Bulletin No. 2008-51December 22, 2008

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Notice 2008–104, page 1298.This notice provides additional transition relief with respect tothe use of debit cards for medical expense reimbursements atstores with the Drug Stores and Pharmacies merchant cate-gory code. Notice 2007–2 modified.

Notice 2008–111, page 1299.This notice clarifies Notice 2001–16, 2001–1 C.B. 730, andsupersedes Notice 2008–20, 2008–6 I.R.B. 406, regardingIntermediary Transaction Tax Shelters. A transaction is treatedas an Intermediary Transaction with respect to a particular per-son only if that person engages in the transaction pursuant toa plan, the transaction contains the four objective componentsindicative of an Intermediary Transaction, and no safe harborexception applies to that person. Notice 2001–16 clarified.Notice 2008–20 superseded.

EMPLOYEE PLANS

REG–148326–05, page 1325.Proposed regulations address the calculation of amounts in-cludible in income under section 409A(a) of the Code and theadditional taxes imposed by such section with respect to a ser-vice provider participating in a nonqualified deferred compen-sation plan if such plan fails to meet the requirements of section409A(a). A public hearing is scheduled for April 2, 2009.

Notice 2008–112, page 1301.Weighted average interest rate update; corporate bondindices; 30-year Treasury securities; segment rates.This notice contains updates for the corporate bond weighted

average interest rate for plan years beginning in December2008; the 24-month average segment rates; the funding tran-sitional segment rates applicable for December 2008; and theminimum present value transitional rates for November 2008.

Notice 2008–113, page 1305.This notice provides taxpayers the ability to correct certain op-erational failures to comply with section 409A of the Code, orto limit the amount of additional taxes due to a failure to complywith section 409A. Section 409A provides rules governing thetaxation of nonqualified deferred compensation plans. Notices2006–100 and 2007–89 modified. Notice 2007–100 obso-leted.

EMPLOYMENT TAX

Notice 2008–114, page 1322.This notice provides tables that show the amount of an indi-vidual’s wages, salary, or other income that is exempt from anotice of levy used to collect delinquent tax in 2009.

(Continued on the next page)

Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 1351.Finding Lists begin on page ii.

EXCISE TAX

Notice 2008–110, page 1298.Biodiesel tax incentive; cellulosic biofuel producercredit. For purposes of the tax incentives for biodiesel undersections 40A, 6426, and 6427(e) of the Code, a liquid mustmeet the standard set in ASTM D6751. ASTM International,the private organization that defines that standard, issued arevised standard effective October 13, 2008. This noticeprovides transitional relief for biodiesel on hand that wasproduced under the old ASTM D6751 standard. Separately,this notice provides rules for registration of producers ofcellulosic biofuel.

ADMINISTRATIVE

Announcement 2008–122, page 1351.This document provides notice of a public hearing on proposedregulations (REG–140029–07, 2008–40 I.R.B. 828) relating tothe substantiation and reporting requirements for cash and non-cash charitable contributions under section 170 of the Code.The regulations reflect the enactment of provisions of the Amer-ican Jobs Creation Act of 2004 and the Pension Protection Actof 2006. The regulations provide guidance to individuals, part-nerships, and corporations that make charitable contributions,and will affect any donor claiming a deduction for a charitablecontribution after the date these regulations are published asfinal regulations in the Federal Register. The public hearing isscheduled for January 23, 2009.

December 22, 2008 2008–51 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helping themunderstand and meet their tax responsibilities and by applying

the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents 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 ofthe 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 internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal 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 thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents 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.

2008–51 I.R.B. December 22, 2008

December 22, 2008 2008–51 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 105.—AmountsReceived Under Accidentand Health Plans

A notice provides additional transition relief withrespect to the use of debit cards for medical expense

reimbursements at stores with the Drug Stores andPharmacies merchant category code. See Notice2008-104, page 1298.

2008–51 I.R.B. 1297 December 22, 2008

Part III. Administrative, Procedural, and MiscellaneousAdditional Transition ReliefWith Respect to DebitCards and Medical ExpenseReimbursements

Notice 2008–104

PURPOSE

This notice provides additional transi-tion relief with respect to the use of debitcards for medical expense reimbursementsat stores with the Drug Stores and Pharma-cies merchant category code.

BACKGROUND

Notice 2007–2, 2007–1 C.B. 254, pro-vides that after December 31, 2008, healthFSA and HRA debit cards may not be usedat stores with the Drug Stores and Phar-macies merchant category code unless: (1)the store participates in the inventory in-formation approval system as described inNotice 2006–69, 2006–2 C.B. 107, or (2)on a store location by store location ba-sis, 90 percent of the store’s gross receiptsduring the prior taxable year consisted ofitems which qualify as expenses for medi-cal care under § 213(d) (including nonpre-scription medications as described in Rev.Rul. 2003–102, 2003–2 C.B. 559).

For transactions using debit cards atstores that meet the 90 percent rule de-scribed in (2) above, employers must treatall charges to the debit card as conditional(other than copayment matches, recurringexpenses, and real-time substantiation asdescribed in Rev. Rul. 2003–43, 2003–1C.B. 935) pending substantiation of thecharges through additional independentthird-party information describing thegoods or services, the date of the serviceor sale, and the amount of the charge.

TRANSITION RELIEF

The deadline in Notice 2007–2 is ex-tended by six months so that, after June30, 2009, health FSA and HRA debit cardsmay not be used at stores with the DrugStores and Pharmacies merchant categorycode unless the requirements of (1) or (2)above are satisfied.

EFFECT ON OTHER DOCUMENTS

Notice 2007–2, 2007–1 C.B. 254, ismodified.

DRAFTING INFORMATION

The principal author of this notice isStephanie L. Caden of the Office of Di-vision Counsel/Associate Chief Counsel(Tax Exempt and Government Entities).For further information regarding this no-tice, contact Ms. Caden at (202) 622–6080(not a toll-free call).

Biodiesel Tax Incentive;Cellulosic Biofuel ProducerCredit

Notice 2008–110

SECTION 1. PURPOSE

This notice provides guidance on thechanges to the biodiesel tax incentives(§§ 40A, 6426, and 6427(e) of the InternalRevenue Code) resulting from a revisionto the requirements of the American So-ciety of Testing and Materials standardD6751 (ASTM D6751). This notice alsoprovides guidance on the cellulosic bio-fuel producer credit under section 40,which was added to the Code by the Food,Conservation, and Energy Act of 2008(Pub. L. 110–234) (the Food Act).

SECTION 2. BIODIESEL; ASTMSTANDARD

(a) Overview. (1) Sections 40A, 6426,and 6427(e) of the Code provide tax incen-tives for the production, sale, and use ofbiodiesel and biodiesel mixtures. Section40A(d)(1) defines biodiesel as monoalkylesters of long chain fatty acids derivedfrom plant or animal matter which meet—

(i) The registration requirements for fu-els and fuel additives established by theEnvironmental Protection Agency undersection 211 of the Clean Air Act (42 U.S.C.7545), and

(ii) The requirements of ASTM D6751.(2) Section 6426(c)(4) of the Code

disallows the biodiesel mixture credit of

§ 6426 unless the producer of the mixtureobtains a certificate, in such form and man-ner as prescribed by the Secretary, fromthe producer of the biodiesel that identifiesthe product produced and the percentageof biodiesel and agri-biodiesel in the prod-uct. Section 40A(b)(4) provides a similarrule for the biodiesel mixture credit andbiodiesel credit allowed by § 40A.

(3) Notice 2005–62, 2005–2 C.B. 443,provides a model certificate for this pur-pose. In completing this certificate, abiodiesel producer certifies, among otherthings, that the biodiesel it has producedand sold meets the requirements of ASTMD6751.

(4) The forms on which taxpayersclaim the biodiesel incentives (Form 8864(Biodiesel and Renewable Diesel FuelsCredit), Form 720 (Quarterly Federal Ex-cise Tax Return), and Form 8849 (Claimfor Refund of Excise Taxes)) require theclaimant to certify that the claim relates tobiodiesel that meets the requirements ofASTM D6751.

(b) Revised Specification for Biodiesel;ASTM D6751. Effective on October 13,2008, the American Society of Testingand Materials revised the requirementsof ASTM D6751 by adding a cold soakfiltration test for biodiesel (the October13, 2008 revision).

(c) Transitional rule. If a claim relatesto production, sale, or use of biodiesel or abiodiesel mixture and the production, sale,or use occurs before April 1, 2009, a certi-fication that the biodiesel covered by theclaim meets the requirements of ASTMD6751 is valid if the biodiesel meets therequirements of ASTM D6751 as in effecteither before or after the October 13, 2008,revision adding the cold soak filtration testfor biodiesel. If a claim relates to produc-tion, sale, or use of biodiesel or a biodieselmixture and the production, sale, or use oc-curs after April 1, 2009, a certification thatthe biodiesel covered by the claim meetsthe requirements of ASTM D6751 is validonly if the biodiesel satisfies the require-ments of ASTM D6751 as in effect afterthe October 13, 2008, revision adding thecold soak filtration test for biodiesel.

December 22, 2008 1298 2008–51 I.R.B.

SECTION 3. CELLULOSICBIOFUEL PRODUCER CREDIT

(a) Overview. Section 15321 of theFood Act provides for a cellulosic biofuelproducer credit under § 40 of the Code.The credit is allowed to a taxpayer for cel-lulosic biofuel that the taxpayer producesafter December 31, 2008, and before Jan-uary 1, 2013, and sells for use or uses fora purpose described in § 40(b)(6)(C).

(b) Definition. (1) Section 40(b)(6)(E)provides that cellulosic biofuel means anyliquid fuel (other than low-proof alcohol)which—

(i) Is produced from any lignocellulosicor hemicellulosic matter that is availableon a renewable or recurring basis, and

(ii) Meets the registration requirementsfor fuels and fuel additives establishedby the Environmental Protection Agencyunder section 211 of the Clean Air Act(42 U.S.C. 7545).

(2) For purposes of paragraph (b)(1) ofthis section, low-proof alcohol is any al-cohol with a proof of less than 150. Thedetermination of the proof of any alcoholshall be made without regard to any addeddenaturants.

(c) Registration—(1) In general. Sec-tion 40(b)(6)(G) of the Code provides thatthe cellulosic biofuel credit under § 40 isnot allowed with respect to any taxpayerunless the taxpayer is registered with theSecretary as a producer of cellulosic bio-fuel under § 4101.

(2) Application for Registration. Tax-payers shall apply for registration as a pro-ducer of cellulosic biofuel on Form 637,Application for Registration (For CertainExcise Tax Activities), in accordance withthe instructions for that form. As providedin § 48.4101–1(a)(2) of the Manufactur-ers and Retailers Excise Tax Regulations,a person is registered under § 4101 only ifthe Service has issued a registration letterto the person.

(3) Requirements. The Service will reg-ister an applicant as a producer of cellu-losic biofuel only if the Service—

(1) Determines that the applicant is aproducer of cellulosic biofuel or is likelyto become a producer of cellulosic biofuelwithin a reasonable time after being regis-tered under § 4101; and

(2) Is satisfied with the filing, de-posit, payment, reporting, and claim his-tory for all federal taxes of the applicant

and any related person (as defined in§ 48.4101–1(b)(5)).

SECTION 4. DRAFTINGINFORMATION

The principal author of this notice isJennifer C. Bernardini of the Office of theAssociate Chief Counsel (Passthroughs& Special Industries). For furtherinformation regarding this notice, contactJennifer C. Bernardini at (202) 622–3110(not a toll-free call).

Intermediary Transaction TaxShelters

Notice 2008–111

SECTION 1. PURPOSE ANDBACKGROUND

This notice clarifies Notice 2001–16,2001–1 C.B. 730, and supersedes Notice2008–20, 2008–6 I.R.B. 406, regarding In-termediary Transaction Tax Shelters. No-tice 2001–16 identified the IntermediaryTransaction Tax Shelter (hereafter, an “In-termediary Transaction”) as a listed trans-action under § 1.6011–4(b)(2) of the In-come Tax Regulations. For purposes ofthis notice, an Intermediary Transaction isdefined in terms of its plan and in termsof more objective components. Under thisnotice, a transaction is treated as an Inter-mediary Transaction with respect to a par-ticular person only if that person engagesin the transaction pursuant to the Plan (asdefined in sections 2 and 4), the transactioncontains the four objective components in-dicative of an Intermediary Transaction setforth in section 3, and no safe harbor ex-ception in section 5 applies to that per-son. A transaction may be an Intermedi-ary Transaction with respect to one per-son and not be an Intermediary Transactionwith respect to another person. This noticedoes not affect the legal determination ofwhether a person’s treatment of the trans-action is proper or whether such person isliable, at law or in equity, as a transferee ofproperty in respect of the unpaid tax obli-gation described in section 3.

SECTION 2. DEFINITION OF THEPLAN

An Intermediary Transaction involvesa corporation (T) that would have a Fed-eral income tax obligation with respect tothe disposition of assets the sale of whichwould result in taxable gain (Built-in GainAssets) in a transaction that would affordthe acquiror or acquirors (Y) a cost or fairmarket value basis in the assets. An Inter-mediary Transaction is structured to causethe tax obligation for the taxable disposi-tion of the Built-in Gain Assets to arise, inconnection with the disposition by share-holders of T (X) of all or a controllinginterest in T’s stock, under circumstanceswhere the person or persons primarily li-able for any Federal income tax obliga-tion with respect to the disposition of theBuilt-in Gain Assets will not pay that tax(hereafter, the Plan). This plan can be ef-fectuated regardless of the order in whichT’s stock or assets are disposed. A transac-tion is not an Intermediary Transaction forpurposes of this notice if there is neitherany X nor any Y engaging in the transac-tion pursuant to the Plan (as defined in sec-tion 4).

