R.B.

entitlement to the payment of a series of
substantially equal periodic amounts to be
paid over a predetermined period of years,
except to the extent any increase (or de-
crease) in the amount reflects reasonable
earnings (or losses) through the date the
amount is paid. For this purpose, a se-
ries of installment payments over a prede-
termined period and a series of installment
payments over a shorter or longer period,
or a series of installment payments over
the same predetermined period but with a
different commencement date, are differ-
ent times and forms of payment. Accord-
ingly, a change in the predetermined period
or the commencement date is a change in
the time and form of payment. Notwith-
standing the foregoing, a schedule of pay-
ments does not fail to be an installment
payment solely because such plan provides
for an immediate payment of all remaining
installments if the present value of the de-
ferred amount to be paid in the remaining
installment payments falls below a prede-
termined amount, and the immediate pay-
ment of such amount does not constitute
an accelerated payment for purposes of
§1.409A–3(j), provided that such feature
including the predetermined amount is es-
tablished by no later than the time and form
of payment is otherwise required to be es-
tablished, and provided further that any
change in such feature including the pre-
determined amount is a change in the time
and form of payment.
(iv)Transition rule. For purposes
of this section, a plan that was adopted
and effective before December 31, 2007,
whether written or unwritten, that fails
to make a designation as to whether the
entitlement to a series of payments is to be
treated as an entitlement to a series of sep-
arate payments under paragraph (b)(2)(iii)
of this section, may make such designation
on or before December 31, 2007, provided
suchdesignationissetforthinwritingon
or before December 31, 2007.
(3)Beneficiaries. The rules of this para-
graph (b) governing changes in the time
and form of payment apply to elections by
beneficiaries with respect to the time and
form of payment, as well as elections by
service providers or service recipients with
respect to the time and form of payment
to beneficiaries. An election to change the
identity of a beneficiary does not consti-
tute a change in the time and form of pay-
ment merely because the election changes
the identity of the recipient of the payment,
if the time and form of the payment is not
otherwise changed. In addition, an elec-
tion to change the identity of a beneficiary
before the initial payment of a life annuity
does not constitute a change in the time and
form of payment if the change in the time
of payments stems solely from the differ-
ent life expectancy of the new beneficiary,
such as in the case of a joint and survivor
annuity.
(4)Domestic relations orders.The
rules of this paragraph (b) governing
changes in the time and form of payment
do not apply to elections by individuals
other than a service provider, with respect
to payments to a person other than the ser-
vice provider, to the extent such elections
are reflected in, or made in accordance
with, the terms of a domestic relations
order (as defined in section 414(p)(1)(B)).
(5)Coordination with prohibition
against acceleration of payments.For
purposes of applying the prohibition
against the acceleration of payments in
§1.409A–3(j), the definition of payment
is the same as the definition in paragraph
(b)(2) of this section. Accordingly, a
change in the form of a payment that
results in a more rapid schedule for pay-
ments generally will not constitute an
acceleration of a payment, if the change
in the form of payment is made in com-
pliance with the subsequent deferral rules.
For example, a change in form from a
10-year installment payment treated as a
single payment to a lump-sum payment
would not constitute an acceleration if the
change in the form of the payment is made
in compliance with the requirements of
paragraph (b)(1) of this section, generally
meaning that the election to change to a
lump-sum payment must be made at least
12 months before the installment pay-
ments were scheduled to commence and
the lump-sum payment could not be made
until at least five years after the date the
installment payments were scheduled to
commence. See §1.409A–3(j)(4)(i) with
respect to situations in which the failure to
accelerate a payment or the modification
of a plan term relating to certain acceler-
ated payments will not be subject to the
rules of this paragraph (b).
(6)Application to multiple payment
events. In the case of a plan that permits
a payment upon each of a number of po-
tential permissible payment events, such
as the earlier of a fixed date or separation
from service, the requirements of para-
graph (b)(1) of this section are applied
separately to each payment (as defined in
paragraph (b)(2) of this section) due upon
each payment event. Notwithstanding the
foregoing, the addition or deletion of a
permissible payment event to a plan under
which amounts were previously deferred
is subject to the rules of this paragraph
(b) where the addition or deletion of the
permissible payment event may result in
a change in the time or form of payment
of the amount deferred. For application
of the rules governing accelerations of
payments to the addition of a permissible
payment event to amounts deferred, see
§1.409A–3(j).
(7)Delay of payments under certain
circumstances. A payment may be de-
layed to a date after the designated pay-
ment date under any of the circumstances
described in this paragraph (b)(7), and the
provision will not fail to meet the require-
ments of establishing a permissible pay-
ment event and the delay in the payment
will not constitute a subsequent deferral
election, so long as the service recipient
treats all payments to similarly situated
service providers on a reasonably consis-
tent basis.
(i)Payments subject to section 162(m).
A payment may be delayed to the extent
that the service recipient reasonably antic-
ipates that if the payment were made as
scheduled, the servicerecipient’s deduc-
tion with respect to such payment would
not be permitted due to the application
of section 162(m), provided that the pay-
ment is made either during the service
provider’s first taxable year in which the
service recipient reasonably anticipates,
or should reasonably anticipate, that if the
payment is made during such year, the de-
duction of such payment will not be barred
by application of section 162(m) or during
the period beginning with the date of the
service provider’s separation from service
andendingonthelaterofthelastdayof
the taxable year of the service recipient in
which the service provider separates from
service or the 15
th
day of the third month
following the service provider’s separa-
tion from service, and provided further that
where any scheduled payment to a specific
service provider in a service recipient’s
taxable year is delayed in accordance with
this paragraph, the delay in payment will
2007–19 I.R.B.1203May 7, 2007

be treated as a subsequent deferral elec-
tion unless all scheduled payments to that
service provider that could be delayed in
accordance with this paragraph are also
delayed. Where the payment is delayed
to a date on or after the service provider’s
separation from service, the payment will
be considered a payment upon a separa-
tion from service for purposes of the rules
under §1.409A–3(i)(2) (payments to spec-
ified employees upona separation from
service) and, in the case of a specified
employee, the date that is six months after
a service provider’s separation from ser-
vice is substituted for any reference to a
service provider’s separation from service
in the first sentence of this paragraph. No
election may be provided to the service
provider with respect to the timing of the
payment under this paragraph (b)(7)(i).
(ii)Payments that would violate Fed-
eral securities laws or other applicable
law. A payment may be delayed where
the service recipient reasonably anticipates
that the making of the payment will violate
Federal securities laws or other applicable
law; provided that the payment is made at
the earliest date at which the service recip-
ient reasonably anticipates that the making
of the payment will not cause such viola-
tion. The making of a payment that would
cause inclusion in gross income or the ap-
plication of any penalty provision or other
provision of the Internal Revenue Code is
not treated as a violation of applicable law.
(iii)Other events and conditions.A
service recipient may delay a payment
upon such other events and conditions
as the Commissioner may prescribe in
generally applicable guidance published
in the Internal Revenue Bulletin (see
§601.601(d)(2) of this chapter). For addi-
tional rules applicable to certain delayed
payments pursuant to a change in control
event, see §1.409A–3(i)(5)(iv). For addi-
tional rules applicable to amounts payable
because of an unforeseeable emergency,
see §1.409A–3(i)(3).
(8)USERRA rights. The requirements
of this paragraph (b) are deemed met to
the extent an election to change the time or
form of a payment of deferred compensa-
tion is provided to satisfy the requirements
of the Uniformed Services Employment
and Reemployment Rights Act of 1994, as
amended, 38 U.S.C. 4301–4344.
(9)Examples. The following examples
illustrate the application of the provisions
of this section. For purposes of these ex-
amples, each employee is an individual
with a calendar year taxable year, and is
employed by the specified employer:
Example 1.Initial election to defer salary.Em-
ployer ZZ sponsors a plan under which Employee
A may elect to defer a percentage of Employee A’s
salary. Employee A has participated in the plan in
prior years. To satisfy the requirements of this section
with respect to salary earned in calendar year 2008, if
Employee A elects to defer any amount of such salary,
the deferral election (including an election as to the
time and form of payment) must be made no later than
December 31, 2007.
Example 2.Designation of time and form of
payment where an initial deferral election is not
provided. Employer YY has a taxable year end-
ing September 30. On July 1, 2008, Employer
YY enters into a legally binding obligation to pay
Employee B a $10,000 bonus. The amount is not
subject to a substantial risk of forfeiture and does
not qualify as performance-based compensation as
described in §1.409A–1(e). Employer YY does not
provide Employee B an election as to the time and
form of payment. Unless the amount is to be paid
in accordance with the short-term deferral rule of
§1.409A–1(b)(4), Employer YY must specify the
time and form of payment on or before July 1, 2008,
to satisfy the requirements of this section.
Example 3.Initial election to defer bonus payable
based on services during calendar year. Employer
XX has a taxable year ending September 30. Em-
ployee C participates in a bonus plan under which
Employee C is entitled to a bonus for services per-
formed during the calendar year that, absent an elec-
tion by Employee C, will be paid on March 15 of
the following year. The amount is not subject to
a substantial risk of forfeiture and does not qualify
as performance-based compensation as described in
§1.409A–1(e). If Employee C elects to defer the pay-
ment of the bonus with respect to services rendered
during calendar year 2008, Employee C must elect
the time and form of payment not later than Decem-
ber 31, 2007, to satisfy the requirements of this sec-
tion.
Example 4.Initial election to defer bonus payable
based on services during fiscal year other than cal-
endar year. Employer WW has a taxable year ending
September 30. Employee D participates in a bonus
plan under which Employee D is entitled to a bonus
for services performed during Employer WW’s fiscal
year that, absent an election by Employee D, will be
paid on December 15 of the calendar year in which
the fiscal year ends. The amount is not subject to
a substantial risk of forfeiture and does not qualify
as performance-based compensation as described in
§1.409A–1(e). The amount qualifies as fiscal year
compensation. If Employee D elects to defer the pay-
ment of the amount related to the fiscal year ending
September 30, 2009, to satisfy the requirements of
this section Employee D must elect the time and form
of payment not later than September 30, 2008.
Example 5.Initial election to defer bonus payable
only if service provider completes at least 12 months
of services after the election. Employer VV has a cal-
endar year taxable year. On March 1, 2008, Employer
VV grants Employee E a $10,000 bonus, payable on
March 1, 2010 (with reasonable interest), provided
that Employee E continues performing services as an
employee of Employer VV through March 1, 2010.
The amount does not qualify as performance-based
compensation as described in §1.409A–1(e), and Em-
ployee E already participates in another account bal-
ance nonqualified deferred compensation plan. Em-
ployee E may make an initial deferral election on
or before March 31, 2008 (within 30 days after ob-
taining a legally binding right), because at least 12
months of additional services are required after the
date of election for the risk of forfeiture to lapse.
Example 6.Initial election to defer bonus that
would otherwise constitute a short-term deferral.
ThesamefactsasExample 5, except that Employee
E does not make an initial deferral election on or
before March 31, 2008. Because the right to the
compensation would not be treated as a deferral of
compensation pursuant to §1.409A–1(b)(4) absent a
deferral election (becausethe arrangement would be
treated as a short-term deferral), Employee E may
make an initial deferral election provided that the
election may not become effective for 12 months and
must defer the payment at least 5 years from March
1, 2010 (the first date the payment could become
substantially vested). Accordingly, Employee E may
make an election before March 1, 2009, provided that
the election defers the payment to a date on or after
March 1, 2015 (other than a payment due to death,
disability, unforeseeable emergency, or a change in
control event).
Example 7.Initial election to defer sales com-
missions. Employer UU has a calendar year taxable
year. As part of Employee F’s services for Employer
UU, Employee F sells refrigerators to customers un-
related to Employee F or Employer UU. Under the
employment arrangement, Employee F is entitled to
10% of the sales price of any refrigerator Employee F
sells, payable only upon the receipt of payment from
the customer who purchased the refrigerator. For pur-
poses of the initial deferral rule, Employee F is treated
as performing the services related to each refrigerator
sale in the calendar year in which each customer pays
for the refrigerator.
Example 8.Initial election to defer renewal sales
commissions. The same facts asExample 7, except
that Employee F also sells warranties related to the re-
frigerators sold. Under the warranty arrangement, re-
frigerator warranty customers are entitled in a future
year to extend the warranty for an additional cost to
be paid at the time of the extension. Under Employee
F’s arrangement with Employer UU, Employee F is
entitled to 10% of the amount paid for an extension
of any warranty, payable upon the receipt of payment
from the customer extending the warranty. For pur-
poses of the initial deferral election rule, Employee
F is treated as performing the services related to the
amount paid for the extension of the warranty in the
taxable year in which the customer pays for the war-
ranty extension.
Example 9.Initial election to defer investment
commissions. Employer TT is in the trade or busi-
ness of managing financial assets for customer ac-
counts. Customers who deposit funds in an account
with Employer TT are entitled to remove the account
balance of such account upon 60 days notice to Em-
ployer TT. Employee G sells financial products and
provides continuing customer service to certain un-
related customers involving the deposit and mainte-
nance of funds in customer accounts managed by Em-
ployer TT. Under the employment arrangement, Em-
May 7, 200712042007–19 I.R.B.

ployee G is entitled to a set percentage of the aggre-
gate value of the assets held in the accounts of cus-
tomers to whom Employee G sold financial products
and provides customer service. Under the arrange-
ment, the aggregate value of the assets held in the
accounts is determined as of June 30 of each year,
and unless Employee G elects to defer the payment,
the amount is payable to Employee G in a lump sum
on December 31 of the year in which the valuation is
made. Employee G has no control over the valuation
of the assets held in the accounts, or the calculation
of the amount due Employee G. For purposes of the
initial deferral rule, Employee G is treated as provid-
ing the services to which a payment relates during the
July 1 through June 30 period ending on the June 30
date as of which the assets held in the account are val-
ued.
Example 10.Initial election to defer part-year
compensation. Employee H provides services as a
teacher to Employer SS, a school system. The period
of services routinely begins on the second Monday
of August of one year and ends on the first Friday of
June of the subsequent year. Employer SS provides
an election to Employee H to receive the compensa-
tion for the period of services ratably over the period
beginning on the second Monday of August of one
year and ending on the last day of August of the sub-
sequent year. Because the compensation constitutes
recurring part-year compensation, as defined in para-
graph (a)(14) of this section, and because the sched-
ule will provide that all of the recurring part-year
compensation is paid no later than September 30 of
the subsequent year, Employee H will be deemed to
have made a timely deferral election with respect to
such recurring part-year compensation if Employee
H elects before the first day of the service period to
have the recurring part-year compensation paid under
such schedule.
Example 11.Initial election to defer negotiated
separation pay. Employer RR decides to terminate
Employee J’s employment involuntarily. As part of
the process of terminating Employee J, Employer RR
enters intobona fide, arm’s length negotiations with
respect to the terms of Employee J’s termination of
employment. As part of the process, Employer RR
offers Employee J an amount that is in addition to any
amounts to which Employee J is otherwise entitled,
payable either as a lump sum payment at the end of
3 years or in 3 annual payments starting at the date
of termination of employment. The election of the
time and form of payment by Employee J may be
made at any time before Employee J accepts the offer
and obtains a legally binding right to the additional
amount. The election may not apply to any amount
to which Employee J already had a legally binding
right.
Example 12.Election of time and form of
payments under a window program. Employer
QQ establishes a window program, as defined in
§1.409A–1(b)(9)(vi). Individuals who elect to ter-
minate employment under the window program are
entitled to receive an amount equal to 2 weeks pay
multiplied by every year of service with Employer
QQ. The individuals participating in the window
program may elect to receive the payment as either
a lump sum payment payable on the first day of the
month after making the election to participate in the
window program, or as a payment of 3 equal annual
installments on each January 1 of the first 3 years
following the election to participate in the window
program. Employee K is eligible to participate in
the window program. Employee K will be treated as
making a timely deferral election if the election as to
the time and form of payment is made on or before
the date Employee K’s election to participate in the
window program becomes irrevocable.
Example 13.Initial election to defer salary
earned during final payroll period beginning in one
calendar year and ending in the subsequent calendar
year. Employer PP pays the salary of its employees,
including Employee L, on a bi-weekly basis. One
bi-weekly payroll period runs from December 24,
2008, through January 6, 2009, with a scheduled
payment date of January 13, 2009. Employer PP
sponsors, and Employee L participates in, a non-
qualified deferred compensation plan under which
Employee L may defer a specified percentage of his
annual salary. The plan does not specify that any
salary compensation paid for the payroll period in
which falls January 1 is to be treated as compensation
for services performed during the year preceding the
year in which falls that January 1. For purposes of
applying the initial deferral election rules, Employee
L is deemed to have performed the services for the
payroll period December 24, 2008, through January
6, 2009, during the calendar year 2009.
Example 14.Application of deferral election
rules and anti-acceleration rules to a nonqualified
deferred compensation plan linked to a qualified
plan. Employee M participates in a qualified retire-
ment plan that is a defined benefit plan that offers
a subsidized early retirement benefit to employees
whohaveattainedage55andcompleted30years
of service. Employee M, who has attained age 55
and completed 30 years of service, also participates
in a nonqualified deferred compensation plan, under
which the benefit payable is calculated under a for-
mula, with that benefit then reduced by any benefit
that Employee M has accrued under the qualified re-
tirement plan. In 2008, Employee M fails to elect the
subsidized early retirement benefit under the quali-
fied retirement plan, with the effect that the amounts
payable under the nonqualified deferred compensa-
tionplanareincreasedbyanamountequaltothe
reduction in the benefit payable under the qualified
plan. In 2009, Employer NN amends the qualified
retirement plan to increase benefits under the plan,
resulting in a decrease in the amounts payable under
the nonqualified deferred compensation plan equal to
the increase in the benefit payable under the qualified
plan. Neither of these actions constitutes a deferral
election or an acceleration of a payment under the
nonqualified deferred compensation plan.
Example 15.Subsequent deferral election.Em-
ployee N participates in a nonqualified deferred com-
pensation plan. Employee N elects to be paid in a
lump sum payment at the earlier of age 65 or sepa-
ration from service. Employee N anticipates that he
will work after age 65, and wishes to defer payment to
a later date. Provided that Employee N continues in
employment and makes the election by his 64
th
birth-
day, Employee N may elect to receive a lump sum
payment at the earlier of age 70 or separation from
service.
Example 16.Subsequent deferral election rule –
change in form of payment from lump sum payment
to life annuity. Employee P participates in a nonqual-
ified deferred compensation plan. Employee P elects
to be paid in a lump sum payment at age 65. Em-
ployee P wishes to change the payment form to a life
annuity. Provided that Employee P makes the elec-
tion on or before his 64
th
birthday, Employee P may
elect to receive a life annuity commencing at age 70.
Example 17.Subsequent deferral election rule –
change in form of payment from life annuity to lump
sum payment. Employee Q participates in a nonquali-
fied deferred compensation plan. Employee Q elects
to be paid in a life annuity at age 65. Employee Q
wishes to change the payment form to a lump sum
payment. Provided that Employee Q makes the elec-
tion on or before his 64
th
birthday, Employee Q may
elect to receive a lump sum payment at age 70.
Example 18.Subsequent deferral election rule
– installment payments designated as separate pay-
ments. Employee R, whose taxable year is the calen-
dar year, participates in a nonqualified deferred com-
pensation plan that provides for payment in a series
of 5 equal annual amounts, each designated as a sep-
arate payment. The first payment is scheduled to be
made on January 1, 2010. Provided that Employee R
makes the election on or before January 1, 2009, Em-
ployee R may elect for the first payment scheduled
to be made on January 1, 2010, to be made on Jan-
uary 1, 2015. If Employee R makes that election, but
does not elect to defer the remaining payments, the
remaining payments continue to be due upon January
1 of the 4 consecutive calendar years commencing on
January 1, 2011.
Example 19.Subsequent deferral election rule
– change in form of payment from installment pay-
ments not designated as separate payments to lump
sum payment. Employee S participates in a nonqual-
ified deferred compensation plan that provides for
payment in a series of 5 equal annual amounts that
are not designated as a series of 5 separate payments.
ThefirstamountisscheduledtobepaidonJanuary
1, 2010. Employee S wishes to receive the entire
amount equal to the sum of all 5 of the amounts to
be paid as a lump sum payment. Provided that Em-
ployee S makes the election on or before January 1,
2009, Employee S may elect to receive a lump sum
payment on or after January 1, 2015.
Example 20.Subsequent deferral election rule –
change in form of payment from installment payments
designated as separate payments to lump sum pay-
ment. Employee T participates in a nonqualified de-
ferred compensation plan that provides for payment
in a series of 5 equal annual amounts each of which
is designated as a separate payment. The first amount
is scheduled to be paid on January 1, 2010. Employee
T wishes to receive the entire amount equal to the
sum of all 5 of the amounts in a single lump sum pay-
ment. Provided that Employee T makes the election
on or before January 1, 2009, Employee T may elect
to receive a lump sum payment on or after January 1,
2019.
Example 21.Subsequent deferral election rule –
change in form of payment from one life annuity form
to another life annuity form. Employee U partici-
pates in a nonqualified deferred compensation plan
that permits Employee U to elect before Employee
U’s separation from service whether to be paid in
the form of a single life annuity beginning on the
first day of the month following Employee U’s sep-
aration from service, or an annuity beginning on the
first day of the month following Employee U’s sep-
aration from service under which annuity payments
2007–19 I.R.B.1205May 7, 2007

