DEFERRED COMPENSATION ARRANGEMENTS AND THE FINAL 409A REGULATIONS

1
DEFERRED COMPENSATION ARRANGEMENTS AND THE FINAL
409A REGULATIONS
Western Pension Benefits ConferenceLos Angeles
ChapterOctober 4, 2007
Marvin S. Swift, Jr. SNELL WILMER L.L.P. One
Arizona Center Phoenix, AZ 85004-2202 602.382.621
1 mswift_at_swlaw.com
2
BACKGROUND

• As a reaction to certain real and perceived
  corporate abuses, Congress passed the American
  Jobs Creation Act of 2004 (AJCA) on October 11,
  2004. The AJCA added Section 409A to the
  Internal Revenue Code, which completely revamped
  the rules for non-qualified deferred
  compensation plans.
• Notice 2005-1 contained the initial substantive
  and transitional guidance under Section 409A.
• On September 29, 2005, Treasury issued 409A
  proposed regulations under 409A (Proposed
  Regulations).
• Notice 2005-94 contained initial guidance
  regarding suspension of employer/payer reporting
  and wage withholding requirements for 2005.
• Notice 2006-4 contained interim guidance on
  application of 409A to stock rights.

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BACKGROUND (contd)

• Notice 2006-33 contained guidance on application
  of 409A to offshore trusts and arrangements with
  financial health triggers.
• Notice 2006-64 contained transition relief
  applicable to accelerated payments to comply with
  Federal ethics requirements.
• Notice 2006-79 extended the transition relief
  provided under Notice 2005-1 to December 31, 2007
  in most circumstances.
• Notice 2006-100 contains interim guidance for
  employers/ payers for wage withholding and
  reporting for 2005 and 2006.
• On April 10, 2007, Treasury issued the final
  regulations under 409A (Regulations).
• On September 10, 2007, Notice 2007-78 extended
  the time to make certain plan amendments to
  December 31, 2008.

4
EFFECTIVE DATES

• Section 409A was effective for amounts deferred
  in taxable years beginning after December 31,
  2004.
• Deferred amounts that were earned and vested as
  of December 31, 2004 (and earnings on those
  amounts) are not subject to 409A and are
  considered grandfathered amounts. Amounts are
  earned and vested if not subject to a substantial
  risk of forfeiture under Section 83 or a
  requirement to perform further services.
• Grandfathered amounts become subject to 409A if
  the plan under which the deferral is made is
  materially modified after October 3, 2004.

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EFFECTIVE DATES (contd)

• A modification is material if a benefit or right
  existing as of October 3, 2004 is materially
  enhanced or a new material benefit or right is
  added, and the material enhancement or addition
  affects amounts earned and vested before
  January 1, 2005.
• Amending a plan to comply with 409A is not a
  material modification.
• Changing investment measures under an account
  balance plan is not a material modification.
• The Regulations are generally effective January
  1, 2008.

6
TRANSITION RELIEF FOR 2007

• The Regulations do not extend the transition
  relief provided under Notice 2006-79. Therefore,
  the following actions must be taken on or before
  December 31, 2007
• Plans must be identified and amended on or before
  December 31, 2007 to comply with 409A.
• Although the amendments need not be effective
  until January 1, 2008, the arrangements must be
  both established and operated in good faith
  compliance with 409A before the effective date.
  Complying with any applicable Notice, or the
  Proposed or Final Regulations will be deemed good
  faith compliance.

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TRANSITION RELIEF FOR 2007 (contd)

• Payment elections under existing arrangements may
  be changed on or before December 31, 2007 without
  violating the subsequent election or
  anti-acceleration rules (except the 2007 election
  cannot defer a payment that would have otherwise
  been made in 2007 to a later year or accelerate a
  payment into 2007 that would have otherwise been
  made in a later year). Caution Amending plans
  with a pre-2008 effective date could violate this
  rule.
• Elections as to time and form of payments under a
  nonqualified deferred compensation arrangement
  linked to payments under a qualified plan are
  permitted to remain in effect until December 31,
  2007, if the determination of the time and form
  of payment is made pursuant to the terms of the
  arrangement that govern payment elections, as in
  effect on October 3, 2004.