SECTION 3. COMPONENTS OF ANINTERMEDIARY TRANSACTION

There are four components of an In-termediary Transaction, and a transactionmust have all four components to be thesame as or substantially similar to thelisted transaction described in Notice2001–16, even if the transaction is en-gaged in pursuant to the Plan. The fourcomponents are:

1. A corporation (T) directly or indi-rectly (e.g., through a pass-through entityor a member of a consolidated group ofwhich T is a member) owns assets the saleof which would result in taxable gain (T’sBuilt-in Gain Assets) and, as of the StockDisposition Date (as defined in compo-nent two), T (or the consolidated group ofwhich T is a member) has insufficient taxbenefits to eliminate or offset such taxablegain (or the tax) in whole. The tax thatwould result from such sale is hereinafterreferred to as T’s Built-in Tax. However,for purposes of this component, T will notbe considered to have any Built-in Taxif, on the Stock Disposition Date, suchamount is less than five percent of the

2008–51 I.R.B. 1299 December 22, 2008

value of the T stock disposed of in theStock Disposition (as defined in compo-nent two). In determining whether T’s(or the consolidated group’s) tax bene-fits are insufficient for purposes of thefirst sentence, the following tax benefitsshall be excluded: (i) any tax benefitsattributable to a listed transaction under§ 1.6011–4(b)(2), and (ii) any tax benefitsattributable to built-in loss property ac-quired within 12 months before any StockDisposition described in component two,to the extent such built-in losses exceedbuilt-in gains in property acquired in thesame transaction(s). All references to T inthis notice include successors to T.

2. At least 80 percent of the T stock(by vote or value) is disposed of by T’sshareholder(s) (X), other than in liquida-tion of T, in one or more related transac-tions within a 12 month period (Stock Dis-position). The first date on which at least80 percent of the T stock (by vote or value)has been disposed of by X in a Stock Dis-position is the Stock Disposition Date.

3. Either within 12 months before, si-multaneously, or within 12 months afterthe Stock Disposition Date, at least 65 per-cent (by value) of T’s Built-in Gain As-sets are disposed of (Sold T Assets) to oneor more buyers (Y) in one or more trans-actions in which gain is recognized withrespect to the Sold T Assets. For pur-poses of this component, transactions inwhich T disposes of all or part of its as-sets to either another member of the con-trolled group of corporations (as definedin § 1563) of which T is a member, or apartnership in which members of such con-trolled group satisfy the requirements of§1.368–1(d)(4)(iii)(B), will be disregardedprovided there is no plan to dispose of atleast 65 percent (by value) of T’s Built-inGain Assets to one or more persons that arenot members of such controlled group, orto partnerships not described herein.

4. At least half of T’s Built-in Tax thatwould otherwise result from the disposi-tion of the Sold T Assets is purportedly off-set or avoided or not paid.

SECTION 4. ENGAGING IN THETRANSACTION PURSUANT TO THEPLAN

A transaction that has all four compo-nents described in section 3 is only an In-termediary Transaction with respect to a

person that engages in the transaction pur-suant to the Plan. A person engages in thetransaction pursuant to the Plan if the per-son knows or has reason to know the trans-action is structured to effectuate the Plan.Additionally, any X that is at least a 5%shareholder of T (by vote or value), or anyX that is an officer or director of T, engagesin the transaction pursuant to the Plan ifany of the following knows or has reasonto know the transaction is structured to ef-fectuate the Plan: (i) any officer or directorof T; (ii) any of T’s advisors engaged by Tto advise T or X with respect to the transac-tion; or (iii) any advisor of that X engagedby that X to advise it with respect to thetransaction. For purposes of this section, ifT has more than five officers then the term“officer” shall be limited to the chief ex-ecutive officer of T (or an individual act-ing in such capacity) and the four highestcompensated officers for the taxable year(other than the chief executive officer oran individual acting in such capacity). Aperson can engage in the transaction pur-suant to the Plan even if it does not under-stand the mechanics of how the tax liabilitypurportedly might be offset or avoided, orthe specific financial arrangements, or re-lationships of other parties or of T after theStock Disposition.

A person will not be treated as engag-ing in the transaction pursuant to the Planmerely because it has been offered attrac-tive pricing terms by the opposite party toa transaction.

Thus, a transaction may be an Inter-mediary Transaction with respect to X butnot Y, or with respect to Y but not X, insituations where one party engages in thetransaction pursuant to the Plan and theother does not. A transaction may alsobe an Intermediary Transaction with re-spect to some but not all Xs and/or somebut not all Ys, depending on whether theyengage in the transaction pursuant to thePlan. A transaction will not be an Inter-mediary Transaction with respect to anyperson that does not engage in the transac-tion pursuant to the Plan regardless of theamounts reported on any return.

SECTION 5. SAFE HARBOREXCEPTIONS FOR CERTAINPERSONS; PARTICIPATIONGENERALLY

01. Safe Harbor Exceptions for CertainPersons

A transaction is not an IntermediaryTransaction with respect to the follow-ing persons under the following circum-stances:

• Any X, if the only T stock it disposesof is traded on an established secu-rities market (within the meaning of§ 1.453–3(d)(4)) and prior to the dis-position X (including related personsdescribed in section 267(b) or 707(b))did not hold five percent (or more) byvote or value of any class of T stockdisposed of by X.

• Any X, T, or M, if, after the acquisi-tion of the T stock, the acquiror of the Tstock is the issuer of stock or securitiesthat are publicly traded on an estab-lished securities market in the UnitedStates, or is consolidated for financialreporting purposes with such an issuer.

• Any Y, if the only Sold T Assets itacquires are either (i) securities (asdefined in section 475(c)(2)) thatare traded on an established secu-rities market (within the meaningof § 1.453–3(d)(4)) and represent aless-than-five-percent interest in thatclass of security, or (ii) assets thatare not securities and do not includea trade or business as described in§ 1.1060–1(b)(2).

02. Participation

If one of the foregoing safe harbor ex-ceptions does not apply to a person, thatperson engaged in a transaction pursuantto the Plan, and the transaction has all fourcomponents described in section 3, the de-termination of whether the person partic-ipated in an Intermediary Transaction forpurposes of § 1.6011–4 in any given tax-able year is made under the general rule in§ 1.6011–4(c)(3)(i)(A).

December 22, 2008 1300 2008–51 I.R.B.

SECTION 6. EFFECTIVE DATE;DISCLOSURE, LIST MAINTENANCE,AND REGISTRATIONREQUIREMENTS; PENALTIES;OTHER CONSIDERATIONS

Transactions that are the same as,or substantially similar to, the transac-tion described in Notice 2001–16 wereidentified as “listed transactions” under§ 1.6011–4(b)(2) effective January 19,2001. Accordingly, this notice is gener-ally effective January 19, 2001. However,this notice imposes no requirements withrespect to any obligation under § 6011,§ 6111, or § 6112 due before December1, 2008, not otherwise imposed by Notice2001–16. Because this notice supersedesNotice 2008–20, any disclosure filed pur-suant to Notice 2008–20 will be treatedas made pursuant to Notice 2001–16. In-dependent of their classification as listedtransactions, transactions that are the sameas, or substantially similar to, the trans-action described in Notice 2001–16 mayalready be subject to the requirements of§ 6011, § 6111, or § 6112, or the regula-tions thereunder.

Persons required to disclose these trans-actions under § 1.6011–4 and who fail todo so may be subject to the penalty un-der § 6707A. Persons required to discloseor register these transactions under § 6111who have failed to do so may be subjectto the penalty under § 6707(a). Personsrequired to maintain lists of investors un-der § 6112 who fail to provide such listswhen requested by the Service may be sub-ject to the penalty under § 6708(a). A per-son that is a tax-exempt entity within themeaning of § 4965(c), or an entity man-ager within the meaning of § 4965(d), maybe subject to excise tax, disclosure, fil-ing or payment obligations under § 4965,§ 6033(a)(2), § 6011, and § 6071. Sometaxable parties may be subject to disclo-sure obligations under § 6011(g) that ap-ply to “prohibited tax shelter transactions”as defined by § 4965(e) (including listedtransactions).

In addition, the Service may imposeother penalties on persons involved in thistransaction or substantially similar trans-actions (including an accuracy-relatedpenalty under § 6662 or 6662A) and, asapplicable, on persons who participate inthe promotion or reporting of this transac-

tion or substantially similar transactions(including the return preparer penalty un-der § 6694, the promoter penalty under§ 6700, and the aiding and abetting penaltyunder § 6701).

Further, under § 6501(c)(10), the pe-riod of limitations on assessment may beextended beyond the general three-yearperiod of limitations for persons requiredto disclose transactions under § 1.6011–4who fail to do so. See Rev. Proc. 2005–26,2005–1 C.B. 965.

The Service and the Treasury Depart-ment recognize that some taxpayers mayhave filed tax returns taking the positionthat they were entitled to the purported taxbenefits of the types of transactions de-scribed in Notice 2001–16. These taxpay-ers should consult with a tax advisor toensure that their transactions are disclosedproperly and to take appropriate correctiveaction.

SECTION 7. EFFECT ON OTHERDOCUMENTS

Notice 2001–16 is clarified. Notice2008–20 is superseded.

SECTION 8. REQUEST FORCOMMENTS

The Service and the Treasury Depart-ment seek comments regarding the abovedefinitions, components, and safe harborsfor the purpose of reflecting more accu-rately which transactions are the same asor substantially similar to an IntermediaryTransaction and which parties are engag-ing in a transaction pursuant to the Plan.

Comments should be submitted to: In-ternal Revenue Service, CC:PA:LPD:PR(Notice 2008–111), Room 5203, PO Box7604, Ben Franklin Station, Washing-ton, DC 20044. Alternatively, commentsmay be hand delivered Monday throughFriday between the hours of 8:00 a.m.and 4:00 p.m. to: CC:PA:LPD:PR (No-tice 2008–111), Courier’s Desk, Inter-nal Revenue Service, 1111 ConstitutionAvenue, NW, Washington, DC. Com-ments may also be submitted electron-ically, via the following email address:Notice.Comments@irscounsel.treas.gov.Please include “Notice 2008–111” in thesubject line of any electronic submissions.All comments received will be open topublic inspection and copying.

DRAFTING INFORMATION

The principal author of this notice isDouglas C. Bates of the Office of Asso-ciate Chief Counsel (Corporate). For fur-ther information regarding this notice, con-tact Mr. Bates at (202) 622–7550 (not atoll-free call).

Update for Weighted AverageInterest Rates, Yield Curves,and Segment Rates

Notice 2008–112

This notice provides guidance as to thecorporate bond weighted average interestrate and the permissible range of interestrates specified under § 412(b)(5)(B)(ii)(II)of the Internal Revenue Code as in ef-fect for plan years beginning before 2008.It also provides guidance on the corpo-rate bond monthly yield curve (and thecorresponding spot segment rates), the24-month average segment rates, andthe funding transitional segment ratesunder § 430(h)(2). In addition, this no-tice provides guidance as to the interestrate on 30-year Treasury securities un-der § 417(e)(3)(A)(ii)(II) as in effect forplan years beginning before 2008, the30-year Treasury weighted average rateunder § 431(c)(6)(E)(ii)(I), and the min-imum present value segment rates under§ 417(e)(3)(D) as in effect for plan yearsbeginning after 2007.

CORPORATE BOND WEIGHTEDAVERAGE INTEREST RATE

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the PensionFunding Equity Act of 2004 and by thePension Protection Act of 2006 (PPA),provide that the interest rates used tocalculate current liability and to determinethe required contribution under § 412(l)for plan years beginning in 2004 through2007 must be within a permissible rangebased on the weighted average of therates of interest on amounts investedconservatively in long term investmentgrade corporate bonds during the 4-yearperiod ending on the last day before thebeginning of the plan year.

2008–51 I.R.B. 1301 December 22, 2008

Notice 2004–34, 2004–1 C.B. 848, pro-vides guidelines for determining the cor-porate bond weighted average interest rateand the resulting permissible range of in-terest rates used to calculate current liabil-ity. That notice establishes that the corpo-rate bond weighted average is based on themonthly composite corporate bond rate de-

rived from designated corporate bond in-dices. The methodology for determiningthe monthly composite corporate bond rateas set forth in Notice 2004–34 continues toapply in determining that rate. See Notice2006–75, 2006–2 C.B. 366.

The composite corporate bond rate forNovember 2008 is 7.72 percent. Pursuant

to Notice 2004–34, the Service has de-termined this rate as the average of themonthly yields for the included corporatebond indices for that month.

The following corporate bond weightedaverage interest rate was determined forplan years beginning in the month shownbelow.

For Plan YearsBeginning in Permissible Range

Month Year

CorporateBond Weighted

Average 90% to 100%

December 2008 6.27 5.64 6.27

YIELD CURVE AND SEGMENTRATES

Generally for plan years beginningafter 2007 (except for delayed effectivedates for certain plans under sections 104,105, and 106 of PPA), § 430 of the Codespecifies the minimum funding require-ments that apply to single employer planspursuant to § 412. Section 430(h)(2) spec-ifies the interest rates that must be usedto determine a plan’s target normal costand funding target. Under this provision,present value is generally determined us-ing three 24-month average interest rates

(“segment rates”), each of which appliesto cash flows during specified periods.However, an election may be made under§ 430(h)(2)(D)(ii) to use the monthly yieldcurve in place of the segment rates. Forplan years beginning in 2008 and 2009, atransitional rule under § 430(h)(2)(G) pro-vides that the segment rates are blendedwith the corporate bond weighted averageas specified above. An election may bemade under § 430(h)(2)(G)(iv) to use thesegment rates without applying the transi-tional rule.

