The "A" List Grows: The Impact of Code Section 457A on Deferred Compensation

Section 409A of the Internal Revenue Code, previously the subject of a full-day NYSBA program, fundamentally changed the way in which nonqualified deferred compensation is provided to executives and other service providers. Now, new Section 457A of the Code, enacted as part of the Emergency Economic Stabilization Act of 2008, establishes rules for including in gross income certain compensation deferred under “nonqualified deferred compensation plans” of “nonqualified entities.” Section 457A limits or eliminates the ability of certain entities to provide tax-deferred compensation to its service providers. Initially, it appeared to some as though the primary target of the legislation was compensation paid to managers of offshore hedge funds, but it has since become apparent that the scope of the new rules reaches to certain other offshore entities and to a number of domestic entities as well.

This upcoming full-day program on Section 457A, featuring experienced private tax and employee-benefits practitioners, and senior government officials with responsibility for interpreting and administering the new rules, will cover many of the important issues that employers and other businesses, employees and their respective advisors face as they try to understand how the new rules will apply to a broad array of compensation arrangements. Treasury representatives in the benefits, partnership and international areas are scheduled to participate throughout the entire day, so that attendees may have the opportunity to obtain a unique insight into the government’s perspective on a wide range of issues. The panelists will consider the latest IRS rules and notices, including Notice 2009-8, and will also discuss issues that may be addressed in pending regulatory initiatives.

The panelists will begin by addressing generally the definitions of “nonqualified deferred compensation plan,” “nonqualified entity,” “short term deferral” and “substantial risk of forfeiture.” The panelists will also compare and contrast other similar rules (e.g., those under Sections 83 and 409A), and examine the application of Section 457A to equity-based compensation.

Later, special concerns will be addressed regarding what entities are caught by the Section 457A web, including whether and when a partnership is a “nonqualified entity.” On the international front, panelists will address requirements for avoiding adverse Section 457A consequences under rules to determine whether substantially all of the income of the sponsor of a foreign plan is subject to a comprehensive foreign income tax. The discussion will extend to policy considerations, and the prospects for revision of the relevant tests.

A critical emerging issue has been the manner in which Section 457A applies in the context of a customary fund structure under which certain investments may be placed in separate vehicles or otherwise ringfenced. One of the day’s sessions will be devoted to a discussion of this practice of using so-called “side pockets” and the manner in which Section 457A may apply to those arrangements.

The numerous difficulties engendered by Section 457A extend to existing arrangements. These difficulties are exacerbated by the relative lack of initial awareness regarding Section 457A, and a misunderstanding of the breadth of its impact by a number of taxpayers and practitioners. Among the topics to be covered will be a discussion of the transition rules set forth in Notice 2009-8 and related grandfathering considerations.

Learn more about The "A" List Grows: The Impact of Code Section 457A on Deferred Compensation or register for this event at the New York State Bar Association website.

Register by: September 16, 2009