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TRANSITION RELIEF FOR 2007 (contd)

• A discounted stock right may be amended on or
  before December 31, 2007, to provide for fixed
  payment terms. A stock right will not be treated
  as payable in a year solely because the stock
  right is exercisable during that year if the
  stock right is reasonably expected to be
  exercised in a later year.
• A discounted stock right may be amended to
  increase the exercise price to the original fair
  market value until December 31, 2007. This
  transition rule does not extend to Section 16
  individuals in public companies with option
  backdating problems. Caution Securities
  issues.

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TRANSITION RELIEF FOR 2008

• Notice 2007-78 extends the deadline to amend plan
  documents to comply with 409A to December 31,
  2008.
• However, on or before December 31, 2007, a plan
  subject to 409A must be amended to designate a
  compliant time and form of payment.
• A plan will designate a compliant time and form
  of payment if the written plan terms,
  disregarding noncompliant terms, provide for a
  form of permissible 409A distribution and
  provides for a permissible time of payment.

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PLANS OR ARRANGEMENTS NOT SUBJECT TO 409A

• The following plans or arrangements are not
  subject to 409A
• any qualified employer plan including a
  qualified retirement plan under 401(a), an
  annuity arrangement under 403(a) or (b), a SEP
  under 408(k), a Simple plan under 408(p), a trust
  under 501(c)(18), a 415(m) plan or any 457(b)
  plan.
• vacation or sick leave, compensatory time,
  disability pay, death benefit plans, Archer MSAs,
  HSAs, or any other medical reimbursement
  arrangements, including arrangements satisfying
  Sections 105 and 106 so that benefits or
  reimbursements are not includible in income.
• certain foreign plans (e.g., subject to a treaty,
  mandated social security systems, tax
  equalizations plans).

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PLANS OR ARRANGEMENTS SUBJECT TO 409A DEFINED
BROADLY

• Section 409A applies to any plan or arrangement
  providing for the deferral of compensation.
• The definition of deferred compensation plans
  includes the usual suspects but is interpreted
  very broadly to include a number of arrangements,
  some of which were not previously thought to be
  traditional deferred compensation arrangements.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A?