Notice 2007–81, 2007–44 I.R.B. 899,provides guidelines for determining the

monthly corporate bond yield curve, the24-month average corporate bond segmentrates, and the funding transitional segmentrates used to compute the target normalcost and the funding target. Pursuant toNotice 2007–81, the monthly corporatebond yield curve derived from November2008 data is in Table I at the end of thisnotice. The spot first, second, and thirdsegment rates for the month of Novem-ber 2008 are, respectively, 7.11, 8.23,and 7.42. The three 24-month averagecorporate bond segment rates applicablefor December 2008 under the election of§ 430(h)(2)(G)(iv) are as follows:

FirstSegment

SecondSegment

ThirdSegment

5.25 6.38 6.68

The transitional segment rates under§ 430(h)(2)(G) applicable for December2008, taking into account the corporate

bond weighted average of 6.27 statedabove, are as follows:

For Plan YearsBeginning in

FirstSegment

SecondSegment

ThirdSegment

2008 5.93 6.31 6.412009 5.59 6.34 6.54

30-YEAR TREASURY SECURITIESINTEREST RATES

Section 417(e)(3)(A)(ii)(II) (prior toamendment by PPA) defines the appli-cable interest rate, which must be usedfor purposes of determining the minimumpresent value of a participant’s benefitunder § 417(e)(1) and (2), as the annual

rate of interest on 30-year Treasury se-curities for the month before the dateof distribution or such other time as theSecretary may by regulations prescribe.Section 1.417(e)–1(d)(3) of the IncomeTax Regulations provides that the applica-ble interest rate for a month is the annualrate of interest on 30-year Treasury secu-rities as specified by the Commissioner

for that month in revenue rulings, noticesor other guidance published in the InternalRevenue Bulletin.

The rate of interest on 30-year Treasurysecurities for November 2008 is 4.00 per-cent. The Service has determined this rateas the monthly average of the daily deter-mination of yield on the 30-year Treasurybond maturing in May 2038.

December 22, 2008 1302 2008–51 I.R.B.

Generally for plan years beginningafter 2007, § 431 specifies the mini-mum funding requirements that apply tomultiemployer plans pursuant to § 412.Section 431(c)(6)(B) specifies a minimumamount for the full-funding limitationdescribed in section 431(c)(6)(A), based

on the plan’s current liability. Section431(c)(6)(E)(ii)(I) provides that the inter-est rate used to calculate current liabilityfor this purpose must be no more than 5percent above and no more than 10 percentbelow the weighted average of the rates ofinterest on 30-year Treasury securities dur-

ing the four-year period ending on the lastday before the beginning of the plan year.Notice 88–73, 1988–2 C.B. 383, providesguidelines for determining the weightedaverage interest rate. The following rateswere determined for plan years beginningin the month shown below.

For Plan YearsBeginning in Permissible Range

Month Year

30-YearTreasuryWeightedAverage 90% to 105%

December 2008 4.66 4.19 4.89

MINIMUM PRESENT VALUESEGMENT RATES

Generally for plan years beginning af-ter December 31, 2007, the applicable in-terest rates under § 417(e)(3)(D) are seg-ment rates computed without regard to a

24-month average. For plan years begin-ning in 2008 through 2011, the applica-ble interest rate is the monthly spot seg-ment rate blended with the applicable rateunder § 417(e)(3)(A)(ii)(II) as in effectfor plan years beginning in 2007. No-tice 2007–81 provides guidelines for de-

termining the minimum present value seg-ment rates. Pursuant to that notice, theminimum present value transitional seg-ment rates determined for November 2008,taking into account the November 200830-year Treasury rate of 4.00 stated above,are as follows:

For Plan YearsBeginning in

FirstSegment

SecondSegment

ThirdSegment

2008 4.62 4.85 4.682009 5.24 5.69 5.37

DRAFTING INFORMATION

The principal author of this notice isTony Montanaro of the Employee Plans,

Tax Exempt and Government Entities Di-vision. Mr. Montanaro may be e-mailed atRetirementPlanQuestions@irs.gov.

2008–51 I.R.B. 1303 December 22, 2008

Table I

Monthly Yield Curve for November 2008

Maturity Yield Maturity Yield Maturity Yield Maturity Yield Maturity Yield

0.5 4.92 20.5 8.05 40.5 7.35 60.5 7.13 80.5 7.03

1.0 5.93 21.0 8.02 41.0 7.34 61.0 7.13 81.0 7.02

1.5 6.77 21.5 7.98 41.5 7.33 61.5 7.13 81.5 7.02

2.0 7.35 22.0 7.95 42.0 7.33 62.0 7.12 82.0 7.02

2.5 7.65 22.5 7.91 42.5 7.32 62.5 7.12 82.5 7.02

3.0 7.75 23.0 7.88 43.0 7.31 63.0 7.12 83.0 7.02

3.5 7.74 23.5 7.85 43.5 7.30 63.5 7.11 83.5 7.01

4.0 7.70 24.0 7.82 44.0 7.30 64.0 7.11 84.0 7.01

4.5 7.66 24.5 7.79 44.5 7.29 64.5 7.11 84.5 7.01

5.0 7.64 25.0 7.77 45.0 7.28 65.0 7.10 85.0 7.01

5.5 7.64 25.5 7.74 45.5 7.28 65.5 7.10 85.5 7.01

6.0 7.68 26.0 7.72 46.0 7.27 66.0 7.10 86.0 7.00

6.5 7.74 26.5 7.70 46.5 7.26 66.5 7.09 86.5 7.00

7.0 7.81 27.0 7.68 47.0 7.26 67.0 7.09 87.0 7.00

7.5 7.90 27.5 7.66 47.5 7.25 67.5 7.09 87.5 7.00

8.0 7.99 28.0 7.64 48.0 7.25 68.0 7.09 88.0 7.00

8.5 8.08 28.5 7.62 48.5 7.24 68.5 7.08 88.5 7.00

9.0 8.17 29.0 7.61 49.0 7.24 69.0 7.08 89.0 6.99

9.5 8.25 29.5 7.59 49.5 7.23 69.5 7.08 89.5 6.99

10.0 8.31 30.0 7.58 50.0 7.23 70.0 7.07 90.0 6.99

10.5 8.37 30.5 7.56 50.5 7.22 70.5 7.07 90.5 6.99

11.0 8.42 31.0 7.55 51.0 7.21 71.0 7.07 91.0 6.99

11.5 8.46 31.5 7.54 51.5 7.21 71.5 7.07 91.5 6.99

12.0 8.49 32.0 7.52 52.0 7.20 72.0 7.06 92.0 6.98

12.5 8.50 32.5 7.51 52.5 7.20 72.5 7.06 92.5 6.98

13.0 8.51 33.0 7.50 53.0 7.20 73.0 7.06 93.0 6.98

13.5 8.51 33.5 7.49 53.5 7.19 73.5 7.06 93.5 6.98

14.0 8.50 34.0 7.47 54.0 7.19 74.0 7.05 94.0 6.98

14.5 8.48 34.5 7.46 54.5 7.18 74.5 7.05 94.5 6.98

15.0 8.46 35.0 7.45 55.0 7.18 75.0 7.05 95.0 6.98

15.5 8.43 35.5 7.44 55.5 7.17 75.5 7.05 95.5 6.97

16.0 8.40 36.0 7.43 56.0 7.17 76.0 7.04 96.0 6.97

16.5 8.37 36.5 7.42 56.5 7.16 76.5 7.04 96.5 6.97

17.0 8.33 37.0 7.41 57.0 7.16 77.0 7.04 97.0 6.97

17.5 8.29 37.5 7.40 57.5 7.16 77.5 7.04 97.5 6.97

18.0 8.25 38.0 7.39 58.0 7.15 78.0 7.04 98.0 6.97

18.5 8.21 38.5 7.38 58.5 7.15 78.5 7.03 98.5 6.97

19.0 8.17 39.0 7.37 59.0 7.14 79.0 7.03 99.0 6.96

19.5 8.13 39.5 7.37 59.5 7.14 79.5 7.03 99.5 6.96

20.0 8.09 40.0 7.36 60.0 7.14 80.0 7.03 100.0 6.96

December 22, 2008 1304 2008–51 I.R.B.

Relief and Guidance onCorrections of CertainFailures of a NonqualifiedDeferred Compensation Planto Comply With § 409A(a) inOperation

Notice 2008–113

TABLE OF CONTENTS

I. Purpose

II. Background

III. Eligibility Requirements

A. In GeneralB. Avoidance of Recurrence of Operational FailuresC. Relief not Available to Service Providers Under ExaminationD. Additional Eligibility RequirementsE. Required Repayments by the Service ProviderF. Eligibility for Relief for a Taxable Year in which the Service Recipient Experiences a Financial Downturn or Other

Financial IssueG. Definition of InsiderH. Determining Certain Periods of DaysI. Adjustments for Earnings and LossesJ. References to the Internal Revenue Code

IV. Corrections of Certain Operational Failures in the Same Taxable Year as the Failure Occurs

A. Failure to Defer Amount or Incorrect Payment of Amount Payable in a Subsequent Taxable Year Corrected in theSame Taxable Year as the Failure

B. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i)Corrected in the Same Taxable Year as the Failure

C. Excess Deferred Amount Corrected in the Same Taxable YearD. Correction of Exercise Price of Otherwise Excluded Stock Rights

V. Corrections of Certain Operational Failures Involving Non-Insider Service Providers in the Taxable Year ImmediatelyFollowing the Taxable Year in which the Failure Occurs

A. In GeneralB. Failure to Defer Amount or Incorrect Payment of Amount Payable in a Subsequent Taxable Year Corrected in the

Taxable Year Immediately Following the FailureC. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i)

Corrected During Subsequent Taxable YearD. Excess Deferred Amount Corrected in the Taxable Year Immediately Following the Year of the FailureE. Correction of Exercise Price of Otherwise Excluded Stock Rights

VI. Relief for Certain Operational Failures Involving Limited Amounts

A. In GeneralB. Failure to Defer Limited Amount not Corrected in the Same Taxable Year and Certain Erroneous Payments of

Limited AmountsC. Limited Excess Deferred Amount not Corrected in the Same Taxable Year

VII. Relief for Certain Other Operational Failures

A. General RequirementsB. Failure to Defer Amount not Corrected in the Same Taxable Year and Certain Erroneous PaymentsC. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i)

not Corrected in the Same Taxable Year as the FailureD. Excess Deferred Amount not Corrected in the Same Taxable Year

VIII. Special Transition Rule for Non-Insiders

2008–51 I.R.B. 1305 December 22, 2008

IX. Information and Reporting Requirements

A. Information Required with Respect to Correction of an Operational Failure in the Same Taxable Year as the FailureOccurs

B. Information Required with Respect to Relief for Certain Operational Failures

X. Effect on Other Documents

XI. Request for Comments

XII. Paperwork Reduction Act

XIII. Drafting Information

I. PURPOSE

This notice provides procedures underwhich taxpayers can obtain relief from thefull application of the income inclusionand the additional taxes under § 409A withrespect to certain failures of a nonquali-fied deferred compensation plan to com-ply with § 409A(a) in operation (an opera-tional failure), including:

• Methods for correcting certain op-erational failures during the serviceprovider’s taxable year in which thefailure occurs and, for certain serviceproviders also during the subsequenttaxable year, to avoid income inclu-sion under § 409A(a).

• Relief limiting the amount includiblein income under § 409A(a) for cer-tain operational failures during a ser-vice provider’s taxable year that in-volve only limited amounts.

• Relief limiting the amount includiblein income under § 409A(a) for cer-tain operational failures regardless ofwhether the failure involves only lim-ited amounts, but subject to further re-quired actions to correct the failure.

• Special transition relief for certain op-erational failures occurring before Jan-uary 1, 2008.

Comments are also requested onwhether procedures for the correction of afailure of a plan to comply with the plandocument requirements of §1.409A–1(c)should be adopted. See § XI of this notice.

II. BACKGROUND

On December 3, 2007, the TreasuryDepartment and the IRS issued Notice2007–100, 2007–52 I.R.B. 1243, settingforth guidance permitting the correction

of certain operational failures, and provid-ing transition relief limiting the amountincludible in income under § 409A(a)for certain operational failures involvinglimited amounts. Notice 2007–100 alsodescribed potential guidance that wouldlimit the amount includible in incomeunder § 409A(a) for certain operationalfailures involving amounts that exceededthe limit. Comments were requested withrespect to all aspects of the notice. TheTreasury Department and the IRS havereviewed all of the comments submitted,and are issuing this notice as a successorto Notice 2007–100. This notice incor-porates, clarifies and expands upon theguidance provided in Notice 2007–100,and accordingly Notice 2007–100 is obso-leted. For further information, see § X ofthis notice.

III. ELIGIBILITY REQUIREMENTS

A. In General

A taxpayer is not eligible for the reliefprovided in §§ IV through VIII of this no-tice unless all of the applicable require-ments of this § III are met, as well as therequirements of the particular section pro-viding the applicable relief and the noticeand the reporting requirements of § IX. Ineach instance, the taxpayer claiming the re-lief has the burden of demonstrating thatthe taxpayer was eligible for the relief andthat the requirements of this notice havebeen met. Any application of the reliefprovided in this notice is subject to exam-ination by the IRS.

B. Avoidance of Recurrence ofOperational Failure

The relief provided under §§ IV throughVIII of this notice is not available unless,

in addition to meeting the applicable re-quirements of the relevant section, the ser-vice recipient takes commercially reason-able steps to avoid a recurrence of the op-erational failure. If the same or a substan-tially similar operational failure has oc-curred previously, the relief is not availablefor any taxable year of the service providerbeginning after December 31, 2009, unlessthe service recipient or service providerdemonstrates that the service recipient hadestablished practices and procedures rea-sonably designed to ensure that such anoperational failure would not recur andhad taken commercially reasonable stepsto avoid a recurrence of the operationalfailure and that the operational failure oc-curred despite the service recipient’s dili-gent efforts.

C. Relief not Available to ServiceProviders Under Examination

The relief provided in §§ V throughVIII is not available if a federal incometax return of the relevant service providerfor the service provider’s taxable year inwhich the operational failure occurred isunder examination with respect to the plan.For this purpose, an individual serviceprovider is treated as under examinationwith respect to the plan if the individualis under examination with respect to theindividual’s federal income tax return (forexample, Form 1040) for the taxable year.

D. Additional Eligibility Requirements

Sections IV through VIII of this noticedo not provide relief for plan terms andprovisions that fail to meet the require-ments of § 409A or for operational failuresthat are not described in those sections.1

The Treasury Department and the IRS are

1 Reliance on the transition relief provided in Notice 2007–86, 2007–46 I.R.B. 990, the preamble to the final regulations under § 409A, 72 Fed. Reg. 19234, Notice 2006–79, 2006–2 C.B.763, the preamble to the proposed regulations under § 409A, 70 Fed. Reg. 57930, or Notice 2005–1, 2005–1 C.B. 274, for the years to which such transition relief applies, does not precludea taxpayer from qualifying for the relief provided in this notice with respect to operational failures occurring in taxable years beginning before January 1, 2009.