continue for Employee U’s lifetime but not less than
10 years. The two types of annuities are actuarially
equivalent at all times applying reasonable actuarial
methods and assumptions. For purposes of this sec-
tion, the two types of annuities are treated as a single
form of payment. Accordingly, the election provided
under the plan is not treated as providing a subsequent
deferral election or accelerated payment, and an elec-
tion by Employee U under the plan between the two
annuity options made before the first scheduled pay-
ment date for an annuity payment is not treated as a
subsequent deferral election or an acceleration of a
payment.
Example 22.Subsequent deferral election rule –
change in time of payment from payment at specified
age to payment at later of specified age or separation
from service. Employee V participates in a nonqual-
ified deferred compensation plan that provides for a
lump sum payment at age 65. Employee V wishes to
modify the plan so that the deferred amount will be
payable upon the later of Employee V’s attainment of
a specified age or separation from service. Provided
that Employee V makes such election on or before his
64
th
birthday, Employee V may modify the plan so
Employee V will receive a lump sum payment upon
the later of age 70 or separation from service.
Example 23.Subsequent deferral election rule –
change in time of payment from payment at separa-
tion from service to payment at later of separation
from service or specified age. Employee W partic-
ipates in a nonqualified deferred compensation plan
that provides for a lump sum payment at separation
from service. Employee W wishes to make the pay-
ment payable upon the later of separation from ser-
vice or a predetermined age. Provided that Employee
W makes such election on or before the date 1 year
before a separation from service, Employee W may
elect to receive a lump sum payment upon the later of
the date 5 years followinga separation from service
or at a specified age.
Example 24.Subsequent deferral election rule
– change in time of payment from payment at sepa-
ration from service to payment at a change in con-
trol event. Employee X participates in a nonqualified
deferred compensation plan that provides for a lump
sum payment at separation from service. Employee X
wishes to change the payment provision such that the
payment is payable upon a change in control event.
A change in the distribution provision to provide for
a payment only upon a change in control event will
violate the rules governing payment provisions, be-
cause the change could result in an acceleration if
the change in control event occurs before Employee
X separates from service, ora subsequent deferral if
the change in control does not occur until after Em-
ployee X separates from service. However, provided
that Employee X makes such election on or before
the date 1 year before a separation from service, Em-
ployee X may elect to receive a payment upon the
later of a change in control event or 5 years following
a separation from service.
(c)Special rules for certain resident
aliens. For the first taxable year of an in-
dividual in which such individual is a res-
ident alien, a nonqualified deferred com-
pensation plan is deemed to meet the re-
quirements of paragraph (a) of this section
if, with respect to compensation payable
for services performed during that first tax-
able year or with respect to compensation
the right to which is subject to a substantial
risk of forfeiture as of the first day of that
first taxable year, an initial deferral elec-
tion is made by the end of such first tax-
able year, provided that the initial defer-
ral election may not apply to amounts that
have already been paid or made available
to the service provider before the election
is made. For any year after the first taxable
year in which an individual is classified
as a resident alien, this paragraph (c) does
not apply, provided that a taxable year may
again be treated as the first taxable year in
which an individual is classified as a res-
ident alien if such individual is classified
as a resident alien in that taxable year and
has not been classified as a resident alien
for the three consecutive taxable years im-
mediately preceding that taxable year.
§1.409A–3 Permissible payments.
(a)In general. The requirements of sec-
tion 409A(a)(2)(A) are met only if the plan
provides that an amount of deferred com-
pensation under the plan may be paid only
upon an event or at a time set forth in this
paragraph (a):
(1) The service provider’s separation
from service (as defined in §1.409A–1(h)
and in accordance with paragraph (i)(2) of
this section).
(2) The service provider becoming dis-
abled (in accordance with paragraph (i)(4)
of this section).
(3) The service provider’s death.
(4) A time or a fixed schedule specified
under the plan (in accordance with para-
graph (i)(1) of this section).
(5) A change in the ownership or effec-
tive control of the corporation, or in the
ownership of a substantial portion of the
assets of the corporation (in accordance
with paragraph (i)(5) of this section).
(6) The occurrence of an unforeseeable
emergency (in accordance with paragraph
(i)(3) of this section).
(b)Designation of payment upon a
permissible payment event. Except as
otherwise specified in this section, a plan
provides for the payment upon an event
described in paragraph (a)(1), (2), (3), (5),
or(6)ofthissectioniftheplanprovides
the date of the event is the payment date,
or specifies another payment date that is
objectively determinable and nondiscre-
tionary at the time the event occurs. A plan
may also provide that a payment upon an
event described in paragraph (a)(1), (2),
(3), (5), or (6) of this section is to be
made in accordance with a schedule that
is objectively determinable and nondiscre-
tionary based on the date the event occurs
and that would qualify as a fixed schedule
under paragraph (i)(1) of this section if
the payment event were instead a fixed
date, provided that the schedule must be
fixed at the time the permissible payment
event is designated. In addition, a plan
may provide that a payment, including a
payment that is part of a schedule, is to
be made during a designated taxable year
of the service provider that is objectively
determinable and nondiscretionary at the
time the payment event occurs such as, for
example, a schedule of three substantially
equal payments payable during the first
three taxable years following the taxable
year in which a separation from service
occurs. A plan may also provide that a
payment, including a payment that is part
of a schedule, is to be made during a desig-
nated period objectively determinable and
nondiscretionary at the time the payment
event occurs, but only if the designated
period both begins and ends within one
taxable year of the service provider or the
designated period is not more than 90 days
and the service provider does not have a
right to designate the taxable year of the
payment (other than an election that com-
plies with the subsequent deferral election
rules of §1.409A–2(b)). Where a plan
provides for a period of more than one day
following a payment event during which a
payment may be made, such as within 90
days following the date of the event, the
payment date for purposes of the subse-
quent deferral rules under §1.409A–2(b)
is treated as the first possible date upon
which a payment could be made under the
terms of the plan. A plan may provide for
payment upon the earliest or latest of more
than one event or time, provided that each
event or time is described in paragraphs
(a)(1) through (6) of this section. For ex-
amples illustrating the provisions of this
paragraph, see paragraph (i)(1)(vi) of this
section.
(c)Designation of alternative specified
dates or payment schedules based upon
date of permissible event. Except as oth-
erwise provided in this paragraph (c), a
plan may designate only one time and form
May 7, 200712062007–19 I.R.B.

of payment upon the occurrence of each
event described in paragraph (a)(1), (2),
(3), (5), or (6) of this section. For ex-
ample, a plan does not satisfy the require-
ments of this paragraph (c) if it provides
for one payment date or schedule of pay-
ments if a specified event occurs on a Mon-
day, but another payment date or sched-
ule of payments if the event occurs on any
other day of the week. However, a plan
that provides for a payment upon an event
described in paragraph (a)(2), (3), (5), or
(6) of this section may allow for an alter-
native payment schedule if the event oc-
curs on or before one (but not more than
one) specified date, provided that the ad-
dition or deletion of such a different time
and form of payment applicable to an ex-
isting deferral is subject to §1.409A–2(b)
(subsequent deferral elections) and para-
graph (j) of this section (accelerated pay-
ments). For example, a plan may provide
that a service provider will receive a lump
sum payment of the service provider’s en-
tire benefit under the plan on the first day
of the month following a change in con-
trol event that occurs before the service
provider attains age55, but will receive 5
substantially equal annual payments com-
mencing on the first day of the month fol-
lowing a change in control event that oc-
curs on or after the service provider attains
age 55. In the case of a plan that provides
that a payment upon an event described in
paragraph (a)(1) of this section (a payment
upon a separation from service), a differ-
ent time and form of payment may be des-
ignated with respect to a separation from
service under each of the following condi-
tions, provided that the addition or deletion
of such a different time and form of pay-
ment applicable to anexisting deferral is
subject to §1.409A–2(b) and paragraph (j)
of this section:
(1) A separation from service during a
limited period of time not to exceed two
years following a change in control event
(as defined in paragraph (i)(5) of this sec-
tion).
(2) A separation from service before or
after a specified date (for example, the at-
tainment of a specified age), or a separa-
tion from service before or after a combi-
nation of a specified date, such as attain-
ing a specified age, and a specified pe-
riod of service determined under a prede-
termined, nondiscretionary, objective for-
mula or pursuant to the method for cred-
iting service under a qualified plan spon-
sored by the service recipient.
(3) A separation from service not de-
scribed in paragraphs (c)(1) or (c)(2) of
this section.
(d)When a payment is treated as made
upon the designated payment date.Ex-
cept as otherwise specified in this sec-
tion, a payment is treated as made upon
the date specified under the plan (includ-
ing a date specified under paragraph (a)(4)
of this section) if the payment is made at
such date or a later date within the same
taxable year of the service provider or, if
later, by the 15
th
day of the third calendar
month following the date specified under
the plan and the service provider is not per-
mitted, directly or indirectly, to designate
the taxable year of the payment. In addi-
tion, a payment is treated as made upon
the date specified under the plan (including
a date specified under paragraph (a)(4) of
this section) and is not treated as an accel-
erated payment if the payment is made no
earlier than 30 days before the designated
payment date and the service provider is
not permitted, directly or indirectly to des-
ignate the taxable year of the payment. For
purposes of this paragraph, if the date spec-
ified is only a designated taxable year of
the service provider, or a period of time
during such a taxable year, the date spec-
ified under the plan is treated as the first
day of such taxable year or the first day
of the period of time during such taxable
year, as applicable. The payment with
respect to a stock right generally occurs
upon the exercise of the stock right, so that
where a stock right designates a fixed ex-
ercise date, the stock right will be deemed
to have been paid at such date if the ex-
ercise and payment occur on such date or
a later date within the same taxable year
of the service provider or, if later, by the
15
th
day of the third calendar month fol-
lowing the exercise date specified under
the plan. If calculation of the amount of
the payment is not administratively practi-
cable due to events beyond the control of
the service provider (or service provider’s
beneficiary), the payment will be treated
as made upon the date specified under the
plan if the payment is made during the
first taxable year of the service provider
in which the calculation of the amount of
the payment is administratively practica-
ble. For purposes of this paragraph, the
inability of a service recipient to calculate
the amount or timing of a payment due
to a failure of a service provider (or ser-
vice provider’s beneficiary) to provide rea-
sonably available information necessary to
make such calculation does not constitute
an event beyond the control of the service
provider. Similarly, if the making of the
payment at the date specified under the
plan would jeopardize the ability of the ser-
vice recipient to continue as a going con-
cern, the payment will be treated as made
upon the date specified under the plan if
the payment is made during the first tax-
able year of the service provider in which
the making of the payment would not have
such effect.
(e)Designation of time and form of pay-
ment with respect to earnings. A non-
qualified deferred compensation plan that
provides for actual or notional earnings to
be credited on amounts of deferred com-
pensation may specify, in accordance with
the requirements of §1.409A–2(a) (initial
deferral elections), that such earnings are
treated separately from the right to the
other amounts deferred under the plan for
purposes of designating the time and form
of payments under such plan, provided that
to satisfy the requirements of this para-
graph (e), actual or notional earnings must
be credited at least annually. For these pur-
poses, a right to dividend equivalents may
be treated analogously to a right to actual
or notional earnings on an amount of de-
ferred compensation. For purposes of this
paragraph (e), the termdividend equiva-
lentsmeans the right to an amount equal to
all or a specified portion of dividends de-
clared and paid, if any, on a specified num-
ber of shares of stock.
(f)Substitutions. Except as otherwise
provided under these regulations, the pay-
ment of an amount as a substitute for a
payment of deferred compensation will be
treated as a payment of the deferred com-
pensation. A forfeiture or voluntary relin-
quishment of an amount of deferred com-
pensation will not be treated as a pay-
ment of the compensation, but there is no
forfeiture or voluntary relinquishment for
this purpose if an amount is paid, or a
legally binding right to a payment is cre-
ated, that acts as a substitute for the for-
feited or voluntarily relinquished amount.
Whether a payment or a right to a payment
acts as a substitute for a payment of de-
ferred compensation is determined based
on all the facts and circumstances. How-
2007–19 I.R.B.1207May 7, 2007

ever, where the payment of an amount re-
sults in an actual or potential reduction of,
or current or future offset to, an amount
of deferred compensation, or if the ser-
vice provider receives a loan the repay-
ment of which is secured by or may be
accomplished through an offset of or a
reduction in an amount deferred under a
nonqualified deferred compensation plan,
the payment or loan is a substitute for
the deferred compensation. In addition,
where a service provider’s right to deferred
compensation is made subject to antici-
pation, alienation, sale, transfer, assign-
ment, pledge, encumbrance, attachment,
or garnishment by creditors of the service
provider or the service provider’s benefi-
ciary, the deferred compensation is treated
as having been paid. For the treatment of
certain offsets, see paragraph (j)(4)(xiii) of
this section. Even where there is no ex-
plicit reduction or offset, the payment of
an amount or creation of a new right to a
payment proximate to the purported forfei-
ture or voluntary relinquishment of a right
to deferred compensation is presumed to
be a substitute for the deferred compensa-
tion. The presumption is rebuttable by a
showing that the compensation paid would
have been received regardless of the for-
feiture or voluntary relinquishment of the
right to deferred compensation. Factors in-
dicating that a payment would have been
received regardless of such forfeiture or
voluntarily relinquishment include that the
amount paid is materially less than the for-
feited or relinquished amount, or consists
of a type of payment customarily made in
the ordinary course of business of the ser-
vice recipient to service providers who do
not forfeit or relinquish deferred compen-
sation (for example, a payment of accrued
but unused leave or a payment for a re-
lease of actual or potential claims). See
§1.409A–1(b)(9)(i) with respect to certain
separation pay plans.
(g)Disputed payments and refusals to
pay. If a service recipient fails to make
a payment in whole or in part as of the
date specified under a plan, either inten-
tionally or unintentionally, other than with
the express or implied consent of the ser-
vice provider, the payment will be treated
as made upon the date specified under the
plan if the service provider accepts the por-
tion (if any) of the payment that the ser-
vice recipient is willing to make (unless
such acceptance will result in a relinquish-
ment of the claim to all or part of the re-
maining amount), makes prompt and rea-
sonable, good faith efforts to collect the re-
maining portion of the payment, and any
further payment (including payment of a
lesser amount that satisfies the obligation
to make the payment) is made no later than
the end of the first taxable year of the ser-
vice provider in which the service recipient
and the service provider enter into a legally
binding settlement of such dispute, the ser-
vice recipient concedes that the amount is
payable, or the service recipient is required
to make such payment pursuant to a final
and nonappealable judgment or other bind-
ing decision. For purposes of this para-
graph (g), efforts to collect the payment
will be presumed not to be prompt, rea-
sonable, good faith efforts, unless the ser-
vice provider provides notice to the service
recipient within 90 days of the latest date
upon which the payment could have been
timely made in accordance with the terms
of the plan and these regulations, and un-
less, if not paid, the service provider takes
further enforcement measures within 180
days after such latest date. For purposes
of this paragraph (g), a service recipient is
not treated as having failed to make a pay-
ment where pursuant to the terms of the
plan the service provider is required to re-
quest payment, or otherwise provide infor-
mation or take any other action, and the
service provider has failed to take such ac-
tion. In addition, for purposes of this para-
graph (g), the service provider is deemed
to have requested that a payment not be
made, rather than the service recipient hav-
ingfailedtomakesuchpayment,where
the service recipient’s decision to refuse
to make the payment is made by the ser-
vice provider or a member of the service
provider’s family (as defined in section
267(c)(4) applied as if the family of an in-
dividual includes the spouse of any mem-
ber of the family), or any person or group
of persons over whom the service provider
or service provider’s family member has
effective control, or any person any por-
tion of whose compensation is controlled
the service provider or service provider’s
family member.
(h)Special rule for certain resident
aliens. An agreement, method, program,
or other arrangement that is, or consti-
tutes part of, a nonqualified deferred
compensation plan is deemed to meet the
requirements of this section with respect
to any amount payable in the first taxable
year of the service provider in which a ser-
vice provider is a resident alien, and with
respect to any amount payable in a subse-
quent taxable year if no later than the last
day of the first taxable year of the service
provider in which the service provider is
a resident alien, the plan is amended as
necessary so that the times and forms of
payment of amounts payable in a subse-
quent year comply with the provisions of
this section. For any year after the first
taxable year of an individual in which the
individual is a resident alien, this para-
graph (h) does not apply, provided that a
taxable year may again be treated as the
first taxable year in which an individual
is a resident alien if such individual has
not been a resident alien for at least three
consecutive taxable years immediately
preceding the taxable year in which the
service provider is again a resident alien.
(i)Definitions and special rules—(1)
Specified time or fixed schedule—(i)In
general. Amounts are payable at a speci-
fied time or pursuant to a fixed schedule
if objectively determinable amounts are
payable at a date or dates that are nondis-
cretionary and objectively determinable
at the time the amount is deferred. An
amount is objectively determinable for
this purpose if the amount is specifically
identified or if the amount may be deter-
mined at the time payment is due pursuant
to an objective, nondiscretionary formula
specified at the time the amount is deferred
(for example, 50 percent of a specified ac-
count balance). Exceptasotherwisepro-
vided in paragraph (i)(1) of this section,
an amount is not objectively determinable
if the amount of the payment is based all
or in part upon the occurrence of an event,
including the consummation of a transac-
tion by, or a payment of an amount to, a
service recipient. If an amount is payable
in a service provider’s taxable year (or
pursuant to a fixed schedule of taxable
years of the service provider) that is des-
ignated at the time the amount is deferred
and that is objectively determinable, the
amount is treated as payable at a specified
time (or pursuant to a fixed schedule), pro-
vided that for purposes of the application
of the subsequent deferral rules contained
in §1.409A–2(b), the specified time or
fixed schedule of payments is deemed to
refer to the first day of the relevant tax-
able year or years. A specified time or
May 7, 200712082007–19 I.R.B.

fixed schedule also includes the designa-
tion at the time the amount is deferred
of a defined period or periods within the
service provider’s taxable year or taxable
years that are objectively determinable,
provided that no such defined period may
begin within one taxable year and end
within another taxable year, and provided
further that for purposes of the application
of the subsequent deferral rules contained
in §1.409A–2(b), the specified time or
fixed schedule of payments is deemed to
refer to the first day of the relevant period
in which the payment will be made. A
plan may provide that a payment upon
the lapse of a substantial risk of forfeiture
is to be made in accordance with a fixed
schedule that is objectively determinable
based on the date the substantial risk of
forfeiture lapses (disregarding any dis-
cretionary acceleration of the lapse of the
substantial risk of forfeiture), provided
that the schedule must be fixed on the
date the time and form of payment are
designated, and any change in the fixed
schedule will constitute a change in the
time and form of payment. For example,
a plan that provides for a bonus payment
subject to the condition that the service
provider complete three years of service,
and subject to the further condition that
such requirement of continued services
will lapse upon the occurrence of an initial
public offering, which condition if applied
alone would constitute a substantial risk
of forfeiture, may provide that a service
provider is entitled to substantially equal
payments on each of the first three an-
niversaries of the date the substantial risk
of forfeiture lapses (the earlier of three
years of service or the date of an initial
public offering).
(ii)Payment schedules with formula
and fixed limitations—(A)Individual lim-
itations. A schedule of payments does not
fail to be a fixed schedule of payments
where the amount of a payment or pay-
ments that may be paid at a specified time
or during a specified period is limited by
an objective nondiscretionary formula or
a specified amount that is not under the
effective control of the service provider
and is not subject to the exercise of dis-
cretion by the service recipient, where
such limitation is established on or before
the date the time and form of payment is
otherwise required to be set under these
regulations, and the plan specifies the
time and form of any payment that will
be made or completed after its original
payment date due to the application of the
limitation. A change in the limitation or a
change in the time and form of any pay-
ment that exceeds the limitation is subject
to the requirements of §1.409A–2(b) (sub-
sequent deferral elections) and paragraph
(j) of this section (accelerated payments).
For purposes of this paragraph, a plan
provision that reduces a schedule of pe-
riodic payments on a dollar-for-dollar
basis by the amount of Social Security
payments received or receivable may be
treated as a nondiscretionary, objective
formula limitation, if such reduction does
not otherwise affect the time of payment
of the deferred compensation (other than a
forfeiture due to the reduction), including
changes based on the service provider’s
eligibility or elections related to Social Se-
curity benefits. Similarly, a plan provision
that reduces a schedule of periodic pay-
ments on a dollar-for-dollar basis by the
amount ofbona fidedisability pay (within
the meaning of §1.409A–1(a)(5)) received
or receivable may be treated as a nondis-
cretionary, objective formula limitation, if
the disability payments are made pursuant
toaplansponsoredbytheservicerecip-
ient that covers a substantial number of
service providers and was established be-
fore the service provider became disabled,
and if such reduction does not otherwise
affect the time of payment of the deferred
compensation (other than a forfeiture due
to the reduction). Whether an amendment
to, or other change in the benefit payable
under, suchbona fidedisability plan re-
sults in an acceleration of a payment for
purposes of paragraph (j) of this section or
a subsequent election to delay the time or
change the form of payment for purposes
of §1.409A–2(b) is determined based on
all of the relevant facts and circumstances.
(B)Limitations on aggregate payments
to all participants in substantially identi-
cal plans. A schedule of payments does
not fail to be a fixed schedule of payments
where the amount of the aggregate pay-
ments that will be made during a speci-
fied period of time to all participants in
substantially identical plans is limited by
an objective nondiscretionary formula or
specified amount that is not under the ef-
fective control of the service provider and
is not subject to the exercise of discretion
by the service recipient, where the limit is
established on or before the date the time
and form of payment of the amount de-
ferred is otherwise required to be set under
these regulations, the method of allocating
payments among the participants where
there is an overall limitation on the aggre-
gate amount that may be paid to a group of
service providers during a specified period
is an objective nondiscretionary allocation
method that is not under the effective con-
trol of the service provider and is not sub-
ject to the exercise of discretion by the ser-
vice recipient, the method is established on
or before the date the time and form of pay-
ment of the amount deferred is otherwise
required to be set, and the plan specifies
the time and form of any payment of any
amountthatwillbepaidafteritsoriginal
payment date due to the application of the
limitation. A change in the limitation or a
change in the time and form of payment of
any payment that is not otherwise made at
the scheduled payment date due to applica-
tion of the formula limitation is subject to
the requirements of §1.409A–2(b) (subse-
quent deferral elections) and paragraph (j)
of this section (accelerated payments).
(iii)Payment schedules determined by
timing of payments received by the service
recipient. A payment schedule determined
by reference to the timing of payments re-
ceived by the service recipient (not includ-
ing payments from one entity to another
entity where both entities are treated as
part of a single servicerecipient), meets the
requirements of a specified date or fixed
schedule of payments if the following con-
ditions are met:
(A) The payments due to the service re-
cipient arise frombona fideand routine
transactions in the ordinary course of busi-
ness of the service recipient.
(B) The service provider does not have
effective control of the service recipient,
the person from whom such amounts are
due, or the collection of any of the amounts
due to the service recipient.
(C) The payment schedule provides
an objective, nondiscretionary method of
identification of the payments to the ser-
vice recipient from which the amount of
the payment from the service recipient to
the service provider is determined.
(D) The payment schedule provides an
objective, nondiscretionary schedule un-
der which the payments will be made to the
service provider.
2007–19 I.R.B.1209May 7, 2007