• Legally Binding Right. Deferred compensation is
  defined as any legally binding right to
  compensation that has not been actually or
  constructively received and that is payable in a
  later year.
• This definition applies even if amounts are not
  determinable and are subject to a contingency or
  a substantial risk of forfeiture.
• A SP does not have a legally binding right to
  compensation that may be unilaterally reduced or
  eliminated after the services have been
  performed.
• This negative discretion right will not be
  respected if the SP has control over, or is
  related to, the person granted the discretion to
  reduce or eliminate the compensation.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Short-Term Deferral Exception. One of the most
  important exceptions to Section 409A is the so
  called short-term deferral exception.
• Exception. If a plan under which a payment is
  made does not provide for a deferred payment and
  the SP actually or constructively receives the
  payment before the last day of the short-term
  deferral period, the payment is exempt from
  Section 409A.
• Short-term deferral period defined. The
  short-term deferral period ends two and one-half
  months following the later of the calendar year
  or the employers fiscal year in which the
  employees right to receive the payment is no
  longer subject to a substantial risk of
  forfeiture. For example, if an employee acquires
  a vested right to receive compensation in
  calendar year 2007, and the employers fiscal
  year is the calendar year, the short-term
  deferral period ends March 15, 2008.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Substantial risk of forfeiture (SROF). The key
  to applying the short-term deferral exception is
  determining whether a SROF exists, and if it
  does, determining whether the payment is made
  before the end of the short-term deferral period.
  The definition of SROF under Section 409A is
  apparently not the same as under Section 83.
• SROF Defined. A SROF exists if entitlement to
  the amount is conditioned on (i) the performance
  of substantial future services by any person or
  (ii) the occurrence of a condition related to a
  purpose of the compensation, and the possibility
  of forfeiture is substantial.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• SROF examples
• A condition related to the purpose of the
  compensation must relate to the service
  providers (SP) performance for the service
  recipient (SR) the SRs business activities or
  organizational goals (e.g., attainment of
  earnings or equity value or completion of IPO).
• Separation from service by SP without cause.
• Separation from service by the SP for good
  reason.
• Non-vested stock right or vested stock right
  exercisable to receive non-vested property.
• The requirement that the SP sign a release to
  receive a benefit is NOT a substantial risk of
  forfeiture.
• Refraining from providing services (e.g.,
  covenant not to compete) is NOT a substantial
  risk of forfeiture.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Enforcement of forfeiture condition. Whether the
  possibility of forfeiture is substantial depends
  on the surrounding circumstances. In the case of
  rights to compensation granted by an SR to a
  significant stockholder SP the determination is
  based on the probability as to whether the SR
  will enforce the forfeiture restriction and
  includes a review of several factors.
• Election between vested and nonvested rights. An
  amount will NOT be considered subject to a
  substantial risk of forfeiture after the date or
  time at this the SP otherwise could have elected
  to receive the compensation, unless the present
  value of the amount subject to the forfeiture
  condition in materially greater than the present
  value of the amount the SP otherwise could have
  elected to receive.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Plan may not provide for deferred payment. A
  plan provides for a deferred payment of the plan
  provides that any payment will be made or
  completed on or after any date, or upon the
  occurrence of any event, that will or may occur
  later than the last day of the short-term
  deferral period, such as a separation from
  service, death, disability, change in control
  event, specified time or schedule of payment, or
  unforeseeable emergency, regardless of whether an
  amount is actually paid as a result of the
  occurrence of such a payment date or event during
  the short-term deferral period.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Delays permitted in certain events. Delays in
  payments beyond the short-term deferral period is
  permitted if
• it is administratively impractical to make the
  payment by the short-term deferral period and
  such impracticality was unforeseeable
• making the payment would jeopardize the
  employers ability to continue as a going
  concern or
• if amounts are paid when they would otherwise be
  deductible under Section 162(m) (assuming the SR
  can show that a reasonable person would not have
  anticipated that Section 162(m) would have
  applied at the time of the payment).

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Separation Pay Exception.
• 409A does not apply to collectively bargained
  separation pay arrangements paid on involuntary
  separation or pursuant to a window program.
• Non-collectively bargained involuntary or window
  separation pay arrangements are not subject to
  409A if
• the total payments to the SP does not exceed the
  lesser of 2 times annual compensation for the
  year prior to the termination, or 2 times the
  401(a)(17) limit (440,000 for 2007) and
• all payments will be made by December 31 of the
  second year following the year in which the SP
  terminates employment.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Even if separation payments exceed these limits,
  the amounts up to the limit can be treated as
  subject to the separation pay exception.
• Whether a payment is voluntary or involuntary is
  fact based, provided parties characterization
  will presumed to be correct. Presumption can be
  rebutted in certain cases.
• The Proposed Regulations suggested that a
  voluntary termination for good reason would not
  be treated as an involuntary termination for
  purposes of the separation pay exception.
• The Regulations permit certain voluntary good
  reason terminations to be treated as involuntary
  separations if there is a material negative
  change in the employment relationship and,
  importantly, must includes an opportunity for the
  employer to remedy the condition.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• The Regulations also provide a safe harbor
  definition of good reason if the SP separates
  service within up to 2 years of the initial
  existence giving rise to the separation the
  amount, time and form of payment is identical to
  a non-good reason termination and one or more of
  the following apply
• A material diminution in the SPs base salary
• A material diminution in the SPs authority,
  duties, or responsibilities
• A material diminution in the SPs authority,
  duties, or responsibilities of the person to whom
  the SP reports
• A material diminution in the budget over which
  the SP retains authority or
• A material change in the geographic location at
  which the SP must perform services.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Reimbursement Arrangements.
• Post-termination reimbursement arrangements are
  not subject to 409A if not includable in gross
  income, are deductible by the SP under Sections
  162 or 167, or are reasonable out-placement or
  moving expenses.
• Reimbursements must be incurred no later than
  December 31 of the second calendar year following
  the calendar year in which the separation occurs
  and paid no later than the third calendar year.
• Medical reimbursements permitted for COBRA period.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Employer Indemnification Plans.
• Bona Fide Legal Settlements.
• Educational Benefits.
• Qualified Options. Qualified stock options under
  Sections 422 and 423 are not subject to 409A.
• Restricted Stock. Restricted stock awards are
  not subject to 409A.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Stock Rights - Non-Qualified Stock Options/SARs.
  An option to purchase service recipient stock
  (SRS) or an SAR granted at fair market value
  is not subject to 409A.
• SRS includes only the common stock of a company
  (under Section 305) but the stock may not have
• any distribution preferences other than
  distributions of SRS and liquidation preferences,
  or
• any mandatory repurchase obligation (other than
  right or first refusal) or put/call right that is
  not a lapse restriction under Section 83, unless
  the right or obligation is at fair market value.
• SRS includes the SR and any corporation that
  commonly controls the SR. In other words, SRS
  includes the common stock of any organization up
  the SRs chain but not down the SRs chain.
  Common control is 50, but may be 20 if there is
  are legitimate business criteria.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• For publicly traded corporations, fair market
  value is any reasonable and consistently applied
  trading price method.
• For privately-held companies, fair market value
  is determined by the reasonable application of a
  reasonable valuation method. Whether a
  valuation method is reasonable is based on facts
  and circumstances and based on all available
  information.