December 22, 2008 1306 2008–51 I.R.B.

requesting comments as to whether an ad-ditional program to address plan documentfailures would be feasible and advisable(see § XI of this notice). In addition, reliefis not available under §§ IV through VIIIof this notice with respect to any exerciseof a stock right that otherwise would resultin a failure to comply with § 409A. Reliefotherwise available under §§ IV throughVIII of this notice is conditioned upon thetimely filing and providing of the informa-tion required by § IX of this notice. Therelief provided by §§ IV through VIII ofthis notice applies only to operational fail-ures that are inadvertent and unintentional.For this purpose, an inadvertent and unin-tentional operational failure means a fail-ure to comply with plan provisions that sat-isfy the requirements of § 409A(a), or aninadvertent unintentional failure to followthe requirements of § 409A(a) in practice,due to one or more inadvertent and unin-tentional errors in the operation of the plan.In addition, the relief provided in this sec-tion is not available if the failure is directlyor indirectly related to participation in anylisted transaction under §1.6011–4(b)(2)).

E. Required Repayments by the ServiceProvider

If to qualify for any applicable relief aservice provider is required to repay to theservice recipient an amount erroneouslypaid or made available to the serviceprovider, such as required in §§ IV.A,IV.B, V.B, V.C, VII.B and VII.C, theamount erroneously paid or made avail-able to the service provider refers to thegross amount paid to, or on behalf of, theservice provider, before the applicationof any withholding requirements such asthe Federal employment tax withholdingrequirements. The service provider maysatisfy the requirement to repay the servicerecipient the amount erroneously paid tothe service provider and interest (if appli-cable) by paying the service recipient theequivalent amount on or before the appli-cable deadline. Alternatively, in lieu ofsuch repayment, the service recipient mayreduce the service provider’s compensa-tion that otherwise would have been paidon or before such applicable deadline byan equivalent amount. To the extent that,in lieu of repayment, the service recipient

reduces other compensation that wouldhave been paid to the service provider, theother compensation that would have beenpaid to the service provider, but insteadis used to repay the erroneous paymentor interest (if applicable), is includible inincome (and wages if the service provideris an employee).

The amount will not be treated as re-paid by the service provider if, in connec-tion with such payment, the service recipi-ent pays the service provider, or otherwiseprovides a benefit (including an obligationto pay an amount or provide a benefit inthe future), intended as a substitute for allor part of the amount the service provideris required to repay the service recipient.

F. Eligibility for Relief for a TaxableYear in which the Service RecipientExperiences a Financial Downturn orOther Financial Issue

The relief provided in §§ IV throughVIII is not available with respect to anyerroneous payment occurring during anytaxable year of the service provider inwhich the service recipient experiences asubstantial financial downturn, or other-wise experiences financial or other issues,if such downturn or other issue indicatesa significant risk that the service recipientwill not be able to pay the amount deferredwhen the payment becomes due.

G. Definition of Insider

Certain sections of this notice provideadditional eligibility requirements for re-lief, or do not provide relief, if the af-fected service provider is an insider withrespect to a service recipient. For purposesof this notice, a service provider is an in-sider with respect to a service recipient ifthe service provider is a director or offi-cer of the service recipient or is directlyor indirectly the beneficial owner of morethan 10% of any class of any equity secu-rity of the service recipient, determined inaccordance with the rules of the Securitiesand Exchange Commission under § 16 ofthe Securities Exchange Act of 1934, asamended, 15 USC 78p, without regard towhether the service recipient has any classof equity securities registered under § 12of such Act, 15 USC 78l. See 17 CFR§ 240.16a–1(a) (beneficial owner) and (f)

(officer). In the case of a service recipientthat is not a corporation, such rules areapplied by analogy.

H. Determining Certain Periods of Days

To apply the requirements of certainsections of this notice, a period of daysmust be calculated and applied. For ex-ample, the number of days that a serviceprovider retained amounts erroneouslypaid to the service provider may be re-quired to be calculated. For purposes ofcounting days under this notice, the firstday of the period is disregarded and thelast day is taken into account. For exam-ple, if on June 1, 2009, a service recipienterroneously paid a service provider anamount that the service provider repaidon June 30, 2009, there would be 29 daysfrom the date of payment through thedate of repayment. If the period of daysrequired to be calculated ends upon theservice provider’s repayment, and the re-payment is made through a reduction ofthe service provider’s other compensation,the repayment date occurs on each datethe compensation otherwise would havebeen paid to the service provider.

I. Adjustments for Earnings and Losses

The relief provided in certain sectionsof this notice permits or requires that de-ferred amounts be adjusted to reflect earn-ings and losses, provided that such adjust-ments must be made by a specified dead-line. If it is impracticable to make the ad-justment by the applicable deadline, theadjustment will be treated as made if, onor before the applicable deadline, the ser-vice provider (in the case of earnings) orthe service recipient (in the case of losses)has a legally binding right to have such ad-justment made.

J. References to the Internal RevenueCode

For purposes of this notice, referencesto sections of the Internal Revenue Codeinclude references to any applicable guid-ance thereunder.

IV. CORRECTIONS OF CERTAINOPERATIONAL FAILURES IN THESAME TAXABLE YEAR AS THEFAILURE OCCURS

2008–51 I.R.B. 1307 December 22, 2008

A. Failure to Defer Amount or IncorrectPayment of Amount Payable in aSubsequent Taxable Year Corrected in theSame Taxable Year as the Failure

1. Relief for Amounts to which § IV.AApplies

This § IV.A applies if during a serviceprovider’s taxable year an operational fail-ure occurs that is described in § IV.A.2(a)and the requirements of § IV.A.2(b)through (d) and § IV.A.4 are met. Anamount to which this § IV.A applies istreated as having been timely deferredin accordance with the terms of the planand any applicable deferral election (or ashaving continued to be deferred under theterms of the plan).

2. Amounts to which § IV.A Applies

(a) A failure is described in this§ IV.A.2(a) if an amount of nonquali-fied deferred compensation that, underthe terms of the plan and any applica-ble deferral election, and § 409A, shouldnot have been paid or made availableto a service provider in a taxable yearof the service provider, was erroneouslypaid or made available to the serviceprovider in that year, other than a pay-ment that fails to meet the requirements of§ 409A(a)(2)(B)(i) (requirement to delayfor six months payments to a specifiedemployee upon separation from service).For rules relating to correction of certainpayments that fail to meet the require-ments of § 409A(a)(2)(B)(i), see § IV.B ofthis notice.

(b) The service provider repays to theservice recipient the amount that was er-roneously paid or made available to theservice provider on or before the last dayof the service provider’s taxable year inwhich such amount was erroneously paidor made available. If the service providerwas not an insider (as defined in § III.G)at any time during the taxable year inwhich such amount was erroneously paidor made available, and if repayment ofsuch amount would cause an immediateand heavy financial need as defined in§1.401(k)–1(d)(3)(iii), in lieu of immedi-ate repayment the service recipient and theservice provider may enter into a legallybinding agreement to have such amountsrepaid over a specified period that endsnot later than 24 months from the due date

(without extensions) for the federal in-come tax return for the service provider’staxable year during which the amount waserroneously paid or made available to theservice provider, provided that the serviceprovider must also pay interest on theamount repaid to the service recipient. Forthis purpose, the interest rate must be noless than the short-term applicable Federalrate (AFR) under § 1274(d)(1), based onannual compounding, for the month inwhich the erroneous payment was paidor made available. If the amount paid orwithheld on a repayment date is less thanthe entire erroneous payment, for eachrepayment date the interest calculation isapplied by substituting the unpaid balanceimmediately before the repayment for theamount of the erroneous payment. Therepayment requirement of this § IV.A.2(b)will not be met unless all payments (in-cluding interest) are made by the end ofthe period specified in such agreement.

(c) Immediately after such repay-ment (or agreement to repay) the serviceprovider has a legally binding right underthe plan to be paid the amount that wouldhave been due if such amount had not beenerroneously paid or made available to theservice provider during such taxable year,at the same time and in the same formof payment that the amount would havebeen payable if such amount had not beenerroneously paid or made available to theservice provider during such taxable year.

(d) If the total of all amounts to whichthis § IV.A applies that are erroneouslypaid or made available under a plan (as de-fined for purposes of § 409A) in a serviceprovider’s taxable year exceeds the limiton elective deferrals that would apply toa qualified plan under § 402(g)(1)(B) forthe year in which the erroneous paymentwas made and the service provider was aninsider (as defined in § III.G of this notice)with respect to the service recipient at anytime during the taxable year in which theerroneous payment was made, the serviceprovider pays interest to the service re-cipient at the time the service providerrepays the amount to the service recipientequal to the amount of the erroneous pay-ment (E) multiplied by an interest rate thatis no less than the short-term applicableFederal rate (AFR) under § 1274(d)(1) (r)multiplied by a fraction, the numeratorof which is the number of days from theerroneous payment date to the repayment

date (n1) and the denominator of which isthe number of days in such taxable year(n2), or (E x r x n1/n2). For purposes ofthe preceding sentence, r is the short-termAFR, based on annual compounding,for the month in which the erroneouspayment was paid or made available tothe service provider. If the amount paid orwithheld on a repayment date is less thanthe entire erroneous payment, for eachrepayment date the interest calculation isapplied by substituting the unpaid balanceimmediately before the repayment for theamount of the erroneous payment. Forrules regarding the counting of days, see§ III.H of this notice.

3. Reporting and WithholdingRequirements

The amount erroneously paid to the ser-vice provider that is repaid by the serviceprovider to the service recipient is not re-quired to be included in income by theservice provider, or reported as income tothe service provider on a Form W–2 orForm 1099 by the service recipient. To theextent employment taxes have been with-held and paid with respect to such pay-ment and would not otherwise have beendue absent such payment, appropriate ad-justments should be made in accordancewith the applicable rules under § 6413.To the extent that, in lieu of repayment,the service recipient reduces other com-pensation that would have been paid to theservice provider, the other compensationthat would have been paid to the serviceprovider, but instead is used to repay the er-roneous payment or to pay any required in-terest on the erroneous payment, is includi-ble in income (and wages if the serviceprovider is an employee); however, anyemployment taxes withheld and paid withrespect to the original erroneous paymentmay be applied to satisfy the requirementto withhold and pay employment taxes onsuch compensation, in which case no ad-justment to the employment taxes previ-ously withheld and paid should be made.

4. Adjustments for Earnings

For purposes of this § IV.A, the ser-vice provider’s account balance or otheramount of deferred compensation underthe plan may be adjusted for earnings (orlosses) retroactive to the date the amountshould have been credited to the service

December 22, 2008 1308 2008–51 I.R.B.

provider’s account or otherwise deferred(or if the amount should have otherwiseremained deferred compensation after theend of the service provider’s taxable year,retroactive to the date the amount was paidor made available), provided that such ad-justment must be made on or before the lastday of such taxable year.

5. Examples

In each of the following examples, itis assumed that Employee is an individualwhose taxable year is the calendar year andEmployee and Employer both satisfy theapplicable requirements of §§ III and IXof this notice.

Example 1: Employee, who is not an insider withrespect to Employer, makes a timely election to de-fer 50% of a bonus payable in 2009 pursuant to anaccount balance plan maintained by Employer. Thebonus is $100,000. Employer erroneously defers only10% of the bonus, or $10,000, and pays Employeethe other $90,000 in 2009 (including the $40,000 thatshould have been deferred). The deferral is treated asmade in accordance with the terms of the plan and thedeferral election if, on or before December 31, 2009,the additional $40,000 is credited to Employee’s ac-count balance and Employee pays Employer $40,000.The $40,000 erroneously paid to Employee is not re-quired to be included in income by Employee or re-ported as income by Employer on Form W–2. Al-ternatively, in lieu of the $40,000 repayment by Em-ployee to Employer, compensation otherwise payableto Employee in 2009 (such as salary payments) maybe reduced by $40,000, provided that the $40,000 re-duction in Employee’s compensation used to repaythe amount (but not the $40,000 erroneous payment)is included in income by Employee and reported aswages by Employer on the 2009 Form W–2. Em-ployer may also adjust Employee’s account to reflectthe earnings (or losses) that would have been allo-cated to Employee’s account had the amount beentimely deferred and credited to Employee’s accountbalance, if such adjustment for earnings (or losses) ismade on or before December 31, 2009. For example,if the original $10,000 deferral would have been cred-ited with 10% in deemed investment earnings, the de-ferral plus earnings would be $11,000. This amountmust be increased by the $40,000 repaid by Employeeand may also be increased by an additional $4,000($40,000 multiplied by 10%), to result in the $55,000account balance that would have been reflected hadthe amount been properly deferred. If the original in-correct deferral would have been charged with 10%in deemed investment losses, the deferral less losseswould be $9,000. This account balance must be in-creased by the $40,000, but may also be reduced by$4,000, for a net increase of $36,000, to result in the$45,000 account balance that would have been re-flected had the amount been properly deferred.

Example 2: Employee, who is an insider withrespect to Employer, makes a timely election to defer80% of a $100,000 bonus payable on July 1, 2010,pursuant to an account balance plan maintained byEmployer. Employer erroneously defers only 10%

of the bonus, or $10,000, and pays Employee theother $90,000 (including $70,000 that should havebeen deferred) on July 1, 2010. Assume for purposesof this example that the short-term AFR, based onannual compounding, for July 2010 is 4.0%. Em-ployer notifies Employee of the error and Employeepays Employer $70,705.75 on October 1, 2010,consisting of the $70,000 erroneous payment plusinterest equal to $705.75 ($70,000 x .04 x 92/365)(because the erroneous payment exceeds the limit onelective deferrals that would apply to a qualified planunder § 402(g)(1)(B) for 2010 and Employee is aninsider). The $70,000 is not required to be includedin income by Employee or reported as income byEmployer on Form W–2. Alternatively, in lieu ofthe $70,705.75 payment by Employee to Employer,compensation otherwise payable to Employee in2010 (such as salary payments) may be reducedby $70,000 plus applicable interest, in which casethe reduction in Employee’s compensation used torepay the amount plus applicable interest (but notthe erroneous $70,000 payment) must be reported byEmployer as wages on the 2010 Form W–2 issuedto Employee and included in Employee’s income for2010. Employer may also adjust Employee’s accountto reflect the earnings that would have been allocatedto Employee’s account had the amount been timelydeferred and credited to Employee’s account bal-ance, if such adjustment for earnings is made on orbefore December 31, 2010. Employer must includein income any interest paid to Employer.