(E) The payments to the service recip-
ient from which the amount of the pay-
ments from service recipient to the service
provider are determined result from sales
of a type that the service recipient is in the
trade or business of making and makes fre-
quently, and either all such sales by the ser-
vice recipient are taken into account for
purposes of determining the payment to
the service provider, or there is a legiti-
mate, non-tax business reason for identi-
fying the specific sales taken into account.
(iv)Reimbursement or in-kind bene-
fit plans—(A)General rule. A plan that
provides for reimbursements of expenses
incurred by a service provider, or in-kind
benefits, meets the requirements of a spec-
ified date or fixed schedule of payments
with respect to such reimbursements or
benefits if the following conditions are
met:
(1) The plan provides an objectively de-
terminable nondiscretionary definition of
the expenses eligible for reimbursement or
of the in-kind benefits to be provided.
(2) The plan provides for the reimburse-
ment of expenses incurred or for the pro-
vision of the in-kind benefits during an
objectively and specifically prescribed pe-
riod (including the lifetime of the service
provider).
(3) The plan provides that the amount
of expenses eligible for reimbursement, or
in-kind benefits provided, during a ser-
vice provider’s taxable year may not affect
the expenses eligible for reimbursement,
or in-kind benefits to be provided, in any
other taxable year.
(4) The reimbursement of an eligible
expense is made on or before the last day of
the service provider’s taxable year follow-
ing the taxable year in which the expense
was incurred.
(5) The right to reimbursement or
in-kind benefits is not subject to liquida-
tion or exchange for another benefit.
(B)Medical reimbursement arrange-
ments. Notwithstanding the foregoing,
an arrangement providing for the reim-
bursement of expenses referred to in
section 105(b) will not be deemed to fail
to meet the requirements of paragraph
(i)(1)(iv)(A)(3) of this section solely be-
cause the arrangement provides for a limit
on the amount of expenses that may be
reimbursed under such arrangement over
some or all of the period in which the
reimbursement arrangement remains in
effect.
(v)Tax gross-up payments. A plan pro-
viding a right to a tax gross-up payment
will be treated as providing for payment
at a specified time or on a fixed sched-
ule of payments if the plan provides that
payment will be made, and the payment is
made, by the end of the service provider’s
taxable year next following the service
provider’s taxable year in which the ser-
vice provider remits the related taxes. For
purposes of this paragraph (i)(1)(v), the
termtax gross-up paymentrefers to a pay-
ment to reimburse the service provider in
an amount equal to all or a designated por-
tion of the Federal, state, local, or foreign
taxes imposed upon the service provider
as a result of compensation paid or made
available to the service provider by the
service recipient, including the amount of
additional taxes imposed upon the service
provider due to the service recipient’s
payment of the initial taxes on such com-
pensation. In addition, a right to the reim-
bursement of expenses incurred due to a
tax audit or litigation addressing the exis-
tence or amount of a tax liability, whether
Federal, state, local, or foreign, satisfies
the requirement of a fixed time and form
of payment if the right to the reimburse-
ment provides that payment will be made,
and the payment is made, by the end of
the service provider’s taxable year follow-
ing the service provider’s taxable year in
which the taxes that are the subject of the
audit or litigation are remitted to the taxing
authority, or where as a result of such audit
or litigation no taxes are remitted, the end
of the service provider’s taxable year fol-
lowing the service provider’s taxable year
in which the audit is completed or there
is a final and nonappealable settlement or
other resolution of the litigation. Nothing
in this paragraph (i)(1)(v) otherwise al-
ters the application of section 409A to the
underlying compensation arrangement or
other arrangement that results in the taxes
subject to the right to the tax gross-up
payment.
(vi)Examples. The following examples
(in which each employee is an individual
whose taxable year is the calendar year)
illustrate the principles of paragraphs (a),
(b), (c), (d), and (i)(1) of this section:
Example 1. Employee A provides services as an
employee of Employer Z, but is not a specified em-
ployee. Employee A participates in a nonqualified
deferred compensation plan providing for a lump sum
payment payable on or before December 31 of the
calendar year in which Employee A separates from
service. The plan provides for a payment upon a sep-
aration from service in compliance with this section.
Example 2. Employee B provides services as an
employee of Employer Y, but is not a specified em-
ployee. Employee B participates in a nonqualified
deferred compensation plan providing for a lump sum
payment payable on or before the 90
th
day immedi-
ately following the date upon which Employee B sep-
arates from service. Employer Y retains the sole dis-
cretion to determine whenduring the 90-day period
the payment will be made. Although the plan does not
specify a period during one calendar year in which the
payment will be made, the plan provides for a pay-
ment upon a separation from service in compliance
with this section because the period over which the
payment may be made is not longer than 90 days.
Example 3. Employee C provides services as an
employee of Employer X, but is not a specified em-
ployee. Employee C participates in a nonqualified
deferred compensation plan providing for a lump sum
payment payable on or before the 180
th
day follow-
ing the date upon which Employee C separates from
service. Employer X retains the sole discretion to de-
termine when during the 180-day period the payment
will be made. Because the plan does not specify a pe-
riod during one calendar year in which the payment
will be made, and because the period over which the
payment may be made is longer than 90 days, the
plan does not provide for a payment upon a separa-
tion from service that complies with this section.
Example 4. Employee D provides services as
an employee of Employer W, but is not a specified
employee. Employee D participates in a nonquali-
fied deferred compensation plan providing for 10 in-
stallment payments payable on the first 10 anniver-
sariesofthedateEmployeeDseparatesfromser-
vice, provided that no installment payment in any
year may be more than 1% of Employer W’s net in-
come for the previous calendar year, and provided
further that the excess over such limit that would oth-
erwise be payable but is not paid due to application
of the limit will become payable as of the first in-
stallment payment date at which time such amount, in
combination with any installment payment otherwise
due Employee D, does not exceed 1% of Employer
W’s net income for the previous calendar year. Pro-
vided that Employee D doesnot retain effective con-
trol of the calculation of Employer W’s net income or
the amount that Employee D will not be paid due to
application of the limit, the plan provides for a sched-
ule of payments upon a separation from service that
complies with this section.
Example 5. Employee E and Employee F pro-
vide services as employees of Employer V, but neither
is a specified employee. Employee E and Employee
F both participate in substantially identical nonqual-
ified deferred compensation plans providing for 10
installment payments payable on the first 10 anniver-
saries of the date the respective employee separates
from service, provided that the total amount of in-
stallment payments in any year may not be more than
1% of Employer V’s net income for the previous year,
that where any payments are not made due to applica-
tion of the limit the determination of the amount not
paid to a particular employee will be made by apply-
ing the overall limit proportionately based upon the
May 7, 200712102007–19 I.R.B.

installment payment due the employee that year, and
that the excess over such limit that would otherwise
be payable but is not paid due to application of the
limit will become payable as of the first installment
payment date at which time such amount, in combi-
nation with any installment payments otherwise due
the participants, does not exceed 1% of Employer V’s
net income for the previous calendar year. Provided
that neither Employee E nor Employee F retains ef-
fective control of the calculation of Employer V’s net
income or the amount that the respective employee
will not be paid due to application of the limit, the
plan provides for a schedule of payments upon a sep-
aration from service that complies with this section.
Example 6. Employee G provides services as
an employee of Employer U, but is not a specified
employee. As abona fidepart of this employment
relationship, Employee G provides professional ser-
vices to clients of Employer U as part of thebona
fide, ordinary course of Employer U’s trade or busi-
ness. Under an arrangement between Employee G
and Employer U, Employer U agrees to pay Em-
ployee G upon Employee G’s separation from ser-
vice an amount equal to 5% of any amount collected
from Company T, a client of Employer U for which
Employee G performed services during his employ-
ment with Employer U, during the 36 months follow-
ing Employee G’s separation from service. Under the
arrangement, the amounts due to Employee G based
upon payments received by Employer U during any
calendar year are payable to Employee G on April 1
of the subsequent calendar year. Provided that Em-
ployee G does not have effective control of Employer
U, Company T, or the collection of any amounts due
Employer Y from Company T, the arrangement pro-
vides for a schedule of payments upon a separation
from service that complies with this section.
Example 7. Employee H provides services as an
employee of Employer S, but is not a specified em-
ployee. Under a plan sponsored by Employer S, Em-
ployee H has a legally binding right upon a separation
from service to the reimbursement of country club
dues paid in the calendar year of the separation from
service and each of the next 3 calendar years follow-
ing the separation from service in an amount not to
exceed $30,000 in any calendar year, provided that
the amount of dues paid in any calendar year that are
eligible for reimbursement equals only the amount
actually expended during such calendar year, and the
maximum amount available for reimbursement in any
calendar year will not be increased or decreased to
reflect the amount expended or reimbursed in a prior
or subsequent calendar year. The plan further pro-
vides that any reimbursement must be paid to Em-
ployee H by December 31 of the calendar year fol-
lowing the year in which Employee H pays the coun-
try club dues. The reimbursement plan provides for a
schedule of payments upon a separation from service
that complies with this section.
Example 8. Employee J provides services as an
employee of Employer Q, but is not a specified em-
ployee. Under a plan sponsored by Employer Q, Em-
ployee J has a legally binding right upon a separation
from service to the reimbursement of country club
dues paid during the calendar year in which the sep-
aration from service occurs and the next 3 calendar
years in a total amount not to exceed $90,000. The
plan further provides that any reimbursement must be
paid to Employee J by December 31 of the calendar
year following the year in which Employee J pays the
country club dues. Because the reimbursement of a
payment of country club dues in one calendar year
may affect the amount of country club dues available
for reimbursement in another calendar year, the plan
does not provide for a schedule of payments upon a
separation from service that complies with this sec-
tion.
(2)Separation from service—required
delay in payment to a specified employee
pursuant to a separation from service—(i)
In general. In the case of any service
provider who is a specified employee (as
defined in §1.409A–1(i)) as of the date
of a separation from service, the require-
ments of paragraph (a)(1) of this section
permitting a payment upon a separation
from service are satisfied only if payments
may not be made before the date that is six
months after the date of separation from
service (or, if earlier than the end of the
six-month period, the date of death of the
specified employee). For this purpose, a
service provider who is not a specified em-
ployee as of the date of a separation from
service will not be treated as subject to this
requirement even if the service provider
would have become a specified employee
if the service provider had continued to
provide services through the next speci-
fied employee effective date. Similarly, a
service provider who is treated as a speci-
fied employee as of the date of a separation
from service will be subject to this require-
ment even if the service provider would
not have been treated as a specified em-
ployee after the next specified employee
effective date had the specified employee
continued providing services through the
next specified employee effective date.
Notwithstanding the foregoing, this para-
graph (i)(2)(i) does not apply to a payment
made under the circumstances described
in paragraph (j)(4)(ii)(domestic relations
order), (j)(4)(iii) (conflicts of interest), or
(j)(4)(vi) (payment of employment taxes)
of this section.
(ii)Application of payment rules to
delayed payments. The required delay
in payment is met if payments to which
a specified employee would otherwise
be entitled during the first six months
following the date of separation from ser-
vice are accumulated and paid on the first
day of the seventh month following the
date of separation from service, or if each
payment to which a specified employee
is otherwise entitled upon a separation
from service is delayed by six months.
A service recipient may retain discretion
to choose which method will be imple-
mented, provided that no direct or indirect
election as to the method may be provided
to the service provider. For an affected
specified employee, a date upon which
the plan or the service recipient designates
that the payment will be made after the
six-month delay is treated as a fixed pay-
ment date for purposes of paragraph (d)
of this section once the separation from
service has occurred.
(3)Unforeseeable emergency—(i)Def-
inition. For purposes of §§1.409A–1 and
1.409A–2, this section, and §§1.409A–4
through 1.409A–6, anunforeseeable emer-
gencyis a severe financial hardship to the
service provider resulting from an ill-
ness or accident of the service provider,
the service provider’s spouse, the ser-
vice provider’s beneficiary, or the service
provider’s dependent (as defined in section
152, without regard to section 152(b)(1),
(b)(2), and (d)(1)(B)); loss of the ser-
vice provider’s property due to casualty
(including the need to rebuild a home fol-
lowing damage to a home not otherwise
covered by insurance, for example, not
as a result of a natural disaster); or other
similar extraordinary and unforeseeable
circumstances arising as a result of events
beyond the control of the service provider.
For example, the imminent foreclosure
of or eviction from the service provider’s
primary residence may constitute an un-
foreseeable emergency. In addition, the
need to pay for medical expenses, includ-
ing non-refundable deductibles, as well
as for the costs of prescription drug med-
ication, may constitute an unforeseeable
emergency. Finally, the need to pay for
the funeral expenses of a spouse, a benefi-
ciary, or a dependent (as defined in section
152, without regard to section 152(b)(1),
(b)(2), and (d)(1)(B)) may also consti-
tute an unforeseeable emergency. Except
as otherwise provided in this paragraph
(i)(3)(i), the purchase of a home and the
payment of college tuition are not unfore-
seeable emergencies. Whether a service
provider is faced with an unforeseeable
emergency permitting a distribution under
this paragraph (i)(3)(i) is to be determined
based on the relevant facts and circum-
stances of each case, but, in any case, a
distribution on account of unforeseeable
emergency may not be made to the extent
that such emergency is or may be relieved
2007–19 I.R.B.1211May 7, 2007

through reimbursement or compensation
from insurance or otherwise, by liquida-
tion of the service provider’s assets, to
the extent the liquidation of such assets
would not cause severe financial hard-
ship, or by cessation of deferrals under the
plan. A plan may provide for a payment
upon a specific type or types of unfore-
seeable emergency, without providing for
payment upon all unforeseeable emergen-
cies, provided that any event upon which
a payment may be made qualifies as an
unforeseeable emergency.
(ii)Amount of payment permitted upon
an unforeseeable emergency. Distribu-
tions because of an unforeseeable emer-
gency must be limited to the amount
reasonably necessary to satisfy the emer-
gency need (which may include amounts
necessary to pay any Federal, state, lo-
cal, or foreign income taxes or penalties
reasonably anticipated to result from the
distribution). Determinations of amounts
reasonably necessary to satisfy the emer-
gency need must take into account any
additional compensation that is available
if the plan provides for cancellation of a
deferral election upon a payment due to
an unforeseeable emergency. See para-
graph (j)(4)(viii) of this section. However,
the determination of amounts reasonably
necessary to satisfy the emergency need is
not required to take into account any addi-
tional compensation that is available from
a qualified employer plan as defined in
§1.409A–1(a)(2) (including any amount
available by obtaining a loan under the
plan), or that due to the unforeseeable
emergency is available under another
nonqualified deferred compensation plan
(including a plan that would provide for
deferred compensation except due to the
application of the effective date provisions
under §1.409A–6). The payment may be
made from any plan in which the service
provider participates that provides for pay-
ment upon an unforeseeable emergency,
provided that the plan under which the
payment was made must be designated at
the time of payment.
(iii)Payments due to an unforeseeable
emergency. A service provider may retain
discretion with respect to whether to ap-
ply for a payment upon an unforeseeable
emergency, and a service recipient may re-
tain discretion with respect to whether to
make a payment available under the plan
due to an unforeseeable emergency. A ser-
vice provider who hasexperienced an un-
foreseeable emergency will not be treated
as making a subsequent deferral election
under §1.409A–2(b) (subsequent deferral
election rules) if the service provider does
not apply for or elect to receive a pay-
ment available under the plan. A ser-
vice recipient will not be treated as mak-
ing a subsequent deferral election under
§1.409A–2(b) (subsequent deferral elec-
tion rules) if the service recipient exercises
its discretion not to make a payment oth-
erwise available due to an unforeseeable
emergency.
(4)Disability—(i)In general.For
purposes of §§1.409A–1 and 1.409A–2,
this section, and §§1.409A–4 through
1.409A–6, except as otherwise specif-
ically provided, a service provider is
considered disabled if the service provider
meets one of the following requirements:
(A) The service provider is unable to
engage in any substantial gainful activity
by reason of any medically determinable
physical or mental impairment that can be
expected to result in death or can be ex-
pected to last for a continuous period of not
less than 12 months.
(B) The service provider is, by reason
of any medically determinable physical or
mental impairment that 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 replace-
ment benefits for a period of not less than
three months under an accident and health
plan covering employees of the service
provider’s employer.
(ii)Limited plan definition of disability.
A plan may provide for a payment upon
any disability, and need not provide for
a payment upon all disabilities, provided
that any disability upon which a payment
may be made under the plan complies with
the provisions of this paragraph (i)(4).
(iii)Determination of disability.A
plan may provide that a service provider
will be deemed disabled if determined to
be totally disabled by the Social Security
Administration or Railroad Retirement
Board. A plan may also provide that a
service provider will be deemed disabled
if determined to be disabled in accor-
dance with a disability insurance program,
provided that the definition of disability
applied under such disability insurance
program complies with the requirements
of this paragraph (i)(4).
(5)Change in the ownership or effec-
tive control of a corporation, or a change
in the ownership of a substantial portion of
the assets of a corporation—(i)In general.
Pursuant to section 409A(a)(2)(A)(v), a
plan may permit a payment upon the oc-
currence of a change in the ownership of
the corporation (as defined in paragraph
(i)(5)(v) of this section), a change in effec-
tive control of the corporation (as defined
in paragraph (i)(5)(vi) of this section), or
a change in the ownership of a substantial
portion of the assets of the corporation (as
defined in paragraph (i)(5)(vii) of this sec-
tion) (collectively referred to as a change
in control event). To qualify as a change
in control event, the occurrence of the
event must be objectively determinable
and any requirement that any other per-
son or group, such as a plan administrator
or compensation committee, certify the
occurrence of a change in control event
must be strictly ministerial and not involve
any discretionary authority. The plan may
provide for a payment on a particular type
or types of change in control events, and
need not provide for a payment on all such
events, provided that each event upon
which a payment is provided qualifies as
a change in control event. For rules re-
garding the ability of the service recipient
to terminate the plan and pay amounts of
deferred compensation upon a change in
control event, see paragraph (j)(4)(ix)(B)
of this section.
(ii)Identification of relevant corpo-
ration—(A)In general. To constitute a
change in control event with respect to
the service provider, the change in control
event must relate to—
(1) The corporation for whom the ser-
vice provider is performing services at the
time of the change in control event;
(2) The corporation that is liable for the
payment of the deferred compensation (or
all corporations liable for the payment if
more than one corporation is liable) but
only if either the deferred compensation is
attributable to the performance of service
by the service provider for such corpora-
tion (or corporations) or there is abona
fidebusiness purpose for such corporation
or corporations to be liable for such pay-
ment and, in either case,no significant pur-
pose of making such corporation or cor-
porations liable for such payment is the
avoidance of Federal income tax; or
May 7, 200712122007–19 I.R.B.