26
WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Factors to be considered under a reasonable
  valuation method include
• Value of tangible and intangible assets
• Present value of anticipated future cash-flows
• Market value of stock or equity interests in
  similar corporations an other entities engaged in
  similar trades or businesses
• Recent arms length transactions and
• Other relevant factors such as control premiums
  or marketability discounts and whether valuation
  is used for other purposes.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• A valuation method will be presumed to be
  reasonable if
• determined by an independent appraiser
• is based on an objective formula and used by the
  SR for transfers to issuer and 10 or more
  shareholders or
• for a company that has been in existence for less
  than 10 years, is made reasonably and in good
  faith and supported by a written report based on
  above relevant factors.

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WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Any modification of a stock option is
  considered the grant of a new option.
  Consequently, if a modification occurs and the
  exercise price is not adjusted to the then fair
  market value (if higher), the option will be
  subject to 409A.
• A modification is any change that reduces the
  exercise price, adds a deferral feature, or
  extends or renews the option.
• Any change to the option that increases its value
  is considered a modification.
• An extension of the option is considered a
  modification, unless the right to exercise the
  option is not extended beyond the earlier of the
  original expiration date or 10 years from the
  grant date.
• A modification does not include the following
  acceleration of vesting, adding a stock exercise
  or withholding feature, making adjustments to
  reflect certain changes in the capitalization of
  the corporation, the grantors exercise of
  discretion to permit the transfer of a stock
  option.

29
WHAT IS (AND IS NOT) DEFERRED COMPENSATION UNDER
409A? (contd)

• Partnerships. The grant of a partnership
  interest is treated under the same principles
  that govern the grant of stock. The grant of a
  profits interest in a partnership that is not
  includable in income was not subject to 409A
  under the Proposed Regulations and that appears
  to be the rule under the Regulations.
• Accrual Basis Taxpayers. Arrangements between
  accrual basis taxpayers are not subject to 409A.
• Certain SPs. Arrangements with SPs (other than
  an employee or director) who are actively engaged
  in the trade or business of providing substantial
  services to two or more unrelated SRs are not
  subject to 409A.

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ELECTIONS UNDER 409A

• Initial elections.
• Generally, elections as to the amount, time of
  distribution and form of payment must be made
  before the beginning of the calendar year in
  which the services are performed.
• An election must be irrevocable but may remain in
  effect for future years until timely changed or
  revoked.
• A plan under which the SP does not elect the time
  or form of payment must provide for the time and
  form of payment generally no later than the date
  the SP first has a legally binding right.