B. Incorrect Payment of Amount Payablein Same Taxable Year or IncorrectPayment in Violation of § 409A(a)(2)(B)(i)Corrected in the Same Taxable Year asthe Failure

1. Relief for Amounts to which § IV.BApplies

With respect to an amount to which this§ IV.B applies, the service provider willnot be treated as having failed to complywith § 409A(a)(2)(B)(i) (if applicable) andthe terms of the plan and any applicabledeferral election as a result of the amountbeing paid or made available at the earlierdate.

2. Amounts to which § IV.B Applies

This § IV.B applies if during a serviceprovider’s taxable year an operational fail-ure occurs that is described in § IV.B.2(a)and the requirements of § IV.B.2(b) and§ IV.B.4 are met.

(a) A failure is described in this§ IV.B.2(a) if an amount of nonquali-fied deferred compensation that, underthe terms of the plan and any applica-ble deferral election, should not havebeen paid or made available to a service

provider until a later date in the same tax-able year, was erroneously paid or madeavailable to the service provider more than30 days before such later due date, or anamount of nonqualified deferred compen-sation that, under the terms of the planand any applicable deferral election, and§ 409A(a)(2)(B)(i) (requirement to delayfor six months payments to a specifiedemployee upon separation from service)and the applicable guidance, (i) wouldhave been payable during the six monthsfollowing the service provider’s separa-tion from service if the service providerhad not been a specified employee, (ii)because the service provider was a speci-fied employee the amount should not havebeen paid or made available to a serviceprovider within the six months after theservice provider’s separation from service,and (iii) such amount was erroneously paidor made available to the service providerduring such six-month period.

(b) On or before the last day of theservice provider’s taxable year in whichthe amount was paid or made available,the service provider repays to the servicerecipient the amount that was erroneouslypaid or made available to the serviceprovider, and immediately after such re-payment the service provider has a legallybinding right to receive such amount fromthe service recipient on the date that (i) ifthe repayment is made on or before thedate the amount would otherwise havebeen payable under the terms of the planand the applicable deferral election, isthe same number of days after the datethe amount would otherwise have beenpayable as the number of days from thedate the service recipient made the er-roneous payment to the service providerthrough the date the service provider re-paid the erroneous payment to the servicerecipient, and (ii) if the repayment is madeafter the date the amount would otherwisehave been payable under the terms of theplan and the applicable deferral election,is the same number of days after the datethe amount is repaid as the number ofdays from the date the service recipientmade the erroneous payment to the ser-vice provider through the date the amountwould otherwise have been payable underthe terms of the plan and the applicabledeferral election. For rules regarding thecounting of days, see § III.H of this notice.

2008–51 I.R.B. 1309 December 22, 2008

3. Reporting and WithholdingRequirements

If the requirements of this § IV.B aremet, the original payment from the servicerecipient to the service provider that hasbeen repaid to the service recipient is notrequired to be reported as income on FormW–2 or Form 1099, as applicable. To theextent employment taxes have been with-held and paid with respect to such pay-ment, and would not otherwise have beendue absent such payment, appropriate ad-justments should be made under the appli-cable rules under § 6413. However, thesubsequent payment of the amount by theservice recipient to the service provider isrequired to be reported appropriately asincome on Form W–2 or Form 1099, asapplicable, and subject to the applicableemployment taxes. If the payment is de-ductible by the service recipient, the tax-able year in which such deduction is al-lowable will be determined in accordancewith § 404(a)(5) and the service recipient’smethod of accounting.

4. Adjustment for Earnings

For purposes of this § IV.B, the ser-vice provider’s account balance or otheramount of deferred compensation underthe plan may not be adjusted for earnings,but may be adjusted for losses, retroac-tive to the date the amount was erroneouslypaid or made available, provided that suchadjustment must be made on or before theapplicable deadline for repayment.

5. Examples

In each of the following examples, itis assumed that Specified Employee is anindividual whose taxable year is the cal-endar year, at all relevant times SpecifiedEmployee is a specified employee of Em-ployer for purposes of § 409A(a)(2)(B)(i),and Specified Employee and Employerboth satisfy the applicable requirements of§§ III and IX of this notice.

Example 1: Under a nonqualified deferred com-pensation plan sponsored by Employer, SpecifiedEmployee has a legally binding right to a payment ofdeferred compensation on the first day of the seventhmonth following Specified Employee’s separationfrom service. Specified Employee separates fromservice on December 15, 2008, so that the paymentis due on July 1, 2009. Employer erroneously paysSpecified Employee the amount of deferred compen-sation on March 1, 2009 (122 days before the originalpayment due date). Employer discovers the error on

May 1, 2009, and Specified Employee repays theamount to Employer on June 1, 2009 (92 days afterthe erroneous payment). Provided that immediatelyafter such repayment Specified Employee has alegally binding right to receive the amount from Em-ployer on October 1, 2009 (92 days after the July 1,2009 original payment due date) and Employer doesnot repay the amount to Specified Employee beforethat date, Specified Employee will not be treatedas having failed to comply with § 409A(a)(2)(B)(i)and the terms of the plan and the applicable deferralelection solely as a result of the early payment.

Example 2: Under a nonqualified deferred com-pensation plan sponsored by Employer, SpecifiedEmployee has a legally binding right to a paymentof deferred compensation payable as a lump sumpayment December 1, 2009 (and so not subject to thesix-month delay requirement of § 409A(a)(2)(B)(i)).Employer erroneously pays Specified Employeethe amount of deferred compensation on September1, 2009 (91 days early). Employer discovers theerror and Specified Employee repays the amountto Employer on November 1, 2009 (61 days afterthe erroneous payment). Provided that immediatelyafter such repayment Specified Employee has alegally binding right to receive the amount fromEmployer on January 31, 2010 (61 days after theoriginal payment due date) and Employer does notrepay the amount to Specified Employee beforethat date, Specified Employee will not be treated ashaving failed to comply with the terms of the planand the applicable deferral election solely as a resultof the early payment. The erroneous payment is notincludible in Specified Employee’s income, and isnot required to be reported as income on the 2009Form W–2. Such amount is includible in SpecifiedEmployee’s income in the year in which the amountis repaid by Employer to Specified Employee, andis required to be reported as income on that year’sForm W–2 and subject to applicable income taxes.

C. Excess Deferred Amount Corrected inthe Same Taxable Year

1. Relief for Amounts to which § IV.CApplies

An excess amount to which this § IV.Capplies is not treated as an amount deferredunder the plan.

2. Amounts to which § IV.C Applies

This § IV.C applies if during a serviceprovider’s taxable year an operational fail-ure occurs that is described in §§ IV.C.2(a)and the requirements of § IV.C.2(b) and (c)and § IV.C.3 are met.

(a) A failure is described in this§ IV.C.2(a) if, under the terms of a planand an applicable deferral election, and§ 409A, an amount that should not havebeen deferred compensation under theplan is erroneously credited to the serviceprovider’s account or otherwise treated

as deferred compensation under the plan,and such excess amount otherwise wouldhave been paid to the service providerduring the service provider’s taxable yearin which the excess amount was incor-rectly credited to the service provider’saccount or otherwise treated as deferredcompensation under the plan. However,a service recipient’s failure to timely payin the proper taxable year of a serviceprovider amounts that were deferred inone or more previous taxable years of theservice provider is not a failure describedin this § IV.C.2(a), but see § 1.409A–3(d)for certain circumstances under whichsuch payments may be treated as madein accordance with a designated paymentdate.

(b) The excess amount is paid to theservice provider on or before the last dayof the service provider’s taxable year inwhich the excess amount was incorrectlytreated as deferred compensation.

(c) The amount to which the serviceprovider has a legally binding right underthe plan at the end of the year is adjusted toreflect the payment (for example, througha reduction in the account balance). Theservice recipient may (but is not requiredto) pay reasonable interest to (or other-wise reasonably compensate) the serviceprovider to reflect the time value of moneywith respect to the late payment, providedthat such interest or other compensation ispaid or made available by the end of theservice provider’s taxable year in whichsuch amount was incorrectly treated as de-ferred compensation under the plan.

3. Adjustment for Earnings

If the service provider was an insiderwith respect to the service recipient (asdefined in § III.G of this notice) at anytime during the service provider’s taxableyear during which the failure occurred,the remaining account balance (or otherdeferred compensation under the plan) isadjusted for earnings retroactive to thedate the excess amount was incorrectlycredited to the service provider’s accountor otherwise incorrectly treated as de-ferred under the plan, provided that suchadjustment must be made on or before thelast day of the service provider’s taxableyear in which such amount was incorrectlytreated as deferred compensation underthe plan. If the service provider was not an

December 22, 2008 1310 2008–51 I.R.B.

insider, such adjustment may be made (butis not required). If the amount was subjectto losses, the remaining account balance(or other deferred compensation under theplan) is not required to be adjusted, butmay be adjusted for such losses retroactiveto the date the excess amount was incor-rectly credited to the service provider’saccount or otherwise incorrectly treated asdeferred under the plan, provided that suchadjustment must be made on or before thelast day of the service provider’s taxableyear in which such amount was incorrectlytreated as deferred compensation underthe plan.

4. Example

In the following example, it is assumedthat Employee is an individual whose tax-able year is the calendar year and Em-ployee and Employer both satisfy the ap-plicable requirements of §§ III and IX ofthis notice.

Example: Employee, who is an insider with re-spect to Employer and whose taxable year is the cal-endar year, makes a timely election pursuant to an ac-count balance plan to defer 10% of a bonus otherwisepayable in 2008. The bonus is $100,000. Employererroneously defers 50% of the bonus, or $50,000, andpays Employee $50,000 (instead of deferring $10,000and paying Employee $90,000). The excess $40,000will not be treated as deferred under the plan if onor before December 31, 2008, Employer pays Em-ployee $40,000 of the account balance under the plan.The remaining account balance must be adjusted forearnings and may be adjusted for losses that were al-locable to such amount under the plan. Employermay (but is not required to) pay Employee reasonableinterest on the $40,000 erroneous deferral providedsuch payment is made by December 31, 2008.

D. Correction of Exercise Price ofOtherwise Excluded Stock Rights

1. Relief for Amounts to which § IV.DApplies

If this § IV.D applies to a stock right, thestock right is treated from the date of grantas not providing for a deferral of compen-sation for purposes of § 409A.

2. Amounts to which § IV.D Applies

This § IV.D applies if during a serviceprovider’s taxable year a failure occurs thatis described in § IV.D.2(a) and the require-ments of § IV.D.2(b) are met.

(a) A failure is described in this§ IV.D.2(a) if, under the terms of a stockright, the stock right would not provide

for a deferral of compensation under§ 1.409A–1(b)(5)(i)(A) (excluded stockoptions) or § 1.409A–1(b)(5)(i)(B) (ex-cluded stock appreciation rights), exceptthat the exercise price of the stock rightis erroneously established at less than thefair market value of the underlying stockon the date of grant.

(b) Before the stock right is exercisedand not later than the last day of the serviceprovider’s taxable year in which the ser-vice recipient granted the service providerthe stock right, the exercise price is resetto an amount not less than the fair marketvalue of the underlying stock on the dateof grant.

3. Example

In the following example, it is assumedthat Employee is an individual whose tax-able year is the calendar year and Em-ployee and Employer both satisfy the ap-plicable requirements of §§ III and IX ofthis notice.

Example: On January 1, 2009, Employer grantsEmployee a stock option to purchase 100 shares ofstock, and the stock option otherwise would not pro-vide for a deferral of compensation for purposes of§ 409A except that due to an error the exercise priceis set at an amount below the fair market value ofthe stock on January 1, 2009. On July 1, 2009, Em-ployee partially exercises the stock option and pur-chases 40 shares, but retains a stock option to pur-chase 60 shares. Provided that before the earlier ofJanuary 1, 2009 or the exercise of the remaining stockoption to purchase 60 shares, the exercise price of thestock option to purchase 60 shares is reset to a price ator above the fair market value of the underlying stockon January 1, 2009, the stock option to purchase 60shares may qualify for the relief provided in this sec-tion. Because the exercise price was not reset beforethe exercise on July 1, 2009, the portion of the stockoption that was exercised to purchase 40 shares is noteligible for the relief provided in this section.

V. CORRECTIONS OF CERTAINOPERATIONAL FAILURESINVOLVING NON-INSIDERSERVICE PROVIDERS IN THETAXABLE YEAR IMMEDIATELYFOLLOWING THE TAXABLE YEARIN WHICH THE FAILURE OCCURS

A. In General

The relief provided in this § V is avail-able only with respect to service providersthat are not insiders as defined in § III.Gof this notice at any time during the serviceprovider’s taxable year in which the opera-tional failure occurs, or at any time during

the immediately following taxable year.The relief is available with respect to suchservice providers regardless of whether thesame or a substantially similar failure oc-curred with respect to a service providerthat is an insider, but in no case is the reliefavailable with respect to a service providerthat is an insider at any time during ei-ther taxable year. For example, if an op-erational failure under an arrangement re-sults in two erroneous $10,000 payments,one to a service provider that is an insiderand one to a service provider that is notan insider, the relief provided in this § Vmay be available with respect to the ser-vice provider that is not an insider (pro-vided that all other requirements are met),but is not available with respect to the ser-vice provider that is an insider. The reliefprovided in this § V may be available re-gardless of whether relief is also availableunder § VI or VII of this notice, so that therelief provided in this section may be uti-lized in lieu of the relief otherwise avail-able under § VI or VII of this notice.

B. Failure to Defer Amount or IncorrectPayment of Amount Payable in aSubsequent Taxable Year Corrected in theTaxable Year Immediately Following theFailure

1. Relief for Amounts to which § V.BApplies

An amount to which this § V.B appliesis treated as having been timely deferredin accordance with the terms of the planand any applicable deferral election (or ashaving continued to be deferred under theterms of the plan).