(3) A corporation that is a majority
shareholder of a corporation identified in
paragraph (i)(5)(ii)(A)(1)or(2)ofthis
section, or any corporation in a chain of
corporations in which each corporation is
a majority shareholder of another corpora-
tion in the chain, ending in a corporation
identified in paragraph (i)(5)(ii)(A)(1)or
(2) of this section.
(B)Majority shareholder. For pur-
poses of this paragraph (i)(5)(ii), a major-
ity shareholder is a shareholder owning
more than 50 percent of the total fair mar-
ket value and total voting power of such
corporation.
(C)Example. The following exam-
ple illustrates the rules of this paragraph
(i)(5)(ii):
Example. Corporation A is a majority share-
holder of Corporation B, which is a majority share-
holder of Corporation C. A change in ownership of
Corporation B constitutes a change in control event
to service providers performing services for Corpo-
ration B or Corporation C, and to service providers
for which Corporation B or Corporation C is solely
liable for payments under the plan (for example,
former employees), but is not a change in control
event as to Corporation A orany other corporation
of which Corporation A is a majority shareholder
unless the sale constitutes a change in the ownership
of a substantial portion of Corporation A’s assets (see
paragraph (i)(5)(vii) of this section).
(iii)Attribution of stock ownership.For
purposes of paragraph (i)(5) of this section,
section 318(a) applies to determine stock
ownership. Stock underlying a vested op-
tion is considered owned by the individ-
ual who holds the vested option (and the
stock underlying an unvested option is not
considered owned by the individual who
holds the unvested option). For purposes
of the preceding sentence, however, if a
vested option is exercisable for stock that
is not substantially vested (as defined by
§1.83–3(b) and (j)), the stock underlying
the option is not treated as owned by the
individual who holds the option.
(iv)Special rules for certain delayed
payments pursuant to a change in con-
trol event—(A)Certain transaction-based
compensation. Payments of compensa-
tion related to a change in control event
described in paragraph (i)(5)(v) of this
section (change in the ownership of a
corporation) or paragraph (i)(5)(vii) of
this section (change in the ownership of
a substantial portion of a corporation’s
assets), that occur because a service recip-
ient purchases its stock held by the service
provider or because the service recipient
or a third party purchases a stock right held
by a service provider, or that are calcu-
lated by reference to the value of stock of
the service recipient (collectively, transac-
tion-based compensation), may be treated
as paid at a designated date or pursuant
to a payment schedule that complies with
the requirements of section 409A if the
transaction-based compensation is paid
on the same schedule and under the same
terms and conditions as apply to payments
to shareholders generally with respect to
stock of the service recipient pursuant to
a change in control event described in
paragraph (i)(5)(v) of this section (change
in the ownership of a corporation) or as
apply to payments to the service recipi-
ent pursuant to a change in control event
described in paragraph (i)(5)(vii) of this
section (change in the ownership of a sub-
stantial portion of a corporation’s assets),
and to the extent that the transaction-based
compensation is paid not later than five
years after the change in control event,
the payment of such compensation will
not violate the initial or subsequent defer-
ral election rules set out in §1.409A–2(a)
and (b) solely as a result of such trans-
action-based compensation being paid
pursuant to such schedule and terms and
conditions. If before and in connection
with a change in control event described
in paragraph (i)(5)(v) or (i)(5)(vii) of this
section, transaction-based compensation
that would otherwise be payable as a re-
sult of such event is made subject to a
condition on paymentthat constitutes a
substantial risk of forfeiture (as defined
in §1.409A–1(d), without regard to the
provisions of that section under which
additions or extensions of forfeiture con-
ditions are disregarded) and the transac-
tion-based compensation is payable under
the same terms and conditions as apply
to payments made to shareholders gener-
ally with respect to stock of the service
recipient pursuant to a change in control
event described in paragraph (i)(5)(v) of
this section or to payments to the service
recipient pursuant to a change in control
event described in paragraph (i)(5)(vii)
of this section, for purposes of deter-
mining whether such transaction-based
compensation is a short-term deferral the
requirements of §1.409A–1(b)(4) are ap-
plied as if the legally binding right to such
transaction-based compensation arose on
the date that it became subject to such
substantial risk of forfeiture.
(B)Certain nonvested compensa-
tion. Notwithstanding the provisions
of §1.409A–1(d) (definition of a substan-
tial risk of forfeiture) that disregard the
extension or modification of a condition
for purposes of determining whether a
condition on payment constitutes a sub-
stantial risk of forfeiture, a condition that
is a substantial risk of forfeiture that oth-
erwise would lapse as a result of a change
in control event described in paragraph
(i)(5)(v) or (i)(5)(vii) of this section may
be extended or modified before and in
connection with such event to provide
for a condition on payment that will not
lapse as a result of such change in con-
trol event, and such extended or modified
condition will be treated as continuing to
subject the amount to a substantial risk
of forfeiture, provided that the transac-
tion constituting the change in control
event is abona fidearm’s length trans-
action between the service recipient or
its shareholders and one or more parties
whoareunrelatedtotheservicerecip-
ient and service provider (applying the
rules of §1.409A–1(f)(2)(ii)) and the mod-
ified or extended condition to which the
payment is subject would otherwise be
treated as a substantial risk of forfeiture
under §1.409A–1(d) (without regard to
the provisions disregarding additions or
extensions of forfeiture conditions). In
such a case, the continued application of
a fixed schedule of payments based upon
the lapse of the substantial risk of forfei-
ture, so that payments commence upon the
lapse of the modified or extended condi-
tion on payment, will not be treated as a
change in the fixed schedule of payments
for purposes of §1.409A–2(b) (subsequent
deferral elections) or paragraph (j) of this
section (prohibition on the acceleration of
payments).
(v)Change in the ownership of a cor-
poration—(A)In general. Except as
provided in paragraph (i)(5)(vi)(C) of this
section, a change in the ownership of a
corporation occurs on the date that any
one person, or more than one person act-
ing as a group (as defined in paragraph
(i)(5)(v)(B) of this section), acquires own-
ership of stock of the corporation that,
togetherwithstockheldbysuchpersonor
group, constitutes more than 50 percent of
the total fair market value or total voting
2007–19 I.R.B.1213May 7, 2007

power of the stock of such corporation. A
nonqualified deferred compensation plan
may provide that amounts payable upon
a change in the ownership of a corpora-
tion will be paid only if the conditions in
the preceding sentence are satisfied but
substituting a percentage specified in the
plan that is higher than 50 percent for
the words “50 percent” in the preceding
sentence, but only if the provision is set
forth in the plan no later than the date by
which the time and form of payment must
be established under §1.409A–2. How-
ever, if any one person, or more than one
person acting as a group, is considered
toownmorethan50percentofthetotal
fair market value or total voting power of
the stock of a corporation (or such higher
percentage specified in accordance with
the preceding sentence), the acquisition of
additional stock by the same person or per-
sons is not considered to cause a change
in the ownership of the corporation (or
to cause a change in the effective control
of the corporation (within the meaning of
paragraph (i)(5)(vi) of this section)). An
increase in the percentage of stock owned
by any one person, or persons acting as
a group, as a result of a transaction in
which the corporation acquires its stock in
exchange for property will be treated as
an acquisition of stock for purposes of this
section. This section applies only when
there is a transfer of stock of a corporation
(or issuance of stock of a corporation)
and stock in such corporation remains
outstanding after the transaction (see para-
graph (i)(5)(vii) of this section for rules
regarding the transfer of assets of a cor-
poration). See §1.280G–1, Q&A–27(d),
Example 1,Example 2,Example 5,and
Example 6.
(B)Persons acting as a group. For pur-
poses of paragraph (i)(5)(v)(A) of this sec-
tion, persons will not be considered to be
acting as a group solely because they pur-
chase or own stock of the same corporation
at the same time, or as a result of the same
public offering. However, persons will be
considered to be acting as a group if they
are owners of a corporation that enters into
a merger, consolidation, purchase or acqui-
sition of stock, or similar business transac-
tion with the corporation. If a person, in-
cluding an entity, owns stock in both cor-
porations that enter into a merger, consol-
idation, purchase or acquisition of stock,
or similar transaction, such shareholder is
considered to be acting as a group with
other shareholders only with respect to the
ownership in that corporation before the
transaction giving rise to the change and
not with respect to the ownership interest
in the other corporation. See §1.280G–1,
Q&A–27(d),Example 3andExample 4.
(vi)Change in the effective control of
a corporation—(A)In general. Notwith-
standing that a corporation has not under-
gone a change in ownership under para-
graph (i)(5)(v) of this section, a change in
the effective control of the corporation oc-
curs only on either of the following dates:
(1) The date any one person, or more
than one person acting as a group (as de-
termined under paragraph (i)(5)(v)(B) of
this section), acquires (or has acquired
during the 12-month period ending on the
date of the most recent acquisition by such
person or persons) ownership of stock
of the corporation possessing 30 percent
or more of the total voting power of the
stock of such corporation. A nonqualified
deferred compensation plan may provide
that amounts payable upon an effective
change in control of a corporation will be
paid only if the conditions in the preced-
ing sentence are satisfied but substituting
a percentage specified in the plan that is
higher than 30 percent for the word “30
percent” in the preceding sentence, but
only if the percentage is set forth in the
plan no later than the date by which the
time and form of payment must be estab-
lished under §1.409A–2).
(2) The date a majority of members of
the corporation’s board of directors is re-
placed during any 12-month period by di-
rectors whose appointment or election is
not endorsed by a majority of the mem-
bers of the corporation’s board of direc-
tors before the date of the appointment or
election, provided that for purposes of this
paragraph (i)(5)(vi)(A) the termcorpora-
tionrefers solely to the relevant corpo-
ration identified in paragraph (i)(5)(ii) of
this section for which no other corporation
is a majority shareholder for purposes of
that paragraph. For example, if Corpora-
tion A is a publicly held corporation with
no majority shareholder, and Corporation
A is the majority shareholder of Corpora-
tion B, which is the majority shareholder
of Corporation C, the termcorporationfor
purposes of this paragraph (i)(5)(vi)(A)(2)
would refer solely to Corporation A. A
nonqualified deferred compensation plan
may provide that amounts payable upon a
change in the effective control of a corpo-
ration will be paid only if the conditions
in the first sentence of this paragraph are
satisfied substituting a portion of the mem-
bers of the corporation’s board of directors
that is higher than the words “a majority of
the members of the corporation’s board of
directors” in the first sentence of this para-
graph, but only if the higher portion is set
forth in the plan no later than the date by
which the time and form of payment must
be established under §1.409A–2(a)).
(B)Multiple change in control events.
A change in effective control may occur in
a transaction in which one of the two cor-
porations involved in the transaction has
a change in control event under paragraph
(i)(5)(v) or (i)(5)(vii) of this section. Thus,
for example, assume Corporation P trans-
fers more than 40 percent of the total gross
fair market value of its assets to Corpora-
tion O in exchange for 35 percent of O’s
stock. P has undergone a change in own-
ership of a substantial portion of its assets
under paragraph (i)(5)(vii) of this section
and O has a change in effective control un-
der this paragraph (i)(5)(vi).
(C)Acquisition of additional control.
If any one person, or more than one per-
son acting as a group, is considered to ef-
fectively control a corporation (within the
meaning of this paragraph (i)(5)(vi)), the
acquisition of additional control of the cor-
poration by the same person or persons is
not considered to cause a change in the
effective control of the corporation (or to
cause a change in the ownership of the cor-
poration within the meaning of paragraph
(i)(5)(v) of this section).
(D)Personsactingasagroup.Per-
sons will not be considered to be acting
as a group solely because they purchase or
own stock of the same corporation at the
same time, or as a result of the same pub-
lic offering. However, persons will be con-
sideredtobeactingasagroupiftheyare
owners of a corporation that enters into a
merger, consolidation, purchase or acqui-
sition of stock, or similar business transac-
tion with the corporation. If a person, in-
cluding an entity, owns stock in both cor-
porations that enter into a merger, consol-
idation, purchase or acquisition of stock,
or similar transaction, such shareholder is
considered to be acting as a group with
other shareholders in a corporation only
with respect to the ownership in that cor-
May 7, 200712142007–19 I.R.B.

poration before the transaction giving rise
to the change and not with respect to the
ownership interest in the other corporation.
See §1.280G–1, Q&A–27(d),Example 4.
(vii)Change in the ownership of a
substantial portion of a corporation’s
assets—(A)In general. A change in
the ownership of a substantial portion
of a corporation’s assets occurs on the
date that any one person, or more than
one person acting as a group (as deter-
mined in paragraph (i)(5)(v)(B) of this
section), acquires (orhas acquired during
the 12-month period ending on the date of
the most recent acquisition by such person
or persons) assets from the corporation
that have a total gross fair market value
equal to or more than 40 percent of the
total gross fair market value of all of the
assets of the corporation immediately be-
fore such acquisition or acquisitions (or
such higher amount specified by the plan
no later than the date by which the time
and form of payment must be established
under §1.409A–2). For this purpose, gross
fair market value means the value of the
assets of the corporation, or the value of
the assets being disposed of, determined
without regard to any liabilities associated
with such assets.
(B)Transfers to a related person—(1)
There is no change in control event un-
der this paragraph (i)(5)(vii) when there
is a transfer to an entity that is controlled
by the shareholders of the transferring cor-
poration immediately after the transfer, as
provided in this paragraph (i)(5)(vii)(B). A
transfer of assets by a corporation is not
treated as a change in the ownership of
such assets if the assets are transferred to—
(i) A shareholder of the corporation
(immediately before the asset transfer) in
exchange for or with respect to its stock;
(ii)Anentity,50percentormoreof
the total value or voting power of which
is owned, directly or indirectly, by the cor-
poration;
(iii) A person, or more than one person
acting as a group, that owns, directly or
indirectly, 50 percent or more of the total
value or voting power of all the outstand-
ing stock of the corporation; or
(iv) An entity, at least 50 percent
of the total value or voting power of
which is owned, directly or indirectly,
by a person described in paragraph
(i)(5)(vii)(B)(1)(iii)ofthissection.
(2) For purposes of this paragraph
(i)(5)(vii)(B) and except as otherwise pro-
vided in this paragraph (i), a person’s
status is determined immediately after
the transfer of the assets. For example,
a transfer to a corporation in which the
transferor corporation has no ownership
interest before the transaction, but that is
a majority-owned subsidiary of the trans-
feror corporation after the transaction is
not treated as a change in the ownership of
the assets of the transferor corporation.
(C)Persons acting as a group. Persons
will not be considered to be acting as a
group solely because they purchase assets
of the same corporation at the same time.
However, persons will be considered to be
acting as a group if they are owners of a
corporation that enters into a merger, con-
solidation, purchase or acquisition of as-
sets, or similar business transaction with
the corporation. If a person, including an
entity shareholder, owns stock in both cor-
porations that enter into a merger, consol-
idation, purchase or acquisition of assets,
or similar transaction, such shareholder is
considered to be acting as a group with
other shareholders in a corporation only
to the extent of the ownership in that cor-
poration before the transaction giving rise
to the change and not with respect to the
ownership interest in the other corporation.
See §1.280G–1, Q&A–27(d),Example 4.
(6)Certain back-to-back arrange-
ments—(i)In general. This paragraph
(i)(6) applies where a service provider is
providing services to a service recipient
(the intermediate service recipient), who
in turn is providing services to another
service recipient (the ultimate service
recipient), the services provided by the
service provider to the intermediate ser-
vice recipient are closely related to the
services provided by the intermediate
service recipient to the ultimate service
recipient, there is anonqualified deferred
compensation plan providing for pay-
ments by the ultimate service recipient
to the intermediate service recipient (the
ultimate service recipient plan), there is a
nonqualified deferred compensation plan
or other agreement, method, program, or
other arrangement providing for payments
of compensation by the intermediate ser-
vice recipient to the service provider (the
intermediate service recipient plan), and
the intermediate service recipient plan pro-
vides for a payment upon the occurrence
of an event describedin paragraph (a)(1),
(2), (3), (5), or (6) of this section. In such
a case, notwithstanding the generally ap-
plicable limits on payments in paragraph
(a) of this section, the ultimate service
recipient plan may provide for a payment
to the intermediate service recipient upon
the occurrence of a payment event under
the intermediate service recipient plan de-
scribed in paragraph (a)(1), (2), (3), (5), or
(6)ofthissectionifthetimeandformof
payment is defined as the same time and
form of payment provided under the inter-
mediate service recipient plan, the amount
of the payment under the ultimate service
recipient plan does not exceed the amount
of the payment under the intermediate
service recipient plan, and the ultimate
service recipient plan and the intermediate
service recipient plan otherwise satisfy the
requirements of section 409A (regardless
of whether such plan is subject to section
409A).
(ii)Example. The provisions of para-
graph (i)(6)(i) of this section are illustrated
by the following example:
Example. Company B (intermediate service re-
cipient) provides services to Company C (ultimate
service recipient). Employee A (service provider)
provides services to Company B that are closely
related to the services Company B provides to
CompanyC.Pursuanttoanonqualified deferred
compensation plan meeting the requirements of
section 409A, Employee A is entitled to a payment
of deferred compensation upon a separation from
service with Company B (the intermediate service
recipient plan). Underan arrangement between
Company B and Company C (the ultimate service
recipient plan), Company C agrees to pay an amount
of deferred compensation to Company B upon Em-
ployee A’s separation from service with Company
B, in accordance with the time, form and amount
of payment provided in the intermediate service
recipient plan. Provided that the intermediate service
recipient plan and the ultimate service recipient plan
otherwise comply with the requirements of section
409A (regardless of whether such arrangements are
subject to section 409A), Company C’s payment to
Company B of the amount due under the ultimate ser-
vice recipient plan upon the separation from service
of Employee A from Company B may constitute a
permissible payment event for purposes of paragraph
(a)ofthissection.
(j)Prohibition on acceleration of pay-
ments—(1)In general. Except as provided
in paragraph (j)(4) of this section, a non-
qualified deferred compensation plan may
not permit the acceleration of the time or
schedule of any payment or amount sched-
uled to be paid pursuant to the terms of
the plan, and no such accelerated payment
may be made whether or not provided for
2007–19 I.R.B.1215May 7, 2007

under the terms of such plan. For purposes
of determining whether a payment of de-
ferred compensation has been made, the
rules of paragraph (f) of this section (sub-
stituted payments) apply. For purposes
of this paragraph (j), an impermissible
acceleration does not occur if payment is
made in accordance with plan provisions
or an election as to the time and form of
payment in effect at the time of initial
deferral (or added in accordance with the
rules applicable to subsequent deferral
elections under §1.409A–2(b)) pursuant
to which payment is required to be made
on an accelerated schedule as a result of
an intervening event that is an event de-
scribed in paragraph (a)(1), (2), (3), (5),
or(6)ofthissection.Forexample,aplan
may provide that a participant will receive
six installment payments commencing at
separation from service, and also provide
that if the participant dies after such pay-
ments commence but before all payments
have been made, all remaining amounts
will be paid in a lump sum payment. Ad-
ditionally, it is not an acceleration of the
time or schedule of payment of a defer-
ral of compensation if a service recipient
waives or accelerates the satisfaction of
a condition constituting a substantial risk
of forfeiture applicable to such deferral
of compensation, provided that the re-
quirements of section 409A (including
the requirement that the payment be made
upon a permissible payment event) are
otherwise satisfied with respect to such
deferral of compensation. For example,
if a nonqualified deferred compensation
plan provides for a lump sum payment of
the vested benefit upon separation from
service, and the benefit vests under the
plan only after 10 years of service, it is
not a violation of the requirements of sec-
tion 409A if the service recipient reduces
the vesting requirement to five years of
service, even if a service provider becomes
vested as a result and receives a payment in
connection with a separation from service
before the service provider would have
completed 10 years of service. However,
if the plan in this example had provided
for a payment at a fixed date, rather than
at separation from service, the date of pay-
ment could not be accelerated due to the
accelerated vesting. For the definition of
a payment for purposes of this paragraph
(j), see §1.409A–2(b)(5) (coordination of
the subsequent deferral election rules with
the prohibition on acceleration of pay-
ments). For other permissible payments,
see §1.409A–2(b)(2)(iii) (certain immedi-
ate payments of remaining installments)
and paragraph (d) of this section (certain
payments made no more than 30 days be-
fore the designated payment date).
(2)Application to multiple payment
events. Generally, the addition of a per-
missible payment event, the deletion of a
permissible payment event, or the substi-
tution of one permissible payment event
for another permissible payment event,
results in an acceleration of a payment
if the addition, deletion, or substitution
could result in the payment being made at
an earlier date than such payment would
have been made absent such addition,
deletion, or substitution. Notwithstand-
ing the previous sentence, the addition of
death, disability (as defined in paragraph
(i)(4) of this section), or an unforeseeable
emergency (as defined in paragraph (i)(3)
of this section), as a potentially earlier
alternative payment event to an amount
previously deferredwill not be treated as
resulting in an acceleration of a payment,
even if such addition results in the pay-
ment being paid at an earlier time than
such payment would have been made ab-
sent the addition of the payment event.
However, the addition of such a payment
event as a potentially later alternative pay-
ment event generally is subject to the rules
governing changes in the time and form of
payment (see §1.409A–2(b)).
(3)Beneficiaries. The rules of this para-
graph (j) apply to elections by beneficia-
ries with respect to the time and form of
payment, as well as elections by service
providers or service recipients with respect
to the time and form of payment to benefi-
ciaries. An election to change the identity
of a beneficiary does not constitute an ac-
celeration of a payment merely because the
election changes the identity of the recip-
ient of the payment, if the time and form
of the payment is not otherwise changed.
In addition, an election before the com-
mencement of a life annuity to change the
identity of a beneficiary does not constitute
an acceleration of a payment if the change
in the time of payments stems solely from
the different life expectancy of the new
beneficiary, such as in the case of a joint
and survivor annuity, and does not change
the commencement date of the life annuity.
(4)Exceptions—(i)In general.Ex-
cept as otherwise expressly provided, a
plan may provide for the acceleration of
a payment in accordance with paragraphs
(j)(4)(ii) through (xiv) of this section, or
may provide a service recipient discre-
tion to accelerate payments in accordance
with the provisions of paragraphs (j)(4)(ii)
through (xiv) of this section. A plan may
not provide a service provider discretion
with respect to whether a payment will be
accelerated, and a service recipient may
not provide a service provider a direct or
indirect election as to whether the ser-
vice recipient’s discretion to accelerate a
payment will be exercised, even if such
acceleration would be permitted under
paragraphs (j)(4)(ii) through (xiv) of this
section. Whether a service recipient has
provided a service provider an election as
to whether the service recipient’s discre-
tion to accelerate a payment will be exer-
cised is determined based on all the facts
and circumstances, including whether sim-
ilarly situated service providers have been
treated differently. Except as otherwise
provided in paragraphs (j)(4)(ii) through
(xiv) of this section, the plan need not set
forth the exception in writing, and pro-
vided all other requirements of this section
are met, the making of such a payment
or the addition of a plan term permitting
the making of such a payment will not
constitute the acceleration of a payment,
and the failure to make such a payment or
the deletion or modification of a plan term
permitting the making of such a payment
will not be subject to the rules regarding
a change in the time and form of payment
under §1.409A–2(b).
(ii)Domestic relations order.Aplan
may provide for acceleration of the time
or schedule of a payment under the plan
to an individual other than the service
provider, or a payment under such plan
may be made to an individual other than
the service provider, to the extent neces-
sary to fulfill a domestic relations order
(as defined in section 414(p)(1)(B)).
(iii)Conflicts of interest—(A)Compli-
ance with ethics agreements with the Fed-
eral government. A plan may provide for
acceleration of the time or schedule of a
payment under the plan, or a payment may
be made under a plan, to the extent nec-
essary for any Federal officer or employee
in the executive branch to comply with an
May 7, 200712162007–19 I.R.B.