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ELECTIONS UNDER 409A (contd)

• In the first year in which an individual becomes
  eligible to participate in a plan, the election
  must be made within 30 days after first becoming
  eligible.
• Only compensation not yet earned may be deferred
  and only a pro rata portion on any bonus type
  compensation earned over a performance period may
  be deferred.
• For performance-based compensation, the election
  must be made no later than six months before the
  end of the period, within certain guidelines.
• Performance-based compensation is an amount
  contingent on satisfying pre-established company
  or individual goals over a performance period not
  less than 12 months that are not substantially
  certain to be met at the time of the election.
• The criteria must be established within 90 days
  after the performance period begins and must be
  based on increases in the SR or its stock only
  after the award date.

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ELECTIONS UNDER 409A (contd)

• Under an involuntary separation pay plan, the SP
  can make an election regarding the form and
  timing of the payment up to the date SP obtains a
  legally binding right to the payment. For window
  separation pay plans, the SP can make this
  election up to the time the election to
  participate in the window program becomes
  irrevocable.
• Certain elections to receive bonuses based on the
  SRs fiscal year must be made before the
  beginning of the relevant fiscal year.

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ELECTIONS UNDER 409A (contd)

• Subsequent elections.
• A participant may make a subsequent election only
  if permitted under the plan and the election
  meets the following conditions
• Any change in the timing or form of distribution
  must not take effect until at least 12 months
  after the election is made.
• Except for payments on account of death,
  disability or unforeseeable emergency, the
  distribution is deferred for at least five years
  from the original payment date, or first payment
  date for a life annuity or installment payments
  treated as a single payment.
• The election to defer fixed payment deferrals
  must be made at least 12 months before the first
  scheduled payment.

34
ELECTIONS UNDER 409A (contd)

• Multiple payments (such as installment or annuity
  payments) that are separately identified may be
  treated as separate payments and eligible for
  separate subsequent elections.
• Installment payments are treated as one payment,
  unless the plan treats each payment separately.
  If the installment is treated as one payment, a
  change to a lump-sum payment would require the SP
  to delay the payment five years from the original
  start of the first installment payment. If the
  installment is treated as separate payments any
  change to a lump sum would require the payment to
  be made five years after the last payment is
  scheduled to be made.
• Life annuities are treated as one payment, but a
  participant may select among actuarial equivalent
  annuities if the election is made before annuity
  payments begin.
• Transition rule permits election to be made on or
  before December 31, 2007.

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DISTRIBUTIONS UNDER 409A

• Distribution Events. A Plan must provide that
  amounts subject to 409A may not be distributed
  earlier than one or more of the following events
• Separation from service.
• There is no separation from service if the
  participant is on military leave, sick leave, or
  other bona fide leave of absence if the period
  does not exceed six months or, if longer, the
  participants right to reemployment is provided
  by contract or statute.
• Under Proposed Regulations, plans were required
  to use a specific definition of separation from
  service and treat all separations the same. The
  Regulations are more flexible, especially in the
  context of acquisitions.
• Payments to specified employees of publicly
  traded companies must be delayed for at least six
  months following separation from service.

36
DISTRIBUTIONS UNDER 409A (contd)

• Death.
• Disability.
• The determination of disability must meet either
  of the following definitions
• 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 last for at
  least 12 months or
• The participant 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 at least 12 months,
  receiving income replacement benefits for a
  period of at least three months under an employer
  sponsored disability plan.
• A participant may also be deemed disabled if
  determined to be totally disabled by the Social
  Security Administration.

37
DISTRIBUTIONS UNDER 409A (contd)

• A time or a fixed schedule specified under the
  plan.
• Unforeseeable emergency.
• Unforeseeable emergency is limited to a severe
  financial hardship resulting from an illness or
  accident of the participant, spouse or dependent,
  loss of participants property due to casualty,
  or other similar extraordinary and unforeseeable
  circumstances arising from events beyond the
  participants control.
• Examples include imminent foreclosure of the
  participants primary residence, medical
  expenses, or funeral expenses.
• Amount payable is limited to amount reasonably
  necessary to satisfy the emergency, including any
  taxes.

38
DISTRIBUTIONS UNDER 409A (contd)

• Change in control.
• Change in control of a corporation must be
  objectively determinable and must involve no
  discretionary authority.
• Each change in control distribution event under
  plan must qualify as a change in control event.
• Change in Control defined.
• Change in the ownership of the corporation.
• Any one person (or more than one person acting as
  a group) acquires more than 50 of the value or
  voting power of the stock of a corporation.