2. Amounts to which § V.B Applies

This § V.B applies if during a serviceprovider’s taxable year an operational fail-ure that is described in § V.B.2(a) occursand the requirements of § V.B.2(b) through(d) and §§ V.B.3 and 4 are met.

(a) A failure is described in this§ V.B.2(a) if an amount of nonqualifieddeferred compensation that, under theterms of the plan and any applicable defer-ral election, and § 409A, should not havebeen paid or made available to a serviceprovider in a taxable year of the serviceprovider, erroneously was paid or madeavailable in that year, and such payment is

2008–51 I.R.B. 1311 December 22, 2008

not a payment that fails to meet the require-ments of § 409A(a)(2)(B)(i) (requirementto delay for six months payments to aspecified employee upon separation fromservice).

(b) The service provider repays to theservice recipient the amount that was erro-neously paid or made available to the ser-vice provider during the service provider’staxable year immediately following thetaxable year in which such amount waserroneously paid or made available. Ifrepayment of such amount would causean immediate and heavy financial needas defined in §1.401(k)–1(d)(3)(iii), theservice recipient and the service providermay enter into a legally binding agree-ment to have such amounts repaid over aspecified period that ends not later than 24months from the due date (without exten-sions) for the federal income tax return forthe service provider’s taxable year duringwhich the amount was erroneously paidor made available to the service provider.However, the repayment requirement ofthis § V.B.2(b) will not be met unless allpayments are made by the end of the pe-riod specified in such agreement. If theamount erroneously paid or made avail-able to the service provider is otherwisepayable under the terms of the plan dur-ing the subsequent taxable year duringwhich repayment would be required underthis § V.B.2(b), no repayment is required.However, the service provider must paythe interest payment set forth in § V.B.2(d)below assuming that the first date duringthe subsequent taxable year at which theamount otherwise could have been paid incompliance with the plan terms is the dateof repayment.

(c) Immediately after such repay-ment (or agreement to repay), the serviceprovider has a legally binding right underthe plan to be paid the amount that wouldhave been due if such amount had not beenerroneously paid or made available to theservice provider during such taxable year,at the same time and in the same formof payment that the amount would havebeen payable if such amount had not beenerroneously paid or made available to theservice provider during such taxable year.

(d) The service provider pays interestto the service recipient at the time the ser-vice provider repays the amount to the ser-

vice recipient with interest at a rate not lessthan the short-term applicable Federal rate(AFR) under § 1274(d)(1), based on an-nual compounding, for the month in whichthe erroneous payment was paid or madeavailable, compounded as of the end of theservice provider’s taxable year. For thispurpose, the interest rate is the short-termAFR for the month in which the erroneouspayment was paid or made available. If theamount paid on a repayment date is lessthan the entire erroneous payment, for eachrepayment date the interest calculation isapplied by substituting the unpaid balanceimmediately before the repayment for theamount of the erroneous payment.

3. Reporting and WithholdingRequirements

The amount erroneously paid to the ser-vice provider that is repaid by the serviceprovider to the service recipient is requiredto be included in income by the serviceprovider, and reported as income to theservice provider on a Form W–2 or Form1099 by the service recipient, for the yearin which the erroneous payment is made.As part of the relief provided by this sec-tion, the service provider is permitted totake a deduction in determining adjustedgross income equal to the repayment to theservice recipient (but not including any in-terest payment), but is required to includethe subsequent payment in income (and theservice recipient is required to report theamount as income on Form W–2 or Form1099). To the extent that, in lieu of repay-ment, the service recipient reduces othercompensation that would have been paidto the service provider, the other compen-sation that would have been paid to theservice provider but that instead is usedto repay the erroneous payment or to payany required interest on the erroneous pay-ment, is includible in income (and wages ifthe service provider is an employee); how-ever, with respect to the amount repaid (ex-cluding any interest payment), the serviceprovider is permitted to take a deduction indetermining adjusted gross income for theamount of the repayment.

4. Adjustment for Earnings

For purposes of this § V.B, the ser-vice provider’s account balance or other

amount of deferred compensation underthe plan may be adjusted for earnings (orlosses) retroactive to the date the amountshould have been credited to the serviceprovider’s account or otherwise deferred(or if the amount should have otherwiseremained deferred compensation after theend of the service provider’s taxable year,retroactive to the date the amount was paidor made available), provided that such ad-justment must be made on or before the lastday of the taxable year in which the repay-ment is made.

5. Example

In the following example, it is assumedthat Employee is an individual whose tax-able year is the calendar year, at all rele-vant times Employee is not an insider asdefined in § III.G of this notice, and Em-ployee and Employer both satisfy the ap-plicable requirements of §§ III and IX ofthis notice.

Example: Employee makes a timely election todefer 20% of a $100,000 bonus payable on July 1,2010, pursuant to an account balance plan maintainedby Employer. Employer erroneously defers only 10%of the bonus, or $10,000, and pays Employee theother $90,000 (including $10,000 that should havebeen deferred) on July 1, 2010. Assume for purposesof this example that the short-term AFR for July 2010is 4.0%. Employer notifies Employee of the errorand Employee pays Employer $10,505.73 on Octo-ber 1, 2011, consisting of the $10,000 erroneous pay-ment plus $505.73 interest.2 The deferral is treated asmade in accordance with the terms of the plan underthis § V.B. For 2010, the $10,000 payment is requiredto be included in income by Employee and reportedas wages by Employer on the 2010 Form W–2. For2011, Employee may take a deduction with respect tothe $10,000 repayment in determining adjusted grossincome, but may not deduct the interest payment. Al-ternatively, in lieu of the $10,505.73 payment by Em-ployee to Employer, compensation otherwise payableto Employee in 2011 (such as salary payments) maybe reduced by $10,000 plus applicable interest, inwhich case the reduction in Employee’s compensa-tion used to repay the amount plus applicable interestmust be reported by Employer as wages on the 2011Form W–2 issued to Employee and included in Em-ployee’s income for 2011. In such a case, Employeemay take a deduction with respect to the $10,000 re-payment in determining adjusted gross income, butmay not deduct the interest payment. Employer mayalso adjust Employee’s account to reflect the earningsthat would have been allocated to Employee’s ac-count had the amount been timely deferred and cred-ited to Employee’s account balance, if such adjust-ment for earnings is made on or before December 31,2011.

2 Interest during 2010 = ($10,000 x (183/365) x 4.0%) = $200.55. Interest during 2011 = ($10,200.55 x (273/365) x 4.0%) = $305.18. Total interest = $200.55 + $305.18 = $505.73.

December 22, 2008 1312 2008–51 I.R.B.

C. Incorrect Payment of Amount Payablein Same Taxable Year or IncorrectPayment in Violation of § 409A(a)(2)(B)(i)Corrected During Subsequent TaxableYear

1. Relief for Amounts to which § V.CApplies

With respect to an amount to which this§ V.C applies, the service provider willnot be treated as having failed to complywith § 409A(a)(2)(B)(i) (if applicable) andthe terms of the plan and any applicabledeferral election as a result of the amountbeing paid or made available as describedin § V.C.2(a) of this notice.

2. Amounts to which § V.C Applies

This § V.C applies if during a serviceprovider’s taxable year an operational fail-ure occurs that is described in § V.C.2(a)and the requirements of § V.C.2(b) and (c)and §§ V.C.3 and 4 are met.

(a) A failure is described in this§ V.C.2(a) if an amount of nonqualifieddeferred compensation that, under theterms of the plan and any applicable defer-ral election, should not have been paid ormade available to a service provider untila later date in the same taxable year, waserroneously paid or made available to theservice provider during such taxable yearbut more than 30 days before such laterdue date, or an amount of nonqualified de-ferred compensation that, under the termsof the plan and any applicable deferralelection, and § 409A(a)(2)(B)(i) (require-ment to delay for six months paymentsto a specified employee upon separationfrom service), (i) would have been payableduring the six months following the ser-vice provider’s separation from service ifthe service provider had not been a spec-ified employee, (ii) because the serviceprovider was a specified employee theamounts should not have been paid ormade available to a service provider withinsix months after the service provider’s sep-aration from service, and (iii) such amountwas erroneously paid or made available tothe service provider before the expirationof such six-month period.

(b) On or before the last day of theservice provider’s taxable year immedi-ately following the taxable year in whichthe amount was paid or made available,the service provider repays to the service

recipient the amount that was erroneouslypaid or made available to the serviceprovider.

(c) Immediately after such repaymentthe service provider has a legally bindingright to receive such amount from the ser-vice recipient on the date that is the samenumber of days after the date the amount isrepaid as the number of days from the datethe service recipient made the erroneouspayment to the service provider throughthe date the amount would otherwise havebeen payable under the terms of the planand the applicable deferral election. Forrules regarding the counting of days, see§ III.H of this notice.

3. Reporting and WithholdingRequirements

If the requirements of this § V.C aremet, the original payment from the servicerecipient to the service provider that hasbeen repaid to the service recipient is re-quired to be reported as income on FormW–2 or Form 1099, as applicable. If therepayment by the service provider to theservice recipient and the subsequent pay-ment from the service recipient to the ser-vice provider both occur within the sametaxable year of the service provider, theservice provider is not permitted to deductthe repayment, but also is not required toinclude the subsequent payment in income(and the service recipient is not required toreport the amount as income on Form W–2or Form 1099). As part of the relief pro-vided in this section, if the repayment bythe service provider to the service recipi-ent and the subsequent payment from theservice recipient to the service provider donot occur within the same taxable year ofthe service provider, the service provideris permitted a deduction in determining ad-justed gross income equal to the amount ofthe repayment, but is required to includethe subsequent payment in income (and theservice recipient is required to report theamount as income on Form W–2 or Form1099). To the extent that, in lieu of repay-ment, the service recipient reduces othercompensation that would have been paidto the service provider, the other compen-sation that would have been paid to the ser-vice provider, but instead is used to repaythe erroneous payment is includible in in-come (and wages if the service provider isan employee); however, with respect to the

amount repaid, the service provider is per-mitted a deduction in determining adjustedgross income equal to the amount of the re-payment.

4. Adjustment for Earnings

For purposes of this § V.C, the ser-vice provider’s account balance or otheramount of deferred compensation underthe plan may not be adjusted for earnings,but may be adjusted for losses, retroac-tive to the date the amount was erroneouslypaid or made available, provided that suchadjustment must be made on or before theapplicable deadline for repayment.

5. Example

In the following example, it is assumedthat Employee is an individual whose tax-able year is the calendar year, Employee isnot an insider as defined in § III.G of thisnotice at all relevant times, and Employeeand Employer both satisfy the applicablerequirements of §§ III and IX of this no-tice.

Example: Under a nonqualified deferred compen-sation plan sponsored by Employer, Employee has alegally binding right to a payment of deferred com-pensation on the specified date of July 1, 2009. Em-ployer erroneously pays Employee the amount of de-ferred compensation on May 1, 2009 (61 days beforethe original payment due date). Employer discoversthe error on August 1, 2010, and Employee repaysthe amount to Employer on August 1, 2010. Providedthat immediately after such repayment Employee hasa legally binding right to receive the amount fromEmployer on October 1, 2010 (61 days after the Au-gust 1, 2010 repayment date) and Employer does notrepay the amount to Employee before that date, Em-ployee will not be treated as having failed to complywith the terms of the plan and the applicable deferralelection solely as a result of the early payment.

D. Excess Deferred Amount Corrected inthe Taxable Year Immediately Followingthe Year of the Failure

1. Relief for Amounts to which § V.DApplies

An excess amount to which this § V.Dapplies is not treated as an amount deferredunder the plan.

2. Amounts to which § V.D. Applies

This § V.D applies if during a serviceprovider’s taxable year an operational fail-ure occurs that is described in § V.D.2(a)and the requirements of § V.D.2(b) through(d) and § V.D.3 are met.

2008–51 I.R.B. 1313 December 22, 2008

(a) A failure is described in this§ V.D.2(a) if, under the terms of a planand an applicable deferral election, and§ 409A, an amount that should not havebeen deferred compensation under theplan is erroneously credited to the serviceprovider’s account or otherwise treatedas deferred compensation under the plan,and such excess amount otherwise wouldhave been paid to the service provider dur-ing the service provider’s taxable year inwhich the excess amount was incorrectlycredited to the service provider’s accountor otherwise treated as deferred compen-sation under the plan.

(b) The excess amount is paid to the ser-vice provider during the service provider’staxable year immediately following thetaxable year in which the excess amountwas incorrectly treated as deferred com-pensation.

(c) The amount to which the serviceprovider has a legally binding right underthe plan at the end of such immediately fol-lowing taxable year is adjusted to reflectthe payment (for example, through a re-duction in the account balance).

(d) The service recipient does not payinterest to (or otherwise compensate) theservice provider to reflect the time valueof money with respect to the late payment.

3. Adjustment for Earnings

The remaining account balance (orother deferred compensation under theplan) must be adjusted for earnings andmay be adjusted for losses retroactive tothe date the excess amount was incorrectlycredited to the service provider’s accountor otherwise incorrectly treated as deferredunder the plan, provided that such adjust-ment must be made on or before the lastday of the service provider’s taxable yearfollowing the year in which such amountwas incorrectly treated as deferred com-pensation under the plan.

4. Example

In the following example, it is assumedthat Employee is an individual whose tax-able year is the calendar year, at all rele-vant times Employee is not an insider asdefined in § III.G of this notice, and Em-ployee and Employer both satisfy the ap-plicable requirements of §§ III and IX ofthis notice.

Example: Employee makes a timely electionpursuant to an account balance plan to defer 10%of a bonus otherwise payable in 2010. The bonusis $100,000. Employer erroneously defers 20% ofthe bonus, or $20,000, and pays Employee $80,000(instead of deferring $10,000 and paying Employee$90,000). Employer pays Employee $10,000 of theaccount balance under the plan on July 1, 2011. Pro-vided that Employee includes in income the $10,000payment in 2011, Employee is not required to includeany amount in income under § 409A. The remainingaccount balance must be adjusted for earnings andmay be adjusted for losses that were allocable to such$10,000 amount under the plan. However, Employermay not pay Employee interest on the $10,000 erro-neous deferral or otherwise compensate Employeefor the loss of the use of such funds.