ethics agreement with the Federal govern-
ment.
(B)Compliance with ethics laws or
conflicts of interest laws.Aplanmay
provide for acceleration of the time or
schedule of a payment under the plan, or a
payment may be made under a plan, to the
extent reasonably necessary to avoid the
violation of an applicable Federal, state,
local, or foreign ethics law or conflicts of
interest law (including where such pay-
ment is reasonably necessary to permit the
service provider to participate in activities
in the normal course of his or her posi-
tion in which the service provider would
otherwise not be able to participate under
an applicable rule).A payment is reason-
ably necessary to avoid the violation of a
Federal, state, local, or foreign ethics law
or conflicts of interest law if the payment
is a necessary part of a course of action
that results in compliance with a Federal,
state, local, or foreign ethics law or con-
flicts of interest law that would be violated
absent such course of action, regardless of
whether other actions would also result in
compliance with the Federal, state, local,
or foreign ethics law or conflicts of inter-
est law. For this purpose, a provision of
foreign law is considered applicable only
to foreign earned income (as defined under
section 911(b)(1) without regard to sec-
tion 911(b)(1)(B)(iv) and without regard
to the requirement that the income be at-
tributable 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.
(iv)Section 457 plans. A plan subject
to section 457(f) may provide for an accel-
eration of the time or schedule of a pay-
ment to a service provider, or a payment
may be made under such a plan, to pay
Federal, state, local, and foreign income
taxes due upon a vesting event, provided
that the amount of such payment is not
more than an amount equal to the Federal,
state, local, and foreign income tax with-
holding that would have been remitted by
the employer if there had been a payment
of wages equal to the income includible by
the service provider under section 457(f) at
the time of the vesting.
(v)Limited cashouts. A plan may re-
quire or provide a service recipient discre-
tion to require (or be amended to require or
to provide a service recipient discretion to
require), a mandatory lump sum payment
of amounts deferred under the plan that do
not exceed a specified amount, provided
that such plan term or amendment is ex-
ecuted and effective, and any required ex-
ercise of service recipient discretion is ev-
idenced in writing, no later than the date of
such payment, and provided that—
(A) The payment results in the termi-
nation and liquidation of the entirety of
the service provider’s interest under the
plan, including all agreements, methods,
programs, or other arrangements with re-
spect to which deferrals of compensation
are treated as having been deferred under
a single nonqualified deferred compensa-
tion plan under §1.409A–1(c)(2); and
(B) The payment is not greater than
the applicable dollar amount under section
402(g)(1)(B).
(vi)Payment of employment taxes.A
plan may provide for the acceleration of
thetimeorscheduleofapayment,orapay-
ment may be made under the plan, to pay
the Federal Insurance Contributions Act
(FICA) tax imposed under section 3101,
section 3121(a), and section 3121(v)(2), or
the Railroad Retirement Act tax imposed
under section 3201, section 3211, section
3231(e)(1), and section 3231(e)(8), where
applicable, on compensation deferred un-
der the plan (the FICA or RRTA amount).
Additionally, a plan may provide for the
acceleration of the time or schedule of a
payment, or a payment may be made under
the plan, to pay the income tax at source on
wages imposed under section 3401 or the
corresponding withholding provisions of
applicable state, local, or foreign tax laws
as a result of the payment of the FICA or
RRTA amount, and to pay the additional
income tax at source on wages attribut-
able to the pyramiding section 3401 wages
and taxes. However, the total payment un-
der this acceleration provision must not ex-
ceed the aggregate of the FICA or RRTA
amount, and the income tax withholding
related to such FICA or RRTA amount.
(vii)Payment upon income inclusion
under section 409A. A plan may provide
for the acceleration of the time or schedule
of a payment, or a payment under such plan
may be made, at any time the plan fails to
meet the requirements of section 409A and
these regulations. Such payment may not
exceed the amount required to be included
in income as a result of the failure to com-
ply with the requirements of section 409A
and these regulations.
(viii)Cancellation of deferrals follow-
ing an unforeseeable emergency or hard-
ship distribution. A plan may provide for
a cancellation of a service provider’s de-
ferral election, or such a cancellation may
be made, due to an unforeseeable emer-
gency or a hardship distribution pursuant
to §1.401(k)–1(d)(3). The deferral elec-
tion must be cancelled, not merely post-
poned or otherwise delayed. Accordingly,
any later deferral election will be subject
to the provisions governing initial deferral
elections. See §1.409A–2(a).
(ix)Plan terminations and liquidations.
A plan may provide forthe acceleration of
the time and form of a payment, or a pay-
ment under such plan may be made, where
the acceleration of the payment is made
pursuant to a termination and liquidation
of the plan in accordance with one of the
following:
(A) The service recipient’s termina-
tion and liquidation of the plan within 12
months of a corporate dissolution taxed
under section 331, or with the approval of
a bankruptcy court pursuant to 11 U.S.C.
§503(b)(1)(A), provided that the amounts
deferred under the plan are included in the
participants’ gross incomes in the latest of
the following years (or, if earlier, the tax-
able year in which the amount is actually
or constructively received).
(1) The calendar year in which the plan
termination and liquidation occurs.
(2) The first calendar year in which the
amount is no longer subject to a substantial
risk of forfeiture.
(3) The first calendar year in which the
payment is administratively practicable.
(B) The service recipient’s termination
and liquidation of the plan pursuant to
irrevocable action taken by the service re-
cipient within the 30 days preceding or the
12 months following a change in control
event (as defined in paragraph (i)(5) of
this section), provided that this paragraph
will only apply to a payment under a plan
if all agreements, methods, programs, and
other arrangements sponsored by the ser-
vice recipient immediately after the time
of the change in control event with respect
to which deferrals of compensation are
treated as having been deferred under a
single plan under §1.409A–1(c)(2) are
terminated and liquidated with respect
to each participant that experienced the
change in control event, so that under
the terms of the termination and liquida-
2007–19 I.R.B.1217May 7, 2007

tion all such participants are required to
receive all amounts of compensation de-
ferred under the terminated agreements,
methods, programs,and other arrange-
ments within 12 months of the date the
service recipient irrevocably takes all nec-
essary action to terminate and liquidate the
agreements, methods, programs, and other
arrangements. Solely for purposes of this
paragraph (j)(4)(ix)(B), where the change
in control event results from an asset pur-
chase transaction, the applicable service
recipient with the discretion to liquidate
and terminate the agreements, methods,
programs, and other arrangements is the
service recipient that is primarily liable
immediately after the transaction for the
payment of the deferred compensation.
(C) The service recipient’s termination
and liquidation of the plan, provided that—
(1) The termination and liquidation
does not occur proximate to a downturn in
the financial health of the service recipi-
ent;
(2) The service recipient terminates and
liquidates all agreements, methods, pro-
grams, and other arrangements sponsored
by the service recipient that would be ag-
gregated with any terminated and liqui-
dated agreements, methods, programs, and
other arrangements under §1.409A–1(c) if
the same service provider had deferrals
of compensation under all of the agree-
ments, methods, programs, and other ar-
rangements that are terminated and liqui-
dated;
(3) No payments in liquidation of the
plan are made within 12 months of the date
the service recipient takes all necessary ac-
tion to irrevocably terminate and liquidate
the plan other than payments that would be
payable under the terms of the plan if the
action to terminate and liquidate the plan
had not occurred;
(4) All payments are made within 24
months of the date the service recipient
takes all necessary action to irrevocably
terminate and liquidate the plan; and
(5) The service recipient does not adopt
a new plan that would be aggregated with
any terminated and liquidated plan under
§1.409A–1(c) if the same service provider
participated in both plans, at any time
within three years following the date the
service recipient takes all necessary action
to irrevocably terminate and liquidate the
plan.
(D) Such other events and conditions
as the Commissioner may prescribe in
generally applicable guidance published
in the Internal Revenue Bulletin (see
§601.601(d)(2) of this chapter).
(x)Certain distributions to avoid a non-
allocation year under section 409(p).A
plan may provide for an acceleration of
the time and form of a payment, or a pay-
ment may be made under such plan, to pre-
vent the occurrence of a nonallocation year
(within the meaning of section 409(p)(3))
in the plan year of an employee stock own-
ership plan next following the plan year
in which such payment is made, provided
that the amount distributed may not exceed
125 percent of the minimum amount of
distribution necessary to avoid the occur-
rence of a nonallocation year. Solely for
purposes of determining permissible dis-
tributions under this paragraph (j)(4)(x),
synthetic equity (within the meaning of
section 409(p)(6)(C) and §1.409(p)–1(f))
granted during the plan year of the em-
ployee stock ownership plan in which such
payment is made is disregarded for pur-
poses of determining whether the subse-
quent plan year would result in a nonallo-
cation year.
(xi)Payment of state, local, or foreign
taxes. A plan may provide for an accelera-
tion of the time and form of a payment, or
a payment may be made under such plan,
to reflect payment of state, local, or for-
eign tax obligations arising from partici-
pation in the plan that apply to an amount
deferred under the plan before the amount
is paid or made available to the participant
(the state, local, or foreign tax amount).
Such payment may not exceed the amount
of such taxes due as a result of participa-
tion in the plan. Such payment may be
made by distributions to the participant in
the form of withholding pursuant to provi-
sions of applicable state, local, or foreign
law or by distribution directly to the partic-
ipant. Additionally, an arrangement may
provide for the acceleration of the time or
schedule of payment, or a payment may
be made under such arrangement, to pay
the income tax at source on wages imposed
under section 3401 as a result of such pay-
ment and to pay the additional income tax
at source on wages imposed under section
3401 attributable to such additional section
3401 wages and taxes. However, the total
payment under this acceleration provision
must not exceed the aggregate of the state,
local, and foreign tax amount, and the in-
come tax withholding related to such state,
local, and foreign tax amount.
(xii)Cancellation of deferral elections
due to disability. A plan may provide for
a cancellation of a service provider’s de-
ferral election, or a cancellation of such
election may be made, where such can-
cellation occurs by the later of the end of
the taxable year of the service provider or
the 15th day of the third month follow-
ing the date the service provider incurs a
disability. For purposes of this paragraph,
a disability refers to any medically deter-
minable physical or mental impairment re-
sulting in the service provider’s inability
to perform the duties of his or her posi-
tion or any substantially similar position,
where such impairment can be expected to
result in death or can be expected to last
for a continuous period of not less than six
months.
(xiii)Certain offsets.Aplanmaypro-
vide for the acceleration of the time or
schedule of a payment, or a payment may
be made under such plan, as satisfaction of
adebtoftheserviceprovidertotheser-
vice recipient, where such debt is incurred
in the ordinary course of the service rela-
tionship between the service recipient and
the service provider, the entire amount of
reduction in any of the service recipient’s
taxable years does not exceed $5,000, and
thereductionismadeatthesametimeand
in the same amount as the debt otherwise
would have been due and collected from
the service provider.
(xiv)Bona fide disputes as to a right to
apayment. A plan may provide for the ac-
celeration of the time or schedule of one
or more payments, or a payment may be
made under such plan, where such pay-
ments occur as part of a settlement be-
tween the service provider and the service
recipient of an arm’s length,bona fidedis-
pute as to the service provider’s right to
the deferred amount. Discretion to accel-
erate payments, other than due to an arm’s
length settlement of abona fidedispute as
to the service provider’s right to the de-
ferred amount, is not permitted under this
paragraph (j)(4)(xiv). Whether a payment
qualifies for the exception under this para-
graph is based on all relevant facts and cir-
cumstances. A payment will be presumed
not to meet this exception unless the pay-
ment is subject to a substantial reduction
in the value of the payment made in rela-
May 7, 200712182007–19 I.R.B.

tion to the amount that would have been
payable had there been no dispute as to
the service provider’s right to the payment.
For this purpose, a reduction that is less
than 25 percent of the present value of the
deferred amount in dispute generally is not
a substantial reduction. In addition, a pay-
ment will be presumed not to meet this ex-
ception if the paymentismadeproximate
to a downturn in the financial health of the
service recipient.
(5)Nonqualified deferred compensa-
tion plans linked to qualified employer
plans or certain other arrangements.Ifa
nonqualified deferred compensation plan
provides that the amount deferred under
the plan is the amount determined under
the formula determining benefits under
a qualified employer plan (as defined
in §1.409A–1(a)(2)), or a broad-based
foreign retirement plan (as defined in
§1.409A–1(a)(3)(v)) maintained by the
service recipient but applied without
regard to one or more limitations ap-
plicable to the qualified employer plan
under the Internal Revenue Code or to the
broad-based foreign retirement plan under
other applicable law, or that the amount
deferred under the nonqualified deferred
compensation plan is determined as an
amount offset by some or all of the bene-
fits provided under the qualified employer
plan or broad-based foreign retirement
plan, a decrease in amounts deferred under
the nonqualified deferred compensation
plan that results directly from changes in
benefit limitations applicable to the qual-
ified employer plan or the broad-based
foreign retirement plan under the Internal
Revenue Code or other applicable law
does not constitute an acceleration of a
payment under the nonqualified deferred
compensation plan, provided that such
operation does not otherwise result in a
change in the time or form of a payment
under the nonqualified deferred compen-
sation plan, and provided further that the
change in the amounts deferred under
the nonqualified deferred compensation
plan does not exceed such change in the
amounts deferred under the qualified em-
ployer plan or the broad-based foreign
retirement plan, as applicable. In addi-
tion, with respect to such a nonqualified
deferred compensation plan, the following
actions or failures to act will not constitute
an acceleration of a payment under the
nonqualified deferred compensation plan
even if in accordance with the terms of the
nonqualified deferred compensation plan,
the actions or inactions result in a decrease
in the amounts deferred under the plan,
provided that such actions or inactions do
not otherwise affect the time or form of
payment under the nonqualified deferred
compensation plan, and provided further
that with respect to actions or inactions
described in paragraphs (j)(5)(i) and (ii)
of this section, the change in the amount
deferred under the nonqualified deferred
compensation plan does not exceed the
change in the amounts deferred under the
qualified employer plan or the broad-based
foreign retirement plan, as applicable:
(i) A service provider’s action or inac-
tion under the qualified employer plan or
broad-based foreign retirement plan with
respect to whether to elect to receive a
subsidized benefit or an ancillary bene-
fit under the qualified employer plan or
broad-based foreign retirement plan.
(ii) The amendment of a qualified em-
ployer plan or broad-based foreign retire-
ment plan to increase benefits provided un-
der such plan, or to add or remove a subsi-
dized benefit or an ancillary benefit.
(iii) A service provider’s action or in-
action under a qualified employer plan
with respect to elective deferrals and other
employee pre-tax contributions subject to
the contribution restrictions under section
401(a)(30) or section 402(g), including
an adjustment to a deferral election under
such qualified employer plan, provided
that for any given taxable year, the service
provider’s action or inaction does not re-
sult in a decrease in the amounts deferred
under all nonqualified deferred compen-
sation plans in which the service provider
participates (other than amounts described
in paragraph (j)(5)(iv) of this section) in
excess of the limit with respect to elective
deferrals under section 402(g)(1)(A), (B),
and (C) in effect for the taxable year in
which such action or inaction occurs.
(iv) A service provider’s action or in-
action under a qualified employer plan
with respect to elective deferrals and other
employee pre-tax contributions subject to
the contributions restrictions under section
401(a)(30) or section 402(g), and after-tax
contributions by the service provider to
a qualified employer plan that provides
for such contributions, that affects the
amounts that are credited under one or
more nonqualified deferred compensation
plans as matching amounts or other similar
amounts contingent on such elective de-
ferrals, pre-tax contributions, or after-tax
contributions, provided that the total of
such matching or contingent amounts, as
applicable, never exceeds 100 percent of
the matching or contingent amounts that
would be provided under the qualified
employer plan absent any plan-based re-
strictions that reflectlimits on qualified
plan contributions under the Internal Rev-
enue Code.
(6)Changes in elections under a cafe-
teria plan. A change in an election un-
der a cafeteria plan (as defined in section
125(d)) does not result in an accelerated
payment of an amount deferred under a
nonqualified deferred compensation plan
to the extent that the change in the amount
deferred under the nonqualified deferred
compensation plan results solely from the
application of the change in amount eligi-
ble to be treated as compensation under the
terms of the nonqualified deferred com-
pensation plan resulting from the election
change under the cafeteria plan, to a bene-
fit formula under the nonqualified deferred
compensation plan based upon the service
provider’s eligible compensation, and only
to the extent that such change applies in
the same manner as any other increase or
decrease in compensation would apply to
such benefit formula.
§1.409A–4 Calculation of income
inclusion. [Reserved].
§1.409A–5 Funding. [Reserved].
§1.409A–6 Application of section 409A
and effective dates.
(a)Statutory application and effec-
tive dates—(1)Application to amounts
deferred—(i)In general. Except as other-
wise provided in this section, section 409A
applies with respect to amounts deferred
in taxable years beginning after December
31, 2004, and with respect to amounts
deferred in taxable years beginning before
January 1, 2005, if the plan under which
the deferral is made is materially modi-
fied after October 3, 2004. For amounts
deferred in taxable years beginning be-
fore January 1, 2005, under a plan that
is materially modified after October 3,
2004, whether the plan complies with the
requirements of section 409A and these
regulations is determined by reference to
2007–19 I.R.B.1219May 7, 2007

the terms of the plan in effect as of, and
any actions taken under the plan on or af-
ter, the date of the material modification.
Section 409A is applicable with respect
to earnings on amounts deferred only to
the extent that section 409A is applica-
ble with respect to the amounts deferred.
Accordingly, section 409A does not ap-
ply with respect to earnings on amounts
deferred before January 1, 2005, unless
section 409A applies with respect to the
amounts deferred. For this purpose, a right
to earnings that is subject to a substantial
risk of forfeiture (as defined in §1.83–3(c))
or a requirement to perform further ser-
vices, on an amount deferred that is not
subject to a substantial risk of forfeiture
(as defined in §1.83–3(c)) or a requirement
to perform further services, is not treated
as earnings on the amount deferred, but
a separate right to compensation. Except
as otherwise provided in applicable guid-
ance (see §601.601(d)(2) of this chapter),
the provisions of §§1.409A–1 through
1.409A–5 and this section provide the ex-
clusive means of identifying agreements,
methods, programs, or other arrangements
subject to section 409A, and the exclu-
sive means of satisfying the requirements
of section 409A with respect to such
agreements, methods, programs, or other
arrangements.
(ii)Collectively bargained plans. Sec-
tion 409A does not apply with respect to
amounts deferred under a plan maintained
pursuant to one or morebona fidecollec-
tive bargaining agreements in effect on Oc-
tober 3, 2004, for the period ending on
the earlier of the date on which the last of
such collective bargaining agreements ter-
minates (determined without regard to any
extension thereof after October 3, 2004) or
December 31, 2009.
(2)Identification of date of deferral
for statutory effective date purposes.For
purposes of determining whether sec-
tion 409A is applicable with respect to
an amount, the amount is considered de-
ferred before January 1, 2005, if before
January 1, 2005, the service provider
had a legally binding right to be paid the
amount, and the right to the amount was
earned and vested. For purposes of this
paragraph (a)(2), a right to an amount
was earned and vested only if the amount
was not subject to a substantial risk of
forfeiture (as defined in §1.83–3(c)) or a
requirement to perform further services.
Amounts to which the service provider
did not have a legally binding right before
January 1, 2005 (for example because
the service recipient retained discretion
to reduce the amount), will not be con-
sidered deferred before January 1, 2005.
In addition, amounts to which the ser-
vice provider had a legally binding right
before January 1, 2005, but the right to
which was subject to a substantial risk
of forfeiture or a requirement to perform
further services after December 31, 2004,
are not considered deferred before Jan-
uary 1, 2005, for purposes of the effective
date. Notwithstanding the foregoing, an
amount to which the service provider had
a legally binding right before January 1,
2005, but for which the service provider
was required to continue performing ser-
vices to retain the right only through the
completion of the payroll period (as de-
fined in §1.409A–1(b)(3)) that includes
December 31, 2004, is not treated as sub-
ject to a requirement to perform further
services (or a substantial risk of forfeiture)
for purposes of the effective date. For
purposes of this paragraph (a)(2), a stock
option, stock appreciation right, or similar
compensation that on or before December
31, 2004, was immediately exercisable for
cash or substantially vested property (as
defined in §1.83–3(b)) is treated as earned
and vested, regardless of whether the right
would terminate if the service provider
ceased providing services for the service
recipient.
(3)Calculationofamountofcompen-
sation deferred for statutory effective date
purposes—(i)Nonaccount balance plans.
The amount of compensation deferred be-
fore January 1, 2005, under a nonqual-
ifieddeferredcompensationplanthatis
a nonaccount balance plan (as defined in
§1.409A–1(c)(2)(i)(C)), equals the present
value of the amount to which the service
provider would have been entitled under
the plan if the service provider voluntar-
ily terminated services without cause on
December 31, 2004, and received a pay-
ment of the benefits available from the
plan on the earliest possible date allowed
under the plan to receive a payment of ben-
efits following the termination of services,
and received the benefits in the form with
the maximum value. Notwithstanding the
foregoing, for any subsequent taxable year
of the service provider, the grandfathered
amount may increase to equal the present
value of the benefit the service provider
actually becomes entitled to, in the form
and at the time actually paid, determined
under the terms of the plan (including ap-
plicable limits under the Internal Revenue
Code), as in effect on October 3, 2004,
without regard to any further services ren-
dered by the service provider after Decem-
ber 31, 2004, or any other events affecting
the amount of or the entitlement to bene-
fits (other than a participant election with
respect to the time or form of an avail-
able benefit). For purposes of calculat-
ing the present value of a benefit under
this paragraph (c)(3)(i), reasonable actuar-
ial assumptions and methods must be used.
Whether assumptions and methods are rea-
sonable for this purpose is determined as of
each date the benefit is valued for purposes
of determining the grandfathered benefit,
provided that any reasonable actuarial as-
sumptions and methods that were used by
the service recipient with respect to such
benefit as of December 31, 2004, will con-
tinue to be treated as reasonable assump-
tions and methods for purposes of calcu-
lating the grandfathered benefit. Actuar-
ial assumptions and methods will be pre-
sumed reasonable if they are the same as
those used to value benefits under a qual-
ifiedplansponsoredbytheservicerecipi-
ent the benefits under which are part of the
benefit formula under, or otherwise impact
the amount of benefits under, the nonac-
count balance nonqualified deferred com-
pensation plan.
(ii)Account balance plans.The
amount of compensation deferred be-
fore January 1, 2005, under a nonqual-
ified deferred compensation plan that is
an account balance plan (as defined in
§1.409A–1(c)(2)(i)(A)), equals the por-
tion of the service provider’s account
balance as of December 31, 2004, the
right to which was earned and vested (as
defined in paragraph (a)(2) of this section)
as of December 31, 2004, plus any future
contributions to the account, the right to
which was earned and vested (as defined
in paragraph (a)(2) of this section) as of
December 31, 2004, to the extent such
contributions are actually made.
(iii)Equity-based compensation plans.
For purposes of determining the amounts
deferred before January 1, 2005, under an
equity-based compensation plan, the rules
of paragraph (a)(3)(ii) of this section gov-
erning account balance plans are applied
May 7, 200712202007–19 I.R.B.

except that the account balance is deemed
to be the amount of the payment available
to the service provider on December 31,
2004 (or that would be available to the ser-
vice provider if the right were immediately
exercisable) the right to which is earned
and vested (as defined in paragraph (a)(2)
of this section) as of December 31, 2004.
For this purpose, the payment available to
the service provider excludes any exercise
price or other amount that must be paid by
the service provider.
(iv)Earnings. Earnings on amounts
deferred under a plan before January 1,
2005, include only income (whether actual
or notional) attributable to the amounts de-
ferred under a plan as of December 31,
2004, or to such income. For example,
notional interest earned under the plan on
amounts deferred in an account balance
plan as of December 31, 2004, generally
will be treated as earnings on amounts
deferred under the plan before January
1, 2005. Similarly, an increase in the
amount of payment available pursuant to
a stock option, stock appreciation right,
or other equity-based compensation above
the amount of payment available as of
December 31, 2004, due to appreciation in
the underlying stock after December 31,
2004, or accrual of other earnings such
as dividends, is treated as earnings on the
amount deferred. In the case of a nonac-
count balance plan, earnings include the
increase, due solely to the passage of time,
in the present value of the future payments
to which the service provider has obtained
a legally binding right, the present value
of which constituted the amounts deferred
under the plan before January 1, 2005.
Thus, for each year, there will be an in-
crease (determined using the same interest
rate used to determine the amounts de-
ferred under the plan before January 1,
2005) resulting from the shortening of the
discount period before the future payments
are made, plus, if applicable, an increase
in the present value resulting from the
service provider’s survivorship during the
year. However, an increase in the potential
benefits under a nonaccount balance plan
due to, for example, an application of an
increase in compensation after December
31, 2004, to a final average pay plan or
subsequent eligibility for an early retire-
ment subsidy, does not constitute earnings
on the amounts deferred under the plan
before January 1, 2005.
(v)Definition of plan. For purposes
of paragraphs (a)(1), (2), and (3) of this
section, the term “plan” has the mean-
ing provided in §1.409A–1(c), except that
the plan aggregation rules do not apply
for purposes of the actuarial assumptions
and methods used in paragraph (a)(3)(i) of
this section. Accordingly, different rea-
sonable actuarial assumptions and meth-
ods may be used to calculate the amounts
deferred by a service provider in two dif-
ferent agreements, methods, programs, or
other arrangementseach of which consti-
tutes a nonaccount balance plan.
(4)Material modifications—(i)In gen-
eral. Except as otherwise provided, a mod-
ification of a plan is a material modifica-
tion if a benefit or right existing as of Oc-
tober 3, 2004, is materially enhanced or
a new material benefit or right is added,
and such material enhancement or addi-
tion affects amounts earned and vested be-
fore January 1, 2005. Such material ben-
efit enhancement or addition is a material
modification whether it occurs pursuant to
an amendment or to the service recipient’s
exercise of discretion under the terms of
the plan. For example, an amendment to
a plan to add a provision that payments of
deferred amounts earned and vested before
January 1, 2005, may be allowed upon re-
quest if service providers are required to
forfeit 20 percent of the amount of the pay-
ment (a haircut) would be a material mod-
ification to the plan. Similarly, a material
modification would occur if a service re-
cipient exercised discretion to accelerate
vesting of a benefit under the plan to a date
on or before December 31, 2004. How-
ever, it is not a material modification for
a service recipient to exercise discretion
over the time and manner of payment of a
benefit to the extent such discretion is pro-
vided under the terms of the plan as of Oc-
tober 3, 2004. It is not a material modi-
fication for a service provider to exercise
a right permitted under the plan as in ef-
fect on October 3, 2004. The amendment
of a plan to bring the plan into compli-
ance with the provisions of section 409A
will not be treated as a material modifica-
tion. However, a plan amendment or the
exercise of discretion under the terms of
the plan that materially enhances an ex-
isting benefit or right or adds a new ma-
terial benefit or right will be considered a
material modification even if the enhanced
or added benefit would be permitted under
section 409A. For example, the addition of
a right to a payment upon an unforesee-
able emergency of an amount earned and
vested before January 1, 2005, would be
considered a material modification. The
reduction of an existing benefit is not a
material modification. For example, the
removal of a haircut provision generally
would not constitute a material modifica-
tion. The following modifications also are
not material modifications for purposes of
this paragraph (a)(4)(i):
(A) The establishment of or contribu-
tions to a trust or other arrangement from
which benefits under the plan are to be paid
is not a material modification of the plan,
provided that the contribution to the trust
or other arrangement would not otherwise
cause an amount to be includible in the ser-
vice provider’s gross income.
(B) The modification of a provision
requiring the immediate cancellation of
a current deferral election, to require the
cancellation of deferrals for the same
length of time beginning with the first
date at which the application of such can-
cellation would not violate section 409A
(for example, the first date of the service
provider’s first taxable year following the
cancellation).
(C) Compliance with a domes-
tic relations order (as defined in
§1.409A–3(j)(4)(ii)) with respect to pay-
ments to an individual other than the ser-
vice provider, or an amendment to a plan
to require compliance with a domestic
relations order with respect to payments
to an individual other than the service
provider.
(D) The modification of a plan provid-
ing a life annuity form of payment to per-
mit an election between the existing life
annuity form of payment and other forms
of annuity payments that would be treated
as a single form of payment with the ex-
isting life annuity form of payment under
§1.409A–2(b)(2)(ii).
(E) The modification of a grandfathered
plan to add a limited cashout feature con-
sistent with §1.409A–3(j)(4)(v) (exception
to prohibition on accelerated payments).
(ii)Adoptions of new plans.Itispre-
sumed that the adoption of a new plan or
the grant of an additional benefit under an
existing plan after October 3, 2004, and be-
fore January 1, 2005, constitutes a mate-
rial modification of a plan. However, the
presumption may be rebutted by demon-
2007–19 I.R.B.1221May 7, 2007

strating that the adoption of the plan or
grant of the additional benefit was con-
sistent with the service recipient’s histor-
ical compensation practices. For exam-
ple, the presumption that the grant of a
discounted stock option on November 1,
2004, is a material modification of a plan
mayberebuttedbydemonstratingthatthe
grant was consistent with the historic prac-
tice of granting substantially similar dis-
counted stock options (both as to terms and
amounts) each November for a significant
number of years. Notwithstanding para-
graph (a)(4)(i) of this section and this para-
graph (a)(4)(ii), the grant of an additional
benefit under an existing plan that consists
of a deferral of additional compensation
not otherwise provided under the plan as
of October 3, 2004, will be treated as a
material modification of the plan only as
to the additional deferral of compensation,
if the plan explicitly identifies the addi-
tional deferral of compensation and pro-
vides that the additional deferral of com-
pensation is subject to section 409A. Ac-
cordingly, amendments to conform a plan
to the requirements of section 409A with
respect to deferrals under a plan occurring
after December 31, 2004, will not con-
stitute a material modification of the plan
with respect to amounts deferred that are
earned and vested on or before December
31, 2004, provided that there is no concur-
rent material modification with respect to
the amount of, or rights to, amounts de-
ferred that were earned and vested on or
before December 31, 2004. Similarly, a
grant of an additional benefit under a new
plan adopted after October 3, 2004, and be-
fore January 1, 2005, will not be treated as
a material modification of an existing plan
to the extent that the new plan explicitly
identifies additional deferrals of compen-
sation and provides that the additional de-
ferrals of compensation are subject to sec-
tion 409A.
(iii)Suspension or termination of a
plan. A cessation of deferrals under, or
termination of, a plan, pursuant to the
provisions of such plan, is not a material
modification. Amending a plan to pro-
vide participants an election whether to
terminate participation in a plan generally
constitutes a material modification of the
plan.
(iv)Changes to investment mea-
sures—account balance plans.With
respect to an account balance plan (as
defined in §1.409A–1(c)(2)(i)(A)), it is
not a material modification to change
a notional investment measure to, or to
add to an existing investment measure,
an investment measure that qualifies as a
predetermined actual investment within
the meaning of §31.3121(v)(2)–1(d)(2)
of this chapter or, for any given tax-
able year, reflects a reasonable rate of
interest (determined in accordance with
§31.3121(v)(2)–1(d)(2)(i)(C) of this chap-
ter). For this purpose, if with respect to
an amount deferred for a period, a plan
provides for a fixed rate of interest to be
credited, and the rate is to be reset under
the plan at a specified future date that is
not later than the end of the fifth taxable
year that begins after the beginning of
the period, the rate is reasonable at the
beginning of the period, and the rate is not
changed before the reset date, then the rate
will be treated as reasonable in all future
periods before the reset date.
(v)Stock rights. The modification, ex-
tension, or renewal of a stock right will
not constitute a material modification of
the stock right, if the modification, ex-
tension, or renewal would not be treated
as the grant of a new stock right under
§1.409A–1(b)(5)(v)(A), and would not re-
sult in the stock right being treated as hav-
ing had a deferral feature from the date of
grant pursuant to §1.409A–1(b)(5)(v)(C).
(vi)Rescission of modifications.Any
modification to the terms of a plan that
would inadvertently result in treatment as
a material modification under this section
is not considered a material modification
of the plan to the extent the modification
in the terms of the plan is rescinded by the
earlier of a date before the right is exer-
cised (if the change grants a discretionary
right) or the last day of the taxable year
of the service provider during which such
change occurred. Thus, for example, if
a service recipient modifies the terms of
aplanonMarch1toallowanindivid-
ual employee to elect a new change in the
time or form of payment without realizing
that such a change constituted a material
modification that would subject the plan
to the requirements of section 409A, and
the modification is rescinded on Novem-
ber 1, then if no change in the time or form
of payment has been made pursuant to the
modification before November 1, the plan
is not considered materially modified un-
der this section.
(vii)Definition of plan.Forpur-
poses of this paragraph (a)(4), the term
“plan” has the same meaning provided in
§1.409A–1(c), except that the plan aggre-
gation rules of §1.409A–1(c)(2) do not
apply.
(b)Regulatory applicability date.
§1.409A–1, §1.409A–2, §1.409A–3 and
this section are applicable for taxable years
beginning on or after January 1, 2008.
Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
Approved March 20, 2007.
Eric Solomon,
Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on April 10, 2007,
8:45 a.m., and published in the issue of the Federal Register
for April 17, 2007, 72 F.R. 19234)
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of May 2007. See Rev. Rul. 2007-29, page 1223.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of May 2007. See Rev. Rul. 2007-29, page 1223.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of May 2007. See Rev. Rul. 2007-29, page 1223.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of May 2007. See Rev.
Rul. 2007-29, page 1223.
May 7, 200712222007–19 I.R.B.

Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of May 2007. See Rev. Rul. 2007-29, page 1223.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
aresetforthforthemonthofMay2007. SeeRev.
Rul. 2007-29, page 1223.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of May 2007. See Rev. Rul. 2007-29, page 1223.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of May 2007. See Rev. Rul. 2007-29, page 1223.
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 642, 1274, 1288, and other
sections of the Code, tables set forth the
rates for May 2007.
Rev. Rul. 2007–29
This revenue ruling provides vari-
ous prescribed rates for federal income
tax purposes for May 2007 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Finally,
Table 5 contains the federal rate for deter-
mining the present value of an annuity, an
interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.
REV. RUL. 2007–29 TABLE 1
Applicable Federal Rates (AFR) for May 2007
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR4.85%4.79%4.76%4.74%
110% AFR5.34%5.27%5.24%5.21%
120% AFR5.83%5.75%5.71%5.68%
130% AFR6.33%6.23%6.18%6.15%
Mid-term
AFR4.62%4.57%4.54%4.53%
110% AFR5.09%5.03%5.00%4.98%
120% AFR5.56%5.48%5.44%5.42%
130% AFR6.03%5.94%5.90%5.87%
150% AFR6.98%6.86%6.80%6.76%
175% AFR8.16%8.00%7.92%7.87%
Long-term
AFR4.90%4.84%4.81%4.79%
110% AFR5.39%5.32%5.29%5.26%
120% AFR5.89%5.81%5.77%5.74%
130% AFR6.39%6.29%6.24%6.21%
2007–19 I.R.B.1223May 7, 2007

REV. RUL. 2007–
29 TABLE 2
Adjusted AFR for May 2007
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
3.47%3.44%3.43%3.42%
Mid-term adjusted AFR3.61%3.58%3.56%3.55%
Long-term ad
justed
AFR
4.11%4.07%4.05%4.04%
REV. RUL. 2007–29 TABLE 3
Rates Under Section 382 for May 2007
Adjusted federal long-term rate for the current month4.11%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)4.18%
REV. RUL. 2007–29 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for May 2007
Appropriate percentage for the 70% present value low-income housing credit8.11%
Appropriate percentage for the 30% present value low-income housing credit3.47%
REV. RU
L. 2007–29 TABLE 5
Rate Under Section 7520 for May 2007
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest5.6%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of May 2007. See Rev. Rul. 2007-29, page 1223.
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of May 2007. See Rev. Rul. 2007-29, page 1223.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of May 2007. See Rev. Rul. 2007-29, page 1223.
May 7, 200712242007–19 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.601: Rules and regulations.
(Also Part I, §§ 25, 103, 143; 1.25–4T, 1.103–1,
6a.103A–2.)
Rev. Proc. 2007–31
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance with respect to the United States and
area median gross income figures that are
to be used by issuers of qualified mortgage
bonds, as defined in § 143(a) of the Inter-
nal Revenue Code, and issuers of mortgage
credit certificates, as defined in § 25(c), in
computing the housing cost/income ratio
described in § 143(f)(5).
SECTION 2. BACKGROUND
.01 Section 103(a) provides that, ex-
cept as provided in § 103(b), gross income
does not include interest on any state or
local bond. Section 103(b)(1) provides
that § 103(a) shall not apply to any pri-
vate activity bond that is not a qualified
bond (within the meaning of § 141). Sec-
tion 141(e) provides that the term “qual-
ified bond” includes any private activity
bond that (1) is a qualified mortgage bond,
(2) meets the applicable volume cap re-
quirements under § 146, and (3) meets the
applicable requirements under § 147.
.02 Section 143(a)(1) provides that the
term “qualified mortgage bond” means a
bond that is issued as part of a “qualified
mortgage issue”. Section 143(a)(2)(A)
provides that the term “qualified mort-
gage issue” means an issue of one or more
bonds by a state or political subdivision
thereof, but only if (i) all proceeds of the
issue (exclusive of issuance costs and a
reasonably required reserve) are to be used
to finance owner-occupied residences; (ii)
the issue meets the requirements of sub-
sections (c), (d), (e), (f), (g), (h), (i), and
(m)(7) of § 143; (iii) the issue does not
meet the private business tests of para-
graphs(1)and(2)of§141(b);and(iv)
with respect to amounts received more
than 10 years after the date of issuance,
repayments of $250,000 or more of prin-
cipal on financing provided by the issue
are used not later than the close of the first
semi-annual period beginning after the
date the prepayment (or complete repay-
ment) is received to redeem bonds that are
part of the issue.
.03 Section 143(f) imposes eligibility
requirements concerning the maximum
income of mortgagors for whom financing
may be provided by qualified mortgage
bonds. Section 25(c)(2)(A)(iii)(IV) pro-
vides that recipients of mortgage credit
certificates must meet the income re-
quirements of § 143(f). Generally, under
§§ 143(f)(1) and 25(c)(2)(A)(iii)(IV),
these income requirements are met only
if all owner-financing under a qualified
mortgage bond and all certified indebt-
edness amounts under a mortgage credit
certificate program are provided to mort-
gagors whose family income is 115 percent
or less of the applicable median family in-
come. Under § 143(f)(6), the income
limitation is reduced to 100 percent of the
applicable median family income if there
are fewer than three individuals in the
family of the mortgagor.
.04 Section 143(f)(4) provides that the
term “applicable median family income”
means the greater of (A) the area median
gross income for the area in which the res-
idence is located, or (B) the statewide me-
dian gross income for the state in which the
residence is located.
.05 Section 143(f)(5) provides for an
upward adjustment of the income limita-
tions in certain high housing cost areas.
Under § 143(f)(5)(C), a high housing
cost area is a statistical area for which
the housing cost/income ratio is greater
than 1.2. The housing cost/income ratio
is determined under § 143(f)(5)(D) by
dividing (a) the applicable housing price
ratio by (b) the ratio that the area median
gross income bears to the median gross
income for the United States. The applica-
ble housing price ratio is the new housing
price ratio (new housing average purchase
price for the area divided by the new hous-
ing average purchase price for the United
States) or the existinghousing price ratio
(existing housing average area purchase
price divided by the existing housing aver-
age purchase price for the United States),
whichever results in the housing cost/in-
come ratio being closer to 1. This income
adjustment applies only to bonds issued,
and nonissued bond amounts elected, after
December 31, 1988.See§ 4005(h) of the
Technical and Miscellaneous Revenue Act
of 1988, 1988–3 C.B. 1, 311 (1988).
.06 The Department of Housing and
Urban Development (HUD) has com-
puted the median gross income for the
United States, the states, and statisti-
cal areas within the states. The income
information was released to the HUD re-
gional offices on March 20, 2007, and
may be obtained by calling the HUD
reference service at 1–800–245–2691.
The income information is also avail-
able at HUD’s World Wide Web site,
http:huduser.org/datasets/il.html,which
provides a menu from which you may
select the year and type of data of interest.
The Internal Revenue Service annually
publishes the median gross income for the
United States.
.07 The most recent nationwide average
purchase prices and average area purchase
price safe harbor limitations were pub-
lished on March 26, 2007, in Rev. Proc.
2007–26, 2007–13 I.R.B. 814.
SECTION 3. APPLICATION
.01 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use as
the median gross income for the United
States either (1) the $59,600 median gross
income figure released to the HUD re-
gional offices on March 8, 2006, or (2)
the $59,000 median gross income figure
released to the HUD regional offices on
March 20, 2007.See§ 2.06 of this revenue
procedure.
.02 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates generally must
use the area median gross income figures
released by HUD on March 20, 2007.See
§ 2.06 of this revenue procedure. How-
ever, for any area for which the March 20,
2007 income figure is lower than the in-
come figure released by HUD on March 8,
2006 for the same area, issuers may use the
higher figure released on March 8, 2006,
when computing the housing cost/income
ratio under § 143(f)(5).
2007–19 I.R.B.1225May 7, 2007

SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
.01 Rev. Proc. 2006–20, 2006–17
I.R.B. 841, is obsolete except as provided
in § 5.02 of this revenue procedure.
.02 This revenue procedure does not af-
fect the effective date provisions of Rev.
Rul. 86–124, 1986–2 C.B. 27. Those ef-
fective date provisions will remain opera-
tive at least until the Service publishes a
new revenue ruling that conforms the ap-
proach to effective dates set forth in Rev.
Rul. 86–124 to the general approach taken
in this revenue procedure. However, when
determining the income requirements un-
der § 143(f), for any state or area for which
the March 20, 2007 statewide or area me-
dian gross income figure is lower than the
income figure released by HUD on March
8, 2006, for the same state or area, is-
suers may use the higher figure released on
March 8, 2006, until 30 days after release
by HUD of updated income limits.
SECTION 5. EFFECTIVE DATES
.01 Issuers must use the United States
and area median gross income figures
specifiedin§3ofthisrevenueprocedure
for commitments to provide financing that
are made, or (if the purchase precedes the
financing commitment) for residences that
are purchased, in the period that begins
on March 20, 2007, and ends on the date
when these United States and area median
gross income figures are rendered obsolete
by a new revenue procedure.
.02 Notwithstanding § 5.01 of this rev-
enue procedure, issuers also may continue
to rely on the United States and area me-
dian gross income figures specified in Rev.
Proc. 2006–20 with respect to bonds orig-
inally sold and nonissued bond amounts
elected not later than May 17, 2007, if
the commitments or purchases described
in § 5.01 are made not later than July
16, 2007. Issuers also may continue to
rely on the United States and area me-
dian gross income figures specified in Rev.
Proc. 2006–20, to the extent allowed under
§§ 3.01 and 3.02 of this revenue procedure.
DRAFTING INFORMATION
The principal author of this revenue
procedure is David White of the Office of
Assistant Chief Counsel (Exempt Organi-
zations/Employment Tax/Government En-
tities). For further information regarding
this revenue procedure, contact Mr. White
at (202) 622–3980 (not a toll-free call).
May 7, 200712262007–19 I.R.B.

