Since 2008, the Internal Revenue Code (Code) has generally required that a service provider with a right to deferred compensation under a nonqualified deferred compensation plan of a “nonqualified entity” include the deferred amount in income as soon as there is no “substantial risk of forfeiture” of the right to compensation, even though the compensation is not payable currently and the obligation to pay is unfunded and unsecured. This rule, found in Code §457A, is even more onerous than that of an analogous provision, §409A, that also applies to nonqualified deferred compensation arrangements. If the §457A rule applies, a service provider with rights to deferred compensation must take amounts into income under timing rules similar to those generally applicable to accrual method taxpayers,1 thereby making deferred compensation arrangements within the scope of §457A disadvantageous.
A “nonqualified entity” is generally (i) a foreign corporation, unless all or substantially all of its income is either effectively connected with the conduct of a trade or business in the United States or subject to a “comprehensive foreign income tax,” or (ii) a partnership, unless substantially all of its income is allocable to persons other than (A) foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax and (B) organizations exempt from tax under the Code.
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