39
DISTRIBUTIONS UNDER 409A (contd)

• Change in effective control of the corporation.
• Any one person (or more than one person acting as
  a group) acquires (during a 12-month period) 30
  or more of the voting power of the stock of a
  corporation, or
• A majority of the board members are replaced
  during any 12-month period by directors whose
  appointment or election was not endorsed by a
  majority of the board prior to the date of
  appointment or election.

40
DISTRIBUTIONS UNDER 409A (contd)

• Change in ownership of a substantial portion of
  the assets of a corporation.
• Any one person (or more than one person acting as
  a group) acquires (during a 12-month period) more
  than 40 of the total gross market value of all
  the assets of the corporation.

41
ACCELERATION OF PAYMENTS UNDER 409A

• The payment of deferred compensation subject to
  409A may not be accelerated, except for payments
  on account of
• Domestic relations order
• Conflicts of interest
• Under 457(f) plans to pay Federal, state, local
  and foreign income taxes due on vesting event
• De minimis amounts certain lump sum payments
  less than applicable 402(g) limit
• Payment of employment taxes
• Payment of benefits if the plan or arrangement
  fails to meet the requirements under 409A or
• A participant may terminate a deferral election
  due to an unforeseeable emergency or a 401(k)
  plan hardship.

42
ACCELERATION OF PAYMENTS UNDER 409A (contd)

• A SP is not permitted to a distribution of assets
  upon the termination of a non-qualified deferred
  compensation plan except for in the following
  circumstances
• A plan may be terminated during 30 days before or
  12 months after a change in control.
• A plan may be terminated upon a corporate
  dissolution or with the approval of a bankruptcy
  court if certain conditions are met.
• A plan may be terminated if (i) the SR terminates
  all similar plans, (ii) distributions are made no
  sooner than 12 months and no later than 24 months
  after termination, and (iii) the SR does not
  adopt any new plan of the same type for three
  years.
• Aggregation of all account and non-account
  balance plans does not apply in this context.
• No acceleration for ceasing to be a member of the
  top-hat group.

43
PLAN AGGREGATION UNDER 409A

• The Proposed Regulations introduced a plan
  aggregation concept and divided plans into four
  separate categories account balance non-account
  balance certain separation pay arrangements and
  other plans.
• All plans of the same type in which a SP
  participates are treated as one plan. If any one
  of those plans violates 409A, adverse tax
  consequences apply to all amounts deferred under
  plans of the same type.
• The Regulations add three new categories of plans
  for this purpose split-dollar life insurance
  arrangements reimbursement plans and stock
  rights.

44
FUNDING RESTRICTIONS UNDER 409A

• The Regulations do not provide any guidance
  concerning the funding restriction requirements
  in 409A. Therefore, the provisions under Notice
  2005-1 and Notice 2006-33 continue to apply.
• Prohibition on Offshore trusts.
• Any assets set aside in a trust under a deferred
  compensation arrangement will be includible in
  the individuals income if the assets are located
  or transferred outside of the U.S.
• This provision does not apply to assets located
  in a foreign jurisdiction if substantially all
  the services to which the deferred compensation
  relates are performed in that jurisdiction.

45
FUNDING RESTRICTIONS UNDER 409A (contd)

• Prohibition of Funding Due to Financial Health.
• Any amounts subject to a deferred compensation
  plan that become restricted in connection with a
  change in the employers financial health will be
  includible in the participants income whether or
  not the assets are available to satisfy the
  claims of the employers general creditors.
• This effectively eliminates immediate funding (in
  either a secular or rabbi trust) if the
  employers financial condition deteriorates.
• Although not entirely clear, this could also
  prevent any funding upon a change in control.

46
PENALTIES

• All current and prior deferred compensation under
  aggregated plans are includible in income.
• A 20 additional tax applies to amounts
  includable as a result of a violation of 409A.
• An additional 1 penalty in addition to the
  underpayment rate on amounts deferred calculated
  as of the date of deferral (or date there is no
  substantial risk of forfeiture, if later).