Part IV. Items of General Interest
Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Suspensions, Censures,
Disbarments, and Resignations
Announcement 2007-41
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility, will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid the institution
or conclusion of a proceeding for his or
her disbarment or suspension from prac-
tice before the Internal Revenue Service,
may offer his or her consent to suspension
from such practice. The Director, Office
of Professional Responsibility, in his dis-
cretion, may suspend an attorney, certified
public accountant, enrolled agent, or en-
rolled actuary in accordance with the con-
sent offered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Hankinson, Eugene M.Somerset, PACPAIndefinite
from
November 15, 2006
Canzano, Richard M.Winchester, MAAttorneyIndefinite
from
November 20, 2006
Sims, Jr., LionelHouston, TXCPAIndefinite
from
November 20, 2006
Wendekier, Raymond J.Patton, PAAttorneyIndefinite
from
November 21, 2006
Golden, LarryHinesville, GACPAIndefinite
from
November 28, 2006
2007–19 I.R.B.1227May 7, 2007

NameAddressDesignationDate of Suspension
Lane, David B.Hanover, MAAttorneyIndefinite
from
November 28, 2006
Brown, Arthur I.Miami, FLCPAIndefinite
from
December 1, 2006
Frisk, Daniel J.Fargo, NDAttorneyIndefinite
from
December 1, 2006
Small, Kenneth A.McMurray, PACPAIndefinite
from
December 1, 2006
Vazquez, Sonya M.Port Orchard, WACPAIndefinite
from
December 1, 2006
Swistak, AnthonyAdams, MAEnrolled AgentIndefinite
from
December 6, 2006
Lenahan, Jr., Robert J.Elizabeth, NJAttorneyIndefinite
from
December 11, 2006
Hayes, Richard A.Havervill, MAAttorneyIndefinite
from
December 14, 2006
Scheller, Stephen M.Coppell, TXCPAIndefinite
from
December 15, 2006
Wilson, James M.Berlin, NJCPAIndefinite
from
December 15, 2006
Franzese, Joseph P.Winthrop, MAAttorneyIndefinite
from
December 18, 2006
Black, Charles C.Marietta, GAAttorneyIndefinite
from
January 1, 2007
Enright, III, Robert A.Naples, FLAttorneyIndefinite
from
January 1, 2007
Fromovitz, Norman M.Brooklyn, NYCPAIndefinite
from
January 1, 2007
Saylor, Mary A.Iowa City, IAEnrolled AgentIndefinite
from
January 1, 2007
May 7, 200712282007–19 I.R.B.

NameAddressDesignationDate of Suspension
Seeherman, AlanWynnewood, PACPAIndefinite
from
January 1, 2007
Beistel, Theodore L.Canton, OHCPAIndefinite
from
January 3, 2007
Myers, Robert J.Fairport Harbor, OHCPAIndefinite
from
January 9, 2007
Burrus, Robert V.Valparaiso, INCPAIndefinite
from
January 22, 2007
Patterson, Douglas W.Newburgh, INAttorneyIndefinite
from
January 31, 2007
Lang, Jeffrey H.Fishers, INCPAIndefinite
from
January 22, 2007
Chickering, DavidVermillion, SDCPAFebruary 5, 2007
to
November 4, 2007
Moss, Steve E.Henderson, NCCPAIndefinite
from
February 5, 2007
Hazlip, KevinOrange Park, FLEnrolled AgentIndefinite
from
February 10, 2007
Adelson, Robert A.Newton, MAAttorneyIndefinite
from
February 15, 2007
Boyer, Daniel D.North Judson, INCPAIndefinite
from
February 15, 2007
LaRusso, Anthony J.North Caldwell, NJAttorneyIndefinite
from
February 15, 2007
Martin, Spencer R.Lancaster, PACPAIndefinite
from
February 15, 2007
Hursh, Stephanie S.Brush Prairie, WAEnrolled AgentIndefinite
from
February 20, 2007
Guidera, George C.Weston, CTAttorneyIndefinite
from
February 26, 2007
Ruth, Christopher A.Cypress, CACPAIndefinite
from
February 27, 2007
2007–19 I.R.B.1229May 7, 2007

NameAddressDesignationDate of Suspension
Elias, Lenard S.El Cajon, CAEnrolled AgentIndefinite
from
March 1, 2007
Ikeji, ChuckOrlando, FLCPAIndefinite
from
March 1, 2007
Lewis, Craig S.Savannah, GACPAIndefinite
from
March 1, 2007
Sloan, Eric R.Brighton, MICPAIndefinite
from
March 1, 2007
Gostomski, MichaelStamford, CTCPAIndefinite
from
March 5, 2007
Hafer, Charles J.Hamburg, PAEnrolled AgentIndefinite
from
March 5, 2007
Jones, Phillip G.Andalusia, ALEnrolled AgentIndefinite
from
March 7, 2007
Agashiwala, Mahesh J.New York, NYCPAIndefinite
from
March 22, 2007
Berndgen, MichaelPlantation, FLCPAIndefinite
from
April 1, 2007
Grahn, Charles R.Indianapolis, INAttorneyIndefinite
from
April 1, 2007
Shaw, G. JoyceHebron, KYEnrolled AgentIndefinite
from
April 1, 2007
Pikaart, Jr., Edward H.N. Branford, CTCPAIndefinite
from
April 10, 2007
Kelley, Richard S.Beverly, MAAttorneyIndefinite
from
May 1, 2007
Crabtree, Michael L.San Dimas, CAEnrolled AgentIndefinite
from
May 15, 2007
Hausmann, Mark D.Troy, NYAttorneyIndefinite
from
May 15, 2007
May 7, 200712302007–19 I.R.B.

Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal RevenueService any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attor-
ney, certified public accountant, or actuary
suspended or revoked for cause or (2) has
been convicted of certain crimes.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions:
NameAddressDesignationDate of Suspension
Hatchett, William M.Pontiac, MIAttorneyIndefinite
from
November 13, 2006
Jacobs, Mark L.Jackson Heights, NYAttorneyIndefinite
from
November 21, 2006
Sylver, Peter T.E. Longmeadow, MAAttorneyIndefinite
from
November 21, 2006
Portlock, David R.Pensacola, FLEnrolled AgentIndefinite
from
November 27, 2006
Ascher, Michael P.North Port, FLAttorneyIndefinite
from
November 28, 2006
Barrett, Norman W.Dover, DECPAIndefinite
from
November 28, 2006
Burd, GeneHouston, TXAttorneyIndefinite
from
November 28, 2006
Caceres, Carlos H.Silver Spring, MDAttorneyIndefinite
from
November 28, 2006
Carrabotta, Peter S.Niles, ILAttorneyIndefinite
from
November 28, 2006
Davis, Carleton W.St. Louis, MOAttorneyIndefinite
from
November 28, 2006
Frasier, Roland B.Rancho Santa Fe, CAAttorneyIndefinite
from
November 28, 2006
Hubbard, EdwardChicago, ILAttorneyIndefinite
from
November 28, 2006
2007–19 I.R.B.1231May 7, 2007

NameAddressDesignationDate of Suspension
Hynes, Richard W.Brookline, MAAttorneyIndefinite
from
November 28, 2006
Johnson, Barbara C.Andover, MAAttorneyIndefinite
from
November 28, 2006
Konas, Theodore V.Lancaster, PACPAIndefinite
from
November 28, 2006
Korson, Daniel M.Muskegon, MICPAIndefinite
from
November 28, 2006
Lee, III, Norman J.Collegeville, PAAttorneyIndefinite
from
November 28, 2006
Loiben, Alan A.Skokie, ILAttorneyIndefinite
from
November 28, 2006
McGarry, Thomas H.Denver, COAttorneyIndefinite
from
November 28, 2006
Roberts, Quinton D.Elkridge, MDAttorneyIndefinite
from
November 28, 2006
Schofield, Peter L.Spencer, MAAttorneyIndefinite
from
November 28, 2006
Shultz, Ryan K.Mitchell, NEAttorneyIndefinite
from
November 28, 2006
Stenger, Jeanne P.Temecula, CAAttorneyIndefinite
from
November 28, 2006
Wood, Gary K.Edina, MNAttorneyIndefinite
from
November 28, 2006
Bakare, Adigun S.Laurel, MDAttorneyIndefinite
from
December 6, 2006
Biagini, Marc J.Downers Grove, ILAttorneyIndefinite
from
December 6, 2006
Birchall, Richard G.Brewster, MAAttorneyIndefinite
from
December 6, 2006
May 7, 200712322007–19 I.R.B.

NameAddressDesignationDate of Suspension
Brown, Edward E.Indianapolis, INAttorneyIndefinite
from
December 6, 2006
Cunningham, Jr., Shirley A. Ft. Lauderdale, FLAttorneyIndefinite
from
December 6, 2006
Docherty, Scott R.Branson West, MOAttorneyIndefinite
from
December 6, 2006
Dressler, Peter P.West Chicago, ILAttorneyIndefinite
from
December 6, 2006
Henry, William J.Irvington, NJAttorneyIndefinite
from
December 6, 2006
Hubbard, Cynthia A.Geneva, ILAttorneyIndefinite
from
December 6, 2006
Jackson, Jr., Donald H.Hanover, MAAttorneyIndefinite
from
December 6, 2006
Katz, Norman H.Owings Mills, MDAttorneyIndefinite
from
December 6, 2006
Lakin, Leonard S.Wellesley Hills, MAAttorneyIndefinite
from
December 6, 2006
McGreevy, Jacqueline K.Carbondale, COAttorneyIndefinite
from
December 6, 2006
Zepp, Dale D.Ferguson, MOAttorneyIndefinite
from
December 6, 2006
Triplett, Austin H.Homewood, ILAttorneyIndefinite
from
December 11, 2006
Murphy, Patrick W.Honolulu, HIAttorneyIndefinite
from
December 11, 2006
Cronin, Jr., Edward M.Cambridge, MAAttorneyIndefinite
from
December 11, 2006
Christof, Kevin F.Santa Monica, CAAttorneyIndefinite
from
December 21, 2006
Heath, Kenneth J.Canaan, VTCPAIndefinite
from
December 21, 2006
2007–19 I.R.B.1233May 7, 2007

NameAddressDesignationDate of Suspension
Madigan, Brian C.Binghamton, NYAttorneyIndefinite
from
December 21, 2006
Malloy, Terry P.Tulsa, OKAttorneyIndefinite
from
December 21, 2006
Baynes, Robert M.Indianapolis, INCPAIndefinite
from
December 27, 2006
Ceresa, Richard A.Woodbridge, CACPAIndefinite
from
December 27, 2006
Crews, Richard A.Henderson, COAttorneyIndefinite
from
December 27, 2006
Menkveld, Paul G.Tucson, AZAttorneyIndefinite
from
December 27, 2006
Worischeck, Joseph H.Tempe, AZAttorneyIndefinite
from
December 27, 2006
Brown, Kirk P.Pueblo, COAttorneyIndefinite
from
December 28, 2006
Dowling, Stanley W.Scotts Valley, CACPAIndefinite
from
December 28, 2006
Simmons, Henry L.Greensboro, NCCPAIndefinite
from
December 28, 2006
Steele, Regina D.San Diego, CAAttorneyIndefinite
from
December 29, 2006
Craig, III, William A.Austin, TXAttorneyIndefinite
from
January 1, 2007
Acker, Thomas R.Hollis Center, MEAttorneyIndefinite
from
January 8, 2007
Baxter, Laura M.Monee, ILCPAIndefinite
from
January 8, 2007
Herald, Sally J.Cold Spring, KYAttorneyIndefinite
from
January 8, 2007
Klapheke, II, William T.Bowling Green, KYAttorneyIndefinite
from
January 8, 2007
May 7, 200712342007–19 I.R.B.

NameAddressDesignationDate of Suspension
McCarthy, Charles C.Encino, CAAttorneyIndefinite
from
January 8, 2007
Bolling, Darius C.Chicago, ILCPAIndefinite
from
January 10, 2007
Breitlauch, LindaSaylorsburg, PAAttorneyIndefinite
from
January 10, 2007
Coddington, Paul F.Concord, NHAttorneyIndefinite
from
January 10, 2007
Davis, Jr., William E.Pinehurst, TXCPAIndefinite
from
January 10, 2007
Esola, Louis A.Greensburg, PACPAIndefinite
from
January 10, 2007
Finch, Judith A.Walnut Creek, CAAttorneyIndefinite
from
January 10, 2007
Jeing, Thomas C.San Francisco, CAAttorneyIndefinite
from
January 10, 2007
Ledbetter, Dean D.Pelham, ALCPAIndefinite
from
January 10, 2007
McDiarmid, Katherine B.Greensboro, NCAttorneyIndefinite
from
January 10, 2007
Mills, George P.Oceanside, CAAttorneyIndefinite
from
January 10, 2007
Rather, James L.Irvine, CAAttorneyIndefinite
from
January 10, 2007
Rivera, Eduardo M.Torrance, CAAttorneyIndefinite
from
January 10, 2007
Stepovich, Michael A.Fairbanks, AKAttorneyIndefinite
from
January 10, 2007
Ulbrich, David L.Woodland Hills, CACPAIndefinite
from
January 10, 2007
Swanson, Todd-EllisGreenville, SCCPAIndefinite
from
January 20, 2007
2007–19 I.R.B.1235May 7, 2007

NameAddressDesignationDate of Suspension
Rubin, Deborah L.Delray Beach, FLAttorneyIndefinite
from
January 26, 2007
Wood, Brent E.Cary, NCAttorneyIndefinite
from
January 26, 2007
Currin, Samuel T.Raleigh, NCAttorneyIndefinite
from
February 7, 2007
Lupo, Robert N.Weston, MAAttorneyIndefinite
from
February 20, 2007
Taggart, Lawrence W.El Cajon, CAAttorneyIndefinite
from
March 7, 2007
Fife, III, James H.Schererville, INAttorneyIndefinite
from
March 8, 2007
Katsis, Kevin G.Riverside, ILAttorneyIndefinite
from
March 8, 2007
O’Driscoll, Dennis M.Quincy, MAAttorneyIndefinite
from
March 8, 2007
Siever, Beth F.Austin,TXAttorneyIndefinite
from
March 8, 2007
Wheatley-Clark, Sheila R.Houston, TXCPAIndefinite
from
March 8, 2007
Suspensions From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Reg-
ulations, Part 10, after notice and an op-
portunity for a proceeding before an ad-
ministrative law judge, the following indi-
viduals have been placed under suspension
from practice before the Internal Revenue
Service:
NameAddressDesignationEffective Date
Redmond, DebraGifford, PAEnrolled AgentIndefinite
from
March 5, 2007
May 7, 200712362007–19 I.R.B.

Disbarments From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an adminis-
trative law judge, the following individu-
als have been disbarred from practice be-
fore the Internal Revenue Service:
NameAddressDesignationEffective Date
Brookstein, GaryHuntingdonValley, PACPADecember 15, 2006
James T. JubbBaltimore, MDCPADecember 15, 2006
Censure Issued by Consent
Under Title 31, Code of Federal Reg-
ulations, Part 10, in lieu of a proceeding
being instituted or continued, an attorney,
certified public accountant, enrolled agent,
or enrolled actuary, may offer his or her
consent to the issuance of a censure. Cen-
sure is a public reprimand.
The following individuals have con-
sented to the issuance of a Censure:
NameAddressDesignationDate of Censure
Zucker, Robert W.Boca Raton, FLCPANovember 14, 2006
Montgomery, David E.Pleasanton, CAEnrolled AgentNovember 15, 2006
Higgins, James M.S. Boston, MAAttorneyDecember 1, 2006
Pennington, Debra L.Lees Summit, MOEnrolled AgentJanuary 29, 2007
Goodwin, Steven C.Concord, MAAttorneyFebruary 2, 2007
Francis, Andrew W.E.Houston, TXCPAFebruary 21, 2007
Griffin, Richard M.Duluth, GACPAFebruary 28, 2007
Resignations of Enrolled Agents
Under Title 31, Code of Federal Regu-
lations, Part 10, an enrolled agent, in or-
der to avoid the institution or conclusion
of a proceeding for his or her disbarment
or suspension from practice before the In-
ternal Revenue Service, may offer his or
her resignation as an enrolled agent. The
Director, Office of Professional Responsi-
bility, in his discretion, may accept the of-
fered resignation.
The Director, Office of Professional
Responsibility, has accepted offers of res-
ignation as an enrolled agent from the
following individuals:
NameAddressDate of Resignation
Filipski, Kenneth M.Bakersfield, CAApril 16, 2007
2007–19 I.R.B.1237May 7, 2007

Archer Medical Savings
Accounts — Cut-Off Year
Announcement 2007–44
PURPOSE
Sections 220(i) and (j) of the Internal
Revenue Code provide that if the num-
ber of Archer Medical Savings Account
(Archer MSA) returns filed for 2005 or
2006 or a statutorily specified projection
of the number of Archer MSA returns that
will be filed for 2005 or 2006 exceeds
750,000, then April 19, 2007, is a “cut-off”
date for the Archer MSA pilot project. The
Internal Revenue Service (IRS) has deter-
mined the following: (1) The applicable
number of Archer MSA returns filed for
2004 is 39,037 and the applicable num-
ber of Archer MSA returns projected to
be filed for 2005 is 35,246 (after reduc-
tion in each case for statutorily specified
exclusions, such as the exclusion for previ-
ously uninsured taxpayers). Consequently,
2005 is not a “cut-off” year for the Archer
MSA pilot project. (2) The applicable
number of Archer MSA returns filed for
2005 is 16,850 and the applicable num-
ber of Archer MSA returns projected to be
filed for 2006 is 15,192 (after reduction in
each case for statutorily specified exclu-
sions, such as the exclusion for previously
uninsured taxpayers). Consequently, April
19, 2007 is not a “cut-off” date and 2006
is not a “cut-off” year for the Archer MSA
pilot project.
BACKGROUND
The Health Insurance Portability and
Accountability Act of 1996 added section
220 to the Code to permit eligible individu-
als to establish Archer MSAs under a pilot
project effective January 1, 1997. The pi-
lot project, as amended by The Tax Relief
and Health Care Act of 2006 (TRHCA),
Pub. Law. No. 109–432, § 117, has a
scheduled “cut-off” year of 2006, but may
have an earlier “cut-off” date if the num-
ber of individuals who have established
Archer MSAs exceeds certain numerical
limitations. Trustees’ reports for Archer
MSAs established between (1) January 1,
2005 and June 30, 2005 and (2) January 1,
2006 and June 30, 2006, were due no later
than March 20, 2007. IRS is required to
publish a determination of whether 2005
or 2006 is a “cut-off” year no later than
April 19, 2007. See sections 220(i) and (j)
as amended by TRHCA; Ann. 2007–24,
2007–10 I.R.B. 681.
If a year is a “cut-off” year, section 220
(i)(1) generally provides that no individual
will be eligible for a deduction or exclu-
sion for Archer MSA contributions for any
taxable year beginning after the “cut-off”
year unless the individual (A) was an ac-
tive Archer MSA participant for any tax-
able year ending on or before the close of
the “cut-off” year, or (B) first became an
active Archer MSA participant for a tax-
able year ending after the “cut-off” year by
reason of coverage under a high deductible
health plan of an Archer MSA-participat-
ing employer.
Section 220(j)(2)(A) provides that the
numerical limitation for 2005 is exceeded
if the number of Archer MSA returns filed
on or before April 15, 2005, for taxable
years ending with or within the 2004 cal-
endar year, plus the Secretary’s estimate
of the number of Archer MSA returns for
those taxable years which will be filed af-
ter April 15, 2005, exceeds 750,000.
Section 220(j)(2)(A) provides that the
numerical limitation for 2006 is exceeded
if the number of Archer MSA returns filed
on or before April 15, 2006, for taxable
years ending with or within the 2005 cal-
endar year, plus the Secretary’s estimate
of the number of Archer MSA returns for
those taxable years which will be filed af-
ter April 15, 2006, exceeds 750,000.
For this purpose, section 220(j)(2)(A)
provides that a tax return is an Archer
MSA return for a taxable year if any ex-
clusion is claimed under section 106(b)
or any deduction is claimed under sec-
tion 220 for that taxable year. Section
220(j)(2)(B) provides, as an alternative
test, that: (1) the numerical limitation
for 2005 is also exceeded if the sum of
90 percent of the Archer MSA returns
for 2004 plus the product of 2.5 and the
number of Archer MSAs for taxable years
beginning in 2005 that are established dur-
ing the portion of 2005 preceding July 1
(based on reports by Archer MSA trustees
and custodians), exceeds 750,000 and (2)
the numerical limitation for 2006 is also
exceeded if the sum of 90 percent of the
Archer MSA returns for 2005 plus the
product of 2.5 and the number of Archer
MSAs for taxable years beginning in 2006
that are established during the portion of
2006 preceding July 1 (based on reports
by Archer MSA trustees and custodians),
exceeds 750,000.
Under section 220(j)(3), in determining
whether any calendar year is a “cut-off”
year, the Archer MSA of any previously
uninsured individual is not taken into ac-
count. In addition, section 220(j)(4)(D)
specifies that, to the extent practical, all
Archer MSAs established by an individual
are aggregated and two married individu-
als opening separate Archer MSAs are to
be treated as having a single Archer MSA
for purposes of determining the number of
Archer MSAs.
2005 Not a Cut-Off Year
A total of 33,622 tax returns reporting
an excludable or deductible contribution to
an Archer MSA for the 2004 taxable year
were filed by April 15, 2005. The num-
ber of taxpayers reported as being previ-
ously uninsured was not available. It has
been estimated that an additional 5,415 tax
returns reporting Archer MSA contribu-
tions for the 2005 taxable year have been
or will be filed after April 15, 2005, includ-
ing 0 taxpayers who were previously unin-
sured. Accordingly, it has been determined
that there were 39,037 (33,622 plus 5,415)
Archer MSA returns for 2005. As a result,
39,622 (39,622 minus 0) Archer MSA re-
turns count toward the applicable statutory
limitation for 2005 Archer MSA returns of
750,000.
BasedontheForms8851filedonor
before March 20, 2007, by Archer MSA
trustees and custodians, it has been de-
termined that 45 taxpayers who did not
have Archer MSA contributions for 2004
established Archer MSAs for 2005 dur-
ing the portion of 2005 preceding July 1.
Of this total, 0 taxpayers were reported
by trustees and custodians as previously
uninsured, and therefore are not taken into
account in determining whether 2005 is
a “cut-off” year. The alternative limita-
tion for 2005 (90 percent of the applicable
number of Archer MSA returns for 2004
plus the product of 2.5 and the number of
applicable Archer MSAs established from
January 1, 2005, through June 30, 2005) is
35,246 (90 percent of 39,037 plus 2.5 mul-
tiplied by 45), which is less than the statu-
tory limit of 750,000. Thus, 2005 is not
a “cut-off” year for the Archer MSA pilot
project by reason of either the 2005 Archer
MSA returns test of section 220(j)(2)(A) or
May 7, 200712382007–19 I.R.B.

the alternative test of section 220(j)(2)(B)
of the Code.
2006NotaCut-OffYear
A total of 17,306 tax returns reporting
an excludable or deductible contribution to
an Archer MSA for the 2005 taxable year
were filed by April 15, 2006. Of this to-
tal, 3,038 taxpayers were reported as be-
ing previously uninsured. It has been esti-
mated that an additional 3,055 tax returns
reporting Archer MSA contributions for
the 2005 taxable year have been or will
be filed after April 15, 2006, including
473 taxpayers who were previously unin-
sured. Accordingly, it has been determined
that there were 20,361(17,306 plus 3,055)
Archer MSA returns for 2006. Of this to-
tal, 3,511 (3,038 plus 473) were for tax-
payers reported as being previously unin-
sured. As a result, 16,850 (20,361 minus
3,511) Archer MSA returns count toward
the applicable statutory limitation for 2006
Archer MSA returns of 750,000.
Based on the Forms 8851 filed on or
before March 20, 2007, by Archer MSA
trustees and custodians, it has been deter-
mined that 11 taxpayers who did not have
Archer MSA contributions for 2005 es-
tablished Archer MSAs for 2006 during
the portion of 2006 preceding July 1. Of
this total, 0 taxpayers were reported by
trustees and custodians as previously unin-
sured, and therefore are not taken into ac-
count in determining whether 2006 is a
“cut-off” year. In addition, 0 taxpayers
were reported by trustees and custodians
as excludable from the count because his
or her spouse also established an Archer
MSA. Accordingly, the applicable number
of Archer MSAs established from January
1, 2006, through June 30, 2006, is 11 (11
minus (0 plus 0)). The alternative limita-
tion for 2006 (90 percent of the applicable
number of Archer MSA returns for 2005
plus the product of 2.5 and the number of
applicable Archer MSAs established from
January 1, 2006, through June 30, 2006) is
15,192 (90 percent of 16,850 plus 2.5 mul-
tiplied by 11), which is less than the statu-
tory limit of 750,000. Thus, 2006 is not
a “cut-off” year for the Archer MSA pilot
project by reason of either the 2006 Archer
MSA returns test of section 220(j)(2)(A) or
the alternative test of section 220(j)(2)(B)
of the Code.
Questions regarding this announcement
may be directed to Shoshanna Tanner in
the Office of Division Counsel/Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities) at (202) 622–6080 (not a
toll-free number).
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2007–46
The names of organizations that no
longer qualify as organizations described
in section 170(c)(2) of the Internal Rev-
enue Code of 1986 are listed below.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on May 7, 2007, and
would end on the date the court first deter-
mines that the organization is not described
in section 170(c)(2) as more particularly
set forth in section 7428(c)(1). For indi-
vidual contributors, the maximum deduc-
tion protected is $1,000, with a husband
and wife treated as one contributor. This
benefit is not extended to any individual, in
wholeorinpart,fortheactsoromissions
of the organization that were the basis for
revocation.
World Project, Inc.
Brooklyn, NY
Izaak Walton League of America
Calumet Region Chapter
Dolton, IL
Greenbriar Club, Inc.
Clearwater, FL
Cunningham Family Foundation
West Jordan, UT
Roxbury Insurance Company
Los Angeles, CA
Wishes Are Forever Foundation
Salt Lake City, UT
2007–19 I.R.B.1239May 7, 2007

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
May 7, 2007i2007–19 I.R.B.

Numerical Finding List
1
Bulletins 2007–1 through 2007–19
Announcements:
2007-1, 2007-1 I.R.B.243
2007-2, 2007-2 I.R.B.263
2007-3, 2007-4 I.R.B.376
2007-4, 2007-7 I.R.B.518
2007-5, 2007-4 I.R.B.376
2007-6, 2007-4 I.R.B.376
2007-7, 2007-4 I.R.B.377
2007-8, 2007-5 I.R.B.416
2007-9, 2007-5 I.R.B.417
2007-10, 2007-6 I.R.B.464
2007-11, 2007-6 I.R.B.464
2007-12, 2007-6 I.R.B.465
2007-13, 2007-7 I.R.B.519
2007-14, 2007-7 I.R.B.519
2007-15, 2007-8 I.R.B.596
2007-16, 2007-8 I.R.B.597
2007-17, 2007-8 I.R.B.597
2007-18, 2007-9 I.R.B.625
2007-19, 2007-7 I.R.B.521
2007-20, 2007-8 I.R.B.599
2007-21, 2007-9 I.R.B.630
2007-22, 2007-9 I.R.B.631
2007-23, 2007-10 I.R.B.665
2007-24, 2007-10 I.R.B.681
2007-25, 2007-10 I.R.B.682
2007-26, 2007-10 I.R.B.682
2007-27, 2007-11 I.R.B.733
2007-28, 2007-10 I.R.B.683
2007-29, 2007-11 I.R.B.733
2007-30, 2007-11 I.R.B.734
2007-31, 2007-12 I.R.B.769
2007-32, 2007-11 I.R.B.734
2007-33, 2007-13 I.R.B.841
2007-34, 2007-13 I.R.B.842
2007-35, 2007-15 I.R.B.949
2007-36, 2007-15 I.R.B.953
2007-37, 2007-15 I.R.B.954
2007-38, 2007-15 I.R.B.954
2007-39, 2007-15 I.R.B.954
2007-40, 2007-16 I.R.B.978
2007-41, 2007-16 I.R.B.978
2007-42, 2007-17 I.R.B.1037
2007-43, 2007-17 I.R.B.1038
2007-44, 2007-19 I.R.B.1238
2007-45, 2007-18 I.R.B.1122
2007-46, 2007-19 I.R.B.1239
Notices:
2007-1, 2007-2 I.R.B.254
2007-2, 2007-2 I.R.B.254
2007-3, 2007-2 I.R.B.255
Notices— Continued:
2007-4, 2007-2 I.R.B.260
2007-5, 2007-3 I.R.B.269
2007-6, 2007-3 I.R.B.272
2007-7, 2007-5 I.R.B.395
2007-8, 2007-3 I.R.B.276
2007-9, 2007-5 I.R.B.401
2007-10, 2007-4 I.R.B.354
2007-11, 2007-5 I.R.B.405
2007-12, 2007-5 I.R.B.409
2007-13, 2007-5 I.R.B.410
2007-14, 2007-7 I.R.B.501
2007-15, 2007-7 I.R.B.503
2007-16, 2007-8 I.R.B.536
2007-17, 2007-12 I.R.B.748
2007-18, 2007-9 I.R.B.608
2007-19, 2007-11 I.R.B.689
2007-20, 2007-9 I.R.B.610
2007-21, 2007-9 I.R.B.611
2007-22, 2007-10 I.R.B.670
2007-23, 2007-11 I.R.B.690
2007-24, 2007-12 I.R.B.750
2007-25, 2007-12 I.R.B.760
2007-26, 2007-14 I.R.B.870
2007-27, 2007-13 I.R.B.814
2007-28, 2007-14 I.R.B.880
2007-29, 2007-14 I.R.B.881
2007-30, 2007-14 I.R.B.883
2007-31, 2007-16 I.R.B.971
2007-32, 2007-17 I.R.B.996
2007-34, 2007-17 I.R.B.996
2007-35, 2007-15 I.R.B.940
2007-36, 2007-17 I.R.B.1000
2007-37, 2007-17 I.R.B.1002
2007-38, 2007-18 I.R.B.1103
Proposed Regulations:
REG-100841-97, 2007-12 I.R.B.763
REG-153037-01, 2007-15 I.R.B.942
REG-157711-02, 2007-8 I.R.B.537
REG-159444-04, 2007-9 I.R.B.618
REG-115403-05, 2007-12 I.R.B.767
REG-152043-05, 2007-2 I.R.B.263
REG-158677-05, 2007-16 I.R.B.975
REG-161919-05, 2007-6 I.R.B.463
REG-125632-06, 2007-5 I.R.B.415
REG-146247-06, 2007-16 I.R.B.977
REG-147144-06, 2007-10 I.R.B.680
REG-156420-06, 2007-18 I.R.B.1110
REG-156779-06, 2007-17 I.R.B.1015
REG-157834-06, 2007-13 I.R.B.840
Revenue Procedures:
2007-1, 2007-1 I.R.B.1
2007-2, 2007-1 I.R.B.88
2007-3, 2007-1 I.R.B.108
Revenue Procedures— Continued:
2007-4, 2007-1 I.R.B.118
2007-5, 2007-1 I.R.B.161
2007-6, 2007-1 I.R.B.189
2007-7, 2007-1 I.R.B.227
2007-8, 2007-1 I.R.B.230
2007-9, 2007-3 I.R.B.278
2007-10, 2007-3 I.R.B.289
2007-11, 2007-2 I.R.B.261
2007-12, 2007-4 I.R.B.354
2007-13, 2007-3 I.R.B.295
2007-14, 2007-4 I.R.B.357
2007-15, 2007-3 I.R.B.300
2007-16, 2007-4 I.R.B.358
2007-17, 2007-4 I.R.B.368
2007-18, 2007-5 I.R.B.413
2007-19, 2007-7 I.R.B.515
2007-20, 2007-7 I.R.B.517
2007-21, 2007-9 I.R.B.613
2007-22, 2007-10 I.R.B.675
2007-23, 2007-10 I.R.B.675
2007-24, 2007-11 I.R.B.692
2007-25, 2007-12 I.R.B.761
2007-26, 2007-13 I.R.B.814
2007-27, 2007-14 I.R.B.887
2007-28, 2007-16 I.R.B.974
2007-29, 2007-17 I.R.B.1004
2007-30, 2007-18 I.R.B.1104
2007-31, 2007-19 I.R.B.1225
Revenue Rulings:
2007-1, 2007-3 I.R.B.265
2007-2, 2007-3 I.R.B.266
2007-3, 2007-4 I.R.B.350
2007-4, 2007-4 I.R.B.351
2007-5, 2007-5 I.R.B.378
2007-6, 2007-5 I.R.B.393
2007-7, 2007-7 I.R.B.468
2007-8, 2007-7 I.R.B.469
2007-9, 2007-6 I.R.B.422
2007-10, 2007-10 I.R.B.660
2007-11, 2007-9 I.R.B.606
2007-12, 2007-11 I.R.B.685
2007-13, 2007-11 I.R.B.684
2007-14, 2007-12 I.R.B.747
2007-15, 2007-11 I.R.B.687
2007-16, 2007-13 I.R.B.807
2007-17, 2007-13 I.R.B.805
2007-18, 2007-13 I.R.B.806
2007-19, 2007-14 I.R.B.843
2007-20, 2007-14 I.R.B.863
2007-21, 2007-14 I.R.B.865
2007-22, 2007-14 I.R.B.866
2007-23, 2007-15 I.R.B.889
2007-25, 2007-16 I.R.B.956
2007-26, 2007-16 I.R.B.970
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin
2006–52, dated December 26, 2006.
2007–19 I.R.B.iiMay 7, 2007

Revenue Rulings— Continued:
2007-27, 2007-18 I.R.B.1099
2007-28, 2007-18 I.R.B.1039
2007-29, 2007-19 I.R.B.1223
Tax Conventions:
2007-23, 2007-10 I.R.B.665
Treasury Decisions:
9298, 2007-6 I.R.B.434
9299, 2007-6 I.R.B.460
9300, 2007-2 I.R.B.246
9301, 2007-2 I.R.B.244
9302, 2007-5 I.R.B.382
9303, 2007-5 I.R.B.379
9304, 2007-6 I.R.B.423
9305, 2007-7 I.R.B.479
9306, 2007-6 I.R.B.420
9307, 2007-7 I.R.B.470
9308, 2007-8 I.R.B.523
9309, 2007-7 I.R.B.497
9310, 2007-9 I.R.B.601
9311, 2007-10 I.R.B.635
9312, 2007-12 I.R.B.736
9313, 2007-13 I.R.B.805
9314, 2007-14 I.R.B.845
9315, 2007-15 I.R.B.891
9316, 2007-16 I.R.B.962
9317, 2007-16 I.R.B.957
9318, 2007-17 I.R.B.990
9319, 2007-18 I.R.B.1041
9320, 2007-17 I.R.B.994
9321, 2007-19 I.R.B.1123
9322, 2007-18 I.R.B.1100
May 7, 2007iii2007–19 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2007–1 through 2007–19
Notices:
2002-45
Modified by
Notice 2007-22, 2007-10 I.R.B.670
2005-1
Obsoleted in part by
T.D. 9321, 2007-19 I.R.B.1123
2005-29
Modified and superseded by
Notice 2007-4, 2007-2 I.R.B.260
2005-86
Modified by
Notice 2007-22, 2007-10 I.R.B.670
2005-98
Modified and superseded by
Notice 2007-26, 2007-14 I.R.B.870
2006-2
Modified and superseded by
Notice 2007-4, 2007-2 I.R.B.260
2006-4
Superseded in part by
T.D. 9321, 2007-19 I.R.B.1123
2006-13
Obsoleted by
T.D. 9315, 2007-15 I.R.B.891
2006-50
Amplified, clarified, and modified by
Notice 2007-11, 2007-5 I.R.B.405
2006-64
Superseded for taxable years on or after January 1,
2008 by
T.D. 9321, 2007-19 I.R.B.1123
2006-77
Clarified, modified, and amplified by
Notice 2007-36, 2007-17 I.R.B.1000
2006-87
Modified and supplemented by
Notice 2007-25, 2007-12 I.R.B.760
2007-19
Amended and supplemented by
Notice 2007-31, 2007-16 I.R.B.971
Proposed Regulations:
REG-208270-86
Corrected by
Ann. 2007-4, 2007-7 I.R.B.518
Proposed Regulations— Continued:
REG-121509-00
Corrected by
Ann. 2007-17, 2007-8 I.R.B.597
REG-139059-02
Corrected by
Ann. 2007-36, 2007-15 I.R.B.953
Ann. 2007-37, 2007-15 I.R.B.954
REG-141901-05
Corrected by
Ann. 2007-7, 2007-4 I.R.B.377
REG-142270-05
Corrected by
Ann. 2007-2, 2007-2 I.R.B.263
REG-125632-06
Corrected by
Ann. 2007-26, 2007-10 I.R.B.682
REG-127819-06
Corrected by
Ann. 2007-5, 2007-4 I.R.B.376
REG-136806-06
Corrected by
Ann. 2007-6, 2007-4 I.R.B.376
Hearing cancelled by
Ann. 2007-19, 2007-7 I.R.B.521
Revenue Procedures:
98-20
Superseded by
Rev. Proc. 2007-12, 2007-4 I.R.B.354
2000-38
Modified by
Rev. Proc. 2007-16, 2007-4 I.R.B.358
2000-42
Obsoleted in part by
T.D. 9315, 2007-15 I.R.B.891
2000-50
Modified by
Rev. Proc. 2007-16, 2007-4 I.R.B.358
2001-31
Superseded by
Rev. Proc. 2007-29, 2007-17 I.R.B.1004
2001-42
Modified and amplified by
Rev. Proc. 2007-19, 2007-7 I.R.B.515
2002-9
Modified and amplified by
Rev. Proc. 2007-14, 2007-4 I.R.B.357
Modified by
Rev. Proc. 2007-16, 2007-4 I.R.B.358
Revenue Procedures— Continued:
2004-11
Superseded by
Rev. Proc. 2007-16, 2007-4 I.R.B.358
2004-65
Modified and superseded by
Rev. Proc. 2007-20, 2007-7 I.R.B.517
2005-12
Superseded by
Rev. Proc. 2007-17, 2007-4 I.R.B.368
2005-51
Amplified by
Rev. Proc. 2007-25, 2007-12 I.R.B.761
2005-69
Superseded by
Rev. Proc. 2007-15, 2007-3 I.R.B.300
2005-74
Superseded by
Rev. Proc. 2007-24, 2007-11 I.R.B.692
2006-1
Superseded by
Rev. Proc. 2007-1, 2007-1 I.R.B.1
2006-2
Superseded by
Rev. Proc. 2007-2, 2007-1 I.R.B.88
2006-3
Superseded by
Rev. Proc. 2007-3, 2007-1 I.R.B.108
2006-4
Superseded by
Rev. Proc. 2007-4, 2007-1 I.R.B.118
2006-5
Superseded by
Rev. Proc. 2007-5, 2007-1 I.R.B.161
2006-6
Superseded by
Rev. Proc. 2007-6, 2007-1 I.R.B.189
2006-7
Superseded by
Rev. Proc. 2007-7, 2007-1 I.R.B.227
2006-8
Superseded by
Rev. Proc. 2007-8, 2007-1 I.R.B.230
2006-17
Obsoleted in part by
Rev. Proc. 2007-26, 2007-13 I.R.B.814
2006-20
Obsoleted in part by
Rev. Proc. 2007-31, 2007-19 I.R.B.1225
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin 2006–52, dated December 26,
2006.
2007–19 I.R.B.ivMay 7, 2007

Revenue Procedures— Continued:
2006-35
Modified by
Rev. Proc. 2007-22, 2007-10 I.R.B.675
Revenue Rulings:
54-19
Obsoleted in part by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
55-132
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
56-462
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
56-518
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
57-505
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
58-370
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
58-500
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
69-141
Modified by
Notice 2007-22, 2007-10 I.R.B.670
69-212
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
69-587
Revoked by
Rev. Rul. 2007-12, 2007-11 I.R.B.685
71-477
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
75-161
Obsoleted by
Rev. Rul. 2007-8, 2007-7 I.R.B.469
76-188
Obsoleted by
Rev. Rul. 2007-8, 2007-7 I.R.B.469
78-330
Modified by
Rev. Rul. 2007-8, 2007-7 I.R.B.469
81-225
Clarified and amplified by
Rev. Rul. 2007-7, 2007-7 I.R.B.468
Revenue Rulings— Continued:
92-19
Supplemented in part by
Rev. Rul. 2007-10, 2007-10 I.R.B.660
96-51
Amplified by
Rev. Rul. 2007-12, 2007-11 I.R.B.685
2002-41
Modified by
Notice 2007-22, 2007-10 I.R.B.670
2003-43
Modified by
Notice 2007-2, 2007-2 I.R.B.254
2003-92
Clarified and amplified by
Rev. Rul. 2007-7, 2007-7 I.R.B.468
2003-102
Modified by
Notice 2007-22, 2007-10 I.R.B.670
2003-109
Superseded by
Rev. Rul. 2007–28, 2007-18 I.R.B.1039
2005-24
Modified by
Notice 2007-22, 2007-10 I.R.B.670
2005-76
Supplemented and superseded by
Rev. Rul. 2007-4, 2007-4 I.R.B.351
2006-36
Modified by
Notice 2007-22, 2007-10 I.R.B.670
Treasury Decisions:
9263
Corrected by
Ann. 2007-22, 2007-9 I.R.B.631
9276
Corrected by
Ann. 2007-20, 2007-8 I.R.B.599
Ann. 2007-21, 2007-9 I.R.B.630
9278
Corrected by
Ann. 2007-9, 2007-5 I.R.B.417
Ann. 2007-10, 2007-6 I.R.B.464
9286
Corrected by
Ann. 2007-8, 2007-5 I.R.B.416
9298
Corrected by
Ann. 2007-32, 2007-11 I.R.B.734
9303
Corrected by
Ann. 2007-25, 2007-10 I.R.B.682
May 7, 2007v2007–19 I.R.B.

2007–19 I.R.B.May 7, 2007

May 7, 20072007–19 I.R.B.

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