E. Correction of Exercise Price ofOtherwise Excluded Stock Rights

1. Relief for Amounts to which § V.EApplies

If this § V.E applies to a stock right, thestock right is treated from the date of grantas not providing for nonqualified deferredcompensation for purposes of § 409A.

2. Amounts to which § V.E. Applies

This § V.E applies if during a serviceprovider’s taxable year a failure occurs thatis described in § V.E.2(a) and the require-ments of § V.E.2(b) are met.

(a) A failure is described in this§ V.E.2(a) if, under the terms of a stockright, the stock right would not providefor a deferral of compensation under§ 1.409A–1(b)(5)(i)(A) (excluded stockoptions) or § 1.409A–1(b)(5)(i)(B) (ex-cluded stock appreciation rights), exceptthat the exercise price of the stock rightis erroneously established at less than thefair market value of the underlying stockon the date of grant.

(b) Before the stock right is exercisedand not later than the last day of the serviceprovider’s taxable year immediately fol-lowing the service provider’s taxable yearin which the service recipient granted theservice provider the stock right, the exer-cise price is reset to an amount equal to orexceeding the fair market value of the un-derlying stock on the date of grant, and atall times before such increase in the exer-cise price the stock right otherwise wouldnot have provided for a deferral of com-pensation for purposes of § 409A.

3. Example

In the following example, it is assumedthat Employee is an individual whose tax-able year is the calendar year, Employee isnot an insider as defined in § III.G of thisnotice at all relevant times, and Employeeand Employer both satisfy the applicablerequirements of §§ III and IX of this no-tice.

Example. On January 1, 2009, Employer grantsEmployee a stock option to purchase 100 shares ofstock, and the stock option otherwise would not pro-vide for a deferral of compensation under § 409Aexcept that due to an administrative error the exer-cise price is set at an amount below the fair marketvalue of the stock on January 1, 2009. On July 1,2010, Employee partially exercises the stock optionand purchases 40 shares, but retains a stock option topurchase 60 shares. Provided that before the later ofJanuary 1, 2011 or the date the remaining stock op-tion to purchase 60 shares is exercised, the exerciseprice of the stock option to purchase 60 shares is re-set to a price at or above the fair market value of theunderlying stock on January 1, 2009, the stock optionto purchase 60 shares may qualify for the relief pro-vided in this section. Because the exercise price wasnot reset before the July 1, 2010 exercise, the portionof the stock option that was exercised to purchase 40shares is not eligible for the relief provided in this sec-tion.

VI. RELIEF FOR CERTAINOPERATIONAL FAILURESINVOLVING LIMITED AMOUNTS

A. In General

If an operational failure to comply with§ 409A(a) occurs, but the operational fail-ure qualifies for the relief provided in this§ VI and the taxpayer meets the require-ments of this § VI, the amount required tobe included in income under § 409A(a) asa result of the failure, and the resulting ad-ditional taxes under § 409A, are limited inaccordance with the provisions of this sec-tion. The relief provided by this sectionis not available with respect to any fail-ure unless all of the requirements of thissection (including any applicable require-ment to file an original or amended return,but not including the requirements of § IXof this notice) have been satisfied not laterthan the end of the second taxable year ofthe service provider following the taxableyear of the service provider in which suchfailure occurred. The relief provided inthis section is available even if additionalrelief would otherwise be available under§ V or § VII of this notice if certain fur-ther actions were taken, so that the relief

December 22, 2008 1314 2008–51 I.R.B.

provided in this section may be utilized inlieu of the relief otherwise available under§ V or § VII of this notice.

B. Failure to Defer Limited Amount notCorrected in the Same Taxable Year andCertain Erroneous Payments of LimitedAmounts

1. Relief for Amounts to which § VI.BApplies

With respect to an amount to which§ VI.B applies, the amount includible inincome under § 409A(a) as a result of apayment described in § VI.B.2(a) is lim-ited to the amount that should have beentreated as deferred compensation underthe plan (or should have continued to bedeferred compensation under the plan) butwas instead paid or made available to theservice provider, and does not include anyother amounts deferred under the plan.In addition, with respect to such amountincludible in income under § 409A(a), theservice provider is required to pay the ad-ditional tax under § 409A(a)(1)(B)(i)(II)(the additional 20% tax), but is not re-quired to pay the additional tax under§ 409A(a)(1)(B)(i)(I) (the premium inter-est tax).

2. Amounts to which § VI.B Applies

This § VI.B applies if during a serviceprovider’s taxable year an operational fail-ure occurs that is described in § IV.B.2(a)and the requirements of § IV.B.2(b) and (c)and § VI.B.3 are met.

(a) A failure is described in this§ IV.B.2(a) if an amount should have beentreated as deferred compensation underthe terms of the plan and any applicabledeferral election, and § 409A, but theamount was not credited to the serviceprovider’s account or otherwise treated asdeferred compensation during the serviceprovider’s taxable year, or did not remaindeferred compensation after the end ofsuch year, and because the amount was notcredited to the service provider’s accountor otherwise treated as deferred compen-sation under the plan during such year,or did not remain deferred compensationunder the plan after the end of such year,the amount was paid or made availableto the service provider during the serviceprovider’s taxable year. For purposes of

this section, a payment of an amount (in-cluding a payment of an amount that is oneof a series of installment payments or lifeannuity payments) that (a) under the termsof the plan and § 409A(a)(2)(B)(i) is re-quired to be delayed for at least six monthsfollowing a separation from service, but ispaid within that six-month-period, or (b)is paid in the same taxable year in whichthe amount was payable under the plan,but more than 30 days before such duedate, may be treated as the payment of anamount that should have continued to bedeferred compensation.

(b) Sections IV.A, IV.B, V.B, V.C, VII.Band VII.C of this notice do not apply be-cause relief is not available under such sec-tions with respect to the failure, the failureis not corrected under such sections, or oth-erwise.

(c) The amount paid or made availableto the service provider does not exceed thelimit on elective deferrals that would applyto a qualified plan under § 402(g)(1)(B) forthe year of the operational failure. For pur-poses of this section, the plan includes anyarrangements treated as a single plan un-der § 1.409A–1(c), so that this section willapply only if any and all erroneous pay-ments under the plan, in the aggregate, ofamounts that otherwise should have beentreated as deferred compensation with re-spect to the service provider during the tax-able year (or should have continued to bedeferred compensation during the taxableyear), do not exceed the limit on electivedeferrals that would apply to a qualifiedplan under § 402(g)(1)(B) for such year.

3. Reporting and Filing Requirements

The service recipient must report suchpayment on a Form W–2 (or Form W–2c)or Form 1099 (or corrected Form 1099), asapplicable, as an amount includible in in-come under § 409A for the year in whichthe payment was made, including report-ing such amount on a Form W–2, Box 12using Code Z, if applicable. The serviceprovider must include such amount in in-come on and pay the additional taxes under§ 409A as described in this section with anoriginal or amended federal income tax re-turn for the taxable year in which the pay-ment was made.

4. Examples

It is assumed for purposes of the follow-ing examples that Employee is an individ-ual whose taxable year is the calendar yearand Employee and Employer both satisfythe applicable requirements of §§ III andIX of this notice.

Example 1: Employee makes a timely electionto defer 10% of a bonus payable in 2008 pursuantto an account balance plan. The bonus is $100,000.Employer erroneously defers only 8% of the bonus,or $8,000, and pays Employee $92,000 (instead ofdeferring $10,000 and paying Employee $90,000).Employer discovers the error on February 1, 2010.As a payment to Employee, Employer must treatthe amount as a wage payment for employment taxand reporting purposes, as appropriate, includingreporting as income and wages on the 2008 FormW–2. Employer is permitted to report as incomeunder § 409A on the 2008 Form W–2 (or 2008 FormW–2c), Box 12, using Code Z, only $2,000, andEmployee is permitted to include in income under§ 409A for 2008 only $2,000. Furthermore, Em-ployee is permitted to pay the additional 20% taxonly with respect to the $2,000 (or $400 in additionalincome tax), and is not required to pay the premiuminterest tax. However, to qualify for the relief, Em-ployee must file an original or amended 2008 incometax return reflecting the additional tax on or beforeDecember 31, 2010.

Example 2: Employee is a specified employeeentitled under a nonqualified deferred compensationplan to a life annuity commencing upon the firstday of the seventh month following the specifiedemployee’s separation from service. The annuitypayments are $5,000 per month. Employee separatesfrom service on April 18, 2008, and is scheduledto receive an initial annuity payment on November1, 2008. Due to a miscalculation of the specifiedemployee’s separation from service date, Employeereceives a $5,000 payment on October 1, 2008,before the end of the six-month period followingEmployee’s separation from service. Employer andEmployee do not discover the error until 2010. Em-ployer must treat the amount paid to Employee asa wage payment for employment tax and reportingpurposes, as appropriate, including reporting as in-come on the 2008 Form W–2. Employer is permittedto report as income under § 409A on the 2008 FormW–2 (or 2008 Form W–2c), Box 12, using Code Z,only $5,000, and Employee is permitted to include inincome under § 409A in 2008 only $5,000. Further-more, Employee is permitted to pay the additional20% tax only with respect to the $5,000 (or $1,000in additional income tax), and is not required to paythe premium interest tax. However, to qualify for therelief, Employee must file an original or amended2008 income tax return reflecting the additional taxon or before December 31, 2010.

2008–51 I.R.B. 1315 December 22, 2008

C. Limited Excess Deferred Amount notCorrected in the Same Taxable Year

1. Relief for Amounts to which § VI.CApplies

With respect to amounts to which§ VI.C applies, the amount includiblein income under § 409A(a) as a resultof an operational failure described in§ VI.C.2(a) is limited to the excess amountpaid to the service provider, and doesnot include any other deferred compensa-tion under the plan, and such amount isincludible in income only when paid tothe service provider in accordance withthis section. In addition, with respect tothis amount includible in income under§ 409A(a), the service provider is requiredto pay the additional 20% tax, but is notrequired to pay the premium interest tax.

2. Amounts to which § VI.C Applies

This § VI.C applies if during a serviceprovider’s taxable year an operational fail-ure occurs that is described in § VI.C.2(a)and the requirements of § VI.C.2(b)through (d) and §§ VI.C.3 and 4 are met:

(a) A failure is described in this§ VI.C.2(a) if, under the terms of the planand any applicable deferral election, and§ 409A, an amount of deferred compensa-tion under the plan should have been paidor made available to the service providerduring the service provider’s taxable year,or an amount is treated as deferred com-pensation under the plan that should havebeen paid or made available to the serviceprovider during the service provider’s tax-able year, but such amount erroneously isnot paid or made available to the serviceprovider.

(b) Sections IV.C, V.D and VII.D of thisnotice do not apply because relief is notavailable under such sections with respectto the failure, the failure is not correctedunder such sections, or otherwise.

(c) The amount that should have beenpaid or made available to the serviceprovider during that service provider’staxable year does not exceed the limit onelective deferrals that would apply to aqualified plan under § 402(g)(1)(B) forsuch year. For purposes of this section,the plan includes any arrangements treatedas a single plan under § 1.409A–1(c), sothat this section will apply only if any andall erroneous deferrals under the plan, in

the aggregate, of amounts that otherwiseshould have been paid during the ser-vice provider’s taxable year to the serviceprovider do not exceed the applicable limiton elective deferrals that would apply to aqualified plan under § 402(g)(1)(B).

(d) By the end of the service provider’ssecond taxable year following the yearin which the failure occurred, the servicerecipient pays the service provider theamount that should have been paid ormade available to the service provider.

3. Reporting and Withholding

The service recipient must report suchpayment on a Form W–2 or Form 1099, asapplicable, for the year of the payment inaccordance with the requirements of thissection. If the service recipient properlyreports the payment as includible in in-come under § 409A on a Form W–2, ifapplicable, for the year in which the pay-ment was made, including reporting suchamount on Form W–2, Box 12 using CodeZ, the service recipient will not be subjectto penalties or liability for the failure toproperly withhold under § 3402(d). Theservice provider must include such amountin income and pay the additional taxes un-der § 409A(a) as described in this sectionon an original or amended federal incometax return.

4. Adjustment for Earnings

Any earnings allocable to such amountsthrough the date of the payment must ei-ther be forfeited or added to the payment tothe service provider, and any losses alloca-ble to such amounts through the date of thepayment must either be permanently disre-garded or subtracted from the payment tothe service provider.

5. Example

It is assumed for purposes of the follow-ing example that Employee is an individ-ual whose taxable year is the calendar yearand Employee and Employer both satisfythe applicable requirements of §§ III andIX of this notice.

Example: Employee makes a timely election todefer 8% of a bonus payable in 2009 into an accountbalance plan. The bonus is $100,000. Employer er-roneously defers 10% of the bonus, or $10,000, andpays Employee $90,000 (instead of deferring $8,000and paying Employee $92,000). Employer discoversthe error on February 1, 2010. On March 1, 2010,

at which time Employee’s account balance includes$150 in earnings on the excess $2,000 credited tothe account, Employer pays Employee $2,150. Em-ployer reports the $2,150 as income under § 409A onthe 2010 Form W–2, Box 1 and Box 12, using CodeZ. Provided that Employee reports such income andpays the applicable taxes, including the additional§ 409A taxes, on a 2010 Form 1040, Employee is notrequired to include any additional amounts deferredunder the plan in income under § 409A(a) or to in-clude any amount in income under § 409A for yearsbefore 2010, and with respect to the $2,150 includi-ble in income under § 409A is required to pay onlythe additional 20% tax (or $425 in additional incometax), and not the premium interest tax. Employer mayalso have paid Employee only the $2,000 excess de-ferred amount if the $150 in earnings on such amountwere forfeited.

VII. RELIEF FOR CERTAIN OTHEROPERATIONAL FAILURES

A. General Requirements

If an operational failure to comply with§ 409A(a) occurs but the operational fail-ure qualifies for the relief provided in this§ VII and is corrected in accordance withthis § VII, the amount required to be in-cluded in income under § 409A(a) as a re-sult of the failure, and the resulting addi-tional taxes under § 409A, are limited inaccordance with the provisions of this sec-tion. The relief provided by this section isnot available with respect to any failure un-less all of the requirements of this section(including any requirement to file an origi-nal or amended return, but not the require-ments of § IX of this notice) have been sat-isfied not later than the end of the secondtaxable year of the service provider follow-ing the taxable year of the service providerin which such failure occurred.

B. Failure to Defer Amount not Correctedin the Same Taxable Year and CertainErroneous Payments

1. Relief for Amounts to which § VII.BApplies

With respect to amounts to which§VII.B applies, the amount includible inincome under § 409A(a) as a result of apayment described in § VII.B.2(a) is lim-ited to the amount that should have beentreated as deferred compensation underthe plan (or should have continued to bedeferred compensation under the plan) butwas instead paid or made available to theservice provider, and does not include anyother amounts deferred under the plan.

December 22, 2008 1316 2008–51 I.R.B.

In addition, with respect to such amountincludible in income under § 409A(a), theservice provider is required to pay the ad-ditional tax under § 409A(a)(1)(B)(i)(II)(the additional 20% tax) for the year inwhich the amount is includible in incomeunder § 409A(a) (the year of the failure),but is not required to pay the additionaltax under § 409A(a)(1)(B)(i)(I) (the pre-mium interest tax). If the requirements ofthis section are met, for taxable years fol-lowing the year during which the failureoccurred, the amount repaid by the serviceprovider is treated as an amount previ-ously included in income for purposes of§ 409A(c).

2. Amounts to which § VII.B Applies

This § VII.B applies if during a serviceprovider’s taxable year an operational fail-ure occurs that is described in § VII.B.2(a)and the requirements of § VII.B.2(b)through (d) and §§ VII.B.3 and 4 are met:

(a) A failure is described in this§ VII.B.2(a) if an amount of nonquali-fied deferred compensation that, underthe terms of the plan and any applica-ble deferral election, and § 409A, shouldnot have been paid or made availableto a service provider in a taxable yearof the service provider, was erroneouslypaid or made available to the serviceprovider in that year, and such paymentdoes not fail to meet the requirements of§ 409A(a)(2)(B)(i) (requirement to delayfor six months payments of a specifiedemployee upon separation from service).For rules relating to correction of certainpayments that fail to meet such require-ments, see § VII.C of this notice;

(b) Sections IV.A, IV.B, V.B, V.C andVI.B of this notice do not apply becauserelief is not available under such sectionswith respect to such failure, the failure isnot corrected under such sections, or oth-erwise;

(c) The service provider repays to theservice recipient the amount that was er-roneously paid or made available to theservice provider on or before the last dayof the service provider’s second taxableyear following the year in which the erro-neous overpayment occurred, and imme-diately after such repayment the serviceprovider has a legally binding right underthe plan to be paid the amount that wouldhave been due if such amount had not been

erroneously paid or made available to theservice provider, at the same time and inthe same form of payment that the amountwould have been payable if such amounthad not been erroneously paid or madeavailable to the service provider.

(d) If the service provider is an insider(as defined in this § III.G) with respect tothe service recipient, the service providerpays interest to the service recipient atthe time the service provider repays theamount to the service recipient at a ratenot less than the short-term applicable Fed-eral rate (AFR) under § 1274(d)(1), basedon annual compounding, for the monthin which the erroneous payment was paidor made available, compounded as of theend of the service provider’s taxable year.For this purpose, the interest rate is theshort-term AFR for the month in whichthe erroneous payment was paid or madeavailable. If the amount paid on a repay-ment date is less than the entire erroneouspayment, for each repayment date the in-terest calculation is applied by substitutingthe unpaid balance immediately before therepayment for the amount of the erroneouspayment.

3. Reporting and Withholding

The service recipient must report the er-roneous payment as an amount includiblein income under § 409A on a Form W–2(or Form W–2c), under Box 12, Code Z,or Form 1099 (or corrected Form 1099),as applicable, for the year in which theerroneous payment was made. The ser-vice provider must include the amount ofthe erroneous payment in income under§ 409A on and pay the additional taxes un-der § 409A(a) with an original or amendedfederal income tax return for the year inwhich the erroneous payment was made,and must not claim a deduction or other ad-justment reflecting the repayment for theyear in which the service provider repaysthe amount to the service recipient.

4. Adjustment for Earnings

For purposes of this § VII.B, the ser-vice provider’s account balance or otheramount of deferred compensation underthe plan may be adjusted for earnings (orlosses) retroactive to the date the amountshould have been credited to the serviceprovider’s account or otherwise deferred

(or if the amount should have otherwiseremained deferred compensation after theend of the service provider’s taxable year,retroactive to the date the amount was paidor made available), provided that such ad-justment must be made on or before the ap-plicable deadline for repayment.

5. Example

It is assumed for purposes of the fol-lowing example that Employee is an indi-vidual whose taxable year is the calendaryear, at all relevant times Employee is notan insider with respect to Employer as de-fined in § III.G, and Employee and Em-ployer both satisfy the applicable require-ments of §§ III and IX of this notice.

Example: Employee makes a timely election todefer 50% of a bonus payable in 2008 pursuant to anaccount balance plan. The bonus is $300,000. Em-ployer erroneously defers only 25% of the bonus, or$75,000, and pays Employee $225,000 (instead ofdeferring $150,000 and paying Employee $150,000).Employer discovers the error on June 1, 2010. Em-ployee pays $75,000 to Employer on July 1, 2010 (oralternatively, Employer retains $75,000 of compen-sation that Employee was otherwise due on July 1,2010). As a payment to Employee, Employer musttreat the 2008 payment as a wage payment for em-ployment tax and reporting purposes, as appropriate,including reporting as income and wages on the 2008Form W–2. Employer is permitted to report as in-come under § 409A on the 2008 Form W–2 (or 2008Form W–2c), Box 12, using Code Z, only $75,000,and Employee is permitted to include in income under§ 409A for 2008 only $75,000. Furthermore, for 2008Employee is permitted to pay the additional 20% taxonly with respect to the $75,000 (or $15,000 in ad-ditional income tax), and is not required to pay thepremium interest tax. The 2010 Form W–2 providedto the Employee must not reflect any reduction in in-come due to the repayment, including if the repay-ment were made through the reduction in compen-sation otherwise payable to the Employee, and Em-ployee is not permitted a deduction or any other ad-justment to income on Employee’s 2010 Form 1040reflecting the repayment. For future taxable years,Employee is treated for purposes of § 409A(c) ashaving previously included in income $75,000 of theamount deferred under the plan.

C. Incorrect Payment of Amount Payablein Same Taxable Year or IncorrectPayment in Violation of § 409A(a)(2)(B)(i)not Corrected in the Same Taxable Yearas the Failure

1. Relief for Amounts to which § VII.CApplies

With respect to amounts to which§ VII.C applies, the amount includible inincome under § 409A(a) as a result of a

2008–51 I.R.B. 1317 December 22, 2008

payment described in § VII.C.2(a) is lim-ited to the amount that should have beentreated as deferred compensation underthe plan (or should have continued to bedeferred compensation under the plan) butwas instead paid or made available to theservice provider, and does not include anyother amounts deferred under the plan.In addition, with respect to such amountincludible in income under § 409A(a), theservice provider is required to pay the ad-ditional tax under § 409A(a)(1)(B)(i)(II)(the additional 20% tax), but is not re-quired to pay the additional tax under§ 409A(a)(1)(B)(i)(I) (the premium inter-est tax). Provided that the requirements ofthis section are met, for taxable years fol-lowing the year during which the failureoccurred, the amount repaid by the serviceprovider is treated as an amount previ-ously included in income for purposes of§ 409A(c).

2. Amounts to which § VII.C Applies

This § VII.C applies if during a serviceprovider’s taxable year an operational fail-ure occurs that is described in § VII.C.2(a)and the requirements of § VII.C.2(b)through (d) and §§ VII.C.3 and 4 are met.

(a) A failure is described in this§ VII.C.2(a) if an amount of nonquali-fied deferred compensation that, under theterms of the plan and any applicable defer-ral election, should not have been paid ormade available to a service provider untila later date in the same taxable year, erro-neously was paid or made available to theservice provider during such taxable yearmore than 30 days before such later date,or an amount of nonqualified deferredcompensation that, under the terms of theplan and any applicable deferral election,and § 409A(a)(2)(B)(i) (requirement to de-lay for six months payments to a specifiedemployee upon separation from service),(i) would have been payable less than sixmonths after the service provider’s sepa-ration from service if the service providerhad not been a specified employee, (ii)because the service provider was a spec-ified employee the amounts should nothave been paid or made available withinthe six-month period following the serviceprovider’s separation from service, and(iii) such amounts were erroneously paidor made available to the service providerwithin such six-month period.

(b) Sections IV.B, V.C, and VI.B of thisnotice do not apply because relief is notavailable under such sections with respectto such failure, the failure is not correctedunder such sections, or otherwise.

(c) On or before the end of the secondtaxable year during which the failure oc-curred, the service provider repays to theservice recipient the amount that was erro-neously paid or made available to the ser-vice provider.

(d) Immediately after such repayment,the service provider has a legally bindingright to receive such amount from the ser-vice recipient on the date that is that samenumber of days after the amount is repaidas the number of days from the date the ser-vice recipient made the erroneous paymentto the service provider through the datethe amount would otherwise have beenpayable under the terms of the plan and theapplicable deferral election, and the repaidamount is not paid or made available to theservice provider before such date (for rulesregarding the counting of days, see § III.Hof this notice).

3. Reporting and Withholding

The service recipient must report the er-roneous payment as an amount includiblein income under § 409A on a Form W–2(or Form W–2c), under Box 12, Code Z,or Form 1099 (or corrected Form 1099),as applicable, for the year in which theerroneous payment was made. The ser-vice provider must include the amount ofthe erroneous payment in income under§ 409A on and pay the additional taxes un-der § 409A(a) with an original or amendedfederal income tax return for the year inwhich the erroneous payment was made,and not claim a deduction or other adjust-ment reflecting the repayment for the yearin which the service provider repays theamount to the service recipient.

4. Adjustment for Earnings

For purposes of this § VII.C, the ser-vice provider’s account balance or otheramount of deferred compensation underthe plan may not be adjusted for earnings,but may be adjusted for losses, retroac-tive to the date the amount was erroneouslypaid or made available, provided that suchadjustment must be made on or before theapplicable deadline for repayment.

5. Examples

In each of the following examples, itis assumed that Specified Employee is anindividual whose taxable year is the cal-endar year, at all relevant times SpecifiedEmployee is a specified employee of Em-ployer for purposes of § 409A(a)(2)(B)(i)and an insider with respect to Employer asdefined in § III.G of this notice, and Spec-ified Employee and Employer both satisfythe applicable requirements of §§ III andIX of this notice.

Example 1: Under a nonqualified deferred com-pensation plan sponsored by Employer, SpecifiedEmployee has a legally binding right to a $100,000payment of deferred compensation on the first day ofthe seventh month following Specified Employee’sseparation from service. Specified Employee sep-arates from service on November 15, 2008 so thatthe payment is due on June 1, 2009. Employer erro-neously pays Specified Employee $100,000 on April1, 2009 (61 days before the due date). Employerdiscovers the error on July 1, 2010, and SpecifiedEmployee repays the $100,000 to Employer onJuly 1, 2010. Immediately after such repaymentSpecified Employee has a legally binding right toreceive $100,000 from Employer on August 31, 2010(61 days after the July 1, 2010 repayment date) andEmployer does not repay the amount to SpecifiedEmployee before that date. Employer treats thepayment as a 2009 wage payment for employmenttax and reporting purposes, as appropriate, includingreporting as income and wages on the 2009 FormW–2. Employer must report as income under § 409Aon the 2009 Form W–2 (or 2009 Form W–2c), Box12, using Code Z, only the $100,000 payment, andSpecified Employee is permitted to include in incomeunder § 409A for 2009 only $100,000. Furthermore,Specified Employee is permitted to pay the additional20% tax only with respect to the $100,000 (or$20,000 in additional income tax), and is not requiredto pay the premium interest tax. The 2010 Form W–2provided to Specified Employee must not reflect anyreduction in income due to the repayment, includingif the repayment were made through the reductionin compensation otherwise payable to SpecifiedEmployee, and Specified Employee is not permitteda deduction or any other adjustment to the 2010 Form1040 reflecting the repayment. For 2010, SpecifiedEmployee is treated as having previously included inincome $100,000 of the amount deferred under theplan for purposes of § 409A(c).

Example 2: Under a nonqualified deferred com-pensation plan sponsored by Employer, SpecifiedEmployee has a legally binding right to a $100,000payment of deferred compensation on the specifieddate of July 1, 2009 (so that the payment is not sub-ject to § 409A(a)(2)(B)(i)). Employer erroneouslypays Specified Employee the $100,000 on May 1,2009 (61 days before the due date). Employer dis-covers the error on December 1, 2010, and SpecifiedEmployee repays the amount to Employer on De-cember 1, 2010. Immediately after such repaymentSpecified Employee has a legally binding right toreceive the amount from Employer on January 31,2011 (61 days after the December 1, 2010 repayment

December 22, 2008 1318 2008–51 I.R.B.

date) and Employer does not repay the amount toSpecified Employee before that date. Employertreats the 2009 payment as a wage payment for em-ployment tax and reporting purposes, as appropriate,including reporting as income and wages on the2009 Form W–2. Employer is permitted to reportas income under § 409A on the 2009 Form W–2 (or2008 Form W–2c), Box 12, using Code Z, only the$100,000 payment, and Specified Employee is per-mitted to include in income under § 409A for 2009only $100,000. Furthermore, Employee is permittedto pay the additional 20% tax only with respect to the$100,000 (or $20,000 in additional income tax), andis not required to pay the premium interest tax. The2010 Form W–2 provided to Specified Employeemust not reflect any reduction in income due to therepayment, including if the repayment were madethrough the reduction in compensation otherwisepayable to Specