Would clarify and modify certain provisions of the final regulations (the "Final Regulations") under Section 409A of the Internal Revenue Code (Code).

Withdraw a provision of Treasury Regulation Section 1.409A-4 (the "Proposed Income Inclusion Regulations") regarding the calculation of amounts includible in income under Section 409A(a)(1) and replace it with a revised provision.

Clarify that Section 409A's rules apply separately and in addition to the rules under Code Section 457A (which limits the payment of nonqualified deferred compensation by certain "nonqualified entities"). For information on Code Section 457A, see Practice Note, Code Section 457A: Overview.

Modify the short-term deferral rule to permit a delay in payments to avoid violating federal securities laws or other applicable law if the payment is made as soon as reasonably practicable after the service recipient anticipates or reasonably should anticipate that making the payment would not cause a violation.

Clarify that a stock right that does not otherwise provide for the deferral of compensation will not be treated as providing for the deferral of compensation solely because the amount payable under the stock right on either a service provider's termination for cause or the occurrence of a condition within the service provider's control (such as the service provider's violation of a restrictive covenant) is based on a measure that is less than fair market value.

Modify the definition of "eligible issuer of service recipient stock" to include an entity for which a person is expected to, and actually does, begin providing services within 12 months after the grant date of a stock right.

Clarify that when applying the separation pay plan exception to service providers whose employment begins and ends in the same taxable year, the service provider's annualized compensation for the taxable year in which the service provider experiences a separation from service may be used.

Provide that an arrangement that provides for the payment or reimbursement of a service provider's reasonable attorneys' fees and other expenses incurred to enforce a service provider's claim against the service recipient regarding his service (a common provision in employment agreements) does not provide for the deferral of compensation.

Modify the rules regarding recurring part-year compensation (that is, compensation for services that are provided during successive service periods of less than 12 months each of which begins in one year and ends in the next year, such as teachers' salaries) to provide that there is no deferral of compensation if:

Clarify that a stock purchase treated as a deemed asset sale under Code Section 338 (26 U.S.C. § 338) is not a sale or other disposition of assets for purposes of determining whether a service provider has a separation from service. Therefore, buyers and sellers do not have discretion to treat employees as having separated from service when the transaction occurs.

Clarify that a service provider who ceases providing services as an employee and begins providing services as an independent contractor is treated as having a separation from service if, at the time of the status change, the level of services reasonably anticipated to be provided after the change would result in a separation from service under the rules that apply to employees (that is, the level of bona fide services the employee would perform after the change in status would permanently decrease to no more than 20% of the average level of bona fide services over the immediately preceding 36 months). However, if a service provider who was an employee becomes an independent contractor, the service provider will have a separation from service in the future when the service provider has a separation from service based on the rules that apply to independent contractors (that is, on a complete termination of the contractual relationship).

Create a rule for determining when a payment has been made under Section 409A. Under the Proposed Regulations, a payment is made when any taxable benefit is actually or constructively received. The Proposed Regulations include an illustrative list of events that would constitute a payment under Section 409A and also provide that the inclusion of an amount in income under Code Section 457(f)(1)(A) would be treated as a payment for all purposes under Section 409A.

Clarify that the rules that apply to amounts payable on a service provider's death also apply to amounts payable on the death of a beneficiary who becomes entitled to payment due to a service provider's death.

Provide that an amount payable following the death of a service provider (or beneficiary) would be considered timely paid if paid at any time during the period beginning on the date of death and ending on December 31 of the first calendar year following the calendar year during which the death occurs. The plan would not be required to specify any particular date within this window period as the payment date and the specific date could be determined in the beneficiary's discretion.

Clarify that Section 409A's special rules for transaction-based compensation (for example, payments related to a change in control that are calculated by reference to the value of service recipient stock) would apply to stock rights that do not otherwise provide for a deferral of compensation and statutory stock options. Under these special rules, compensation may be paid on the same schedule and under the same terms and conditions as apply to shareholders generally in connection with the change in control and will not violate Section 409A's deferral election rules if paid no later than five years after the change in control.

Provide that adding the death, disability, or unforeseeable emergency of a beneficiary who has become entitled to payment due to a service provider's death as a potentially earlier payment event for a deferred amount would not result in a prohibited accelerated payment.

Modify the conflict of interest exception to the prohibition on the acceleration of payments to permit the payment of all types of deferred compensation (not only certain types of foreign earned income) to comply with bona fide foreign ethics or conflicts of interest laws.

Clarify the provision permitting accelerated payments of deferred amounts on termination and liquidation of a plan in connection with bankruptcy (by deleting an incorrect section of the Bankruptcy Code).

Clarify the rules permitting accelerated payments in connection with the termination and liquidation of a plan by indicating that acceleration would be permitted only if the service recipient terminates and liquidates all plans of the same category that the service recipient sponsors (and not merely all plans of the same category in which a particular service provider participates).

Provide that a plan would be permitted to accelerate payments as reasonably necessary to comply with federal debt collection laws.

Clarify specific provisions in the Final Regulations to recognize that a service provider can be an entity as well as an individual.

The total amount deferred under the plan for the taxable year (including any payments made under the plan during that year), over

The portion of that amount that is either subject to a substantial risk of forfeiture (SRF) or has been previously included in income.

Clarifying that a deferred amount that is otherwise subject to an SRF is treated as not subject to an SRF if an otherwise impermissible change is made that affects the time or form of payment of the amount if there is no reasonable good faith basis for concluding that the original provision failed to meet Section 409A's requirements and is necessary to bring the plan into compliance with Section 409A.

Providing examples of the types of facts and circumstances that indicate whether a service recipient has a pattern or practice of permitting impermissible changes in the time or form of payment of unvested deferred amounts.

Providing that if generally applicable guidance regarding Section 409A corrections prescribes a particular correction method for a type of plan failure, then that correction method must be used if a service recipient chooses to correct that type of failure with respect to unvested amounts. Service recipients that correct plan failures based on generally applicable guidance must comply with the method of correction only. The unvested amounts affected by the correction are not subject to income inclusion, additional taxes, interest penalties, or IRS notification requirements.

Providing that substantially similar failures affecting unvested deferred amounts must be corrected in substantially the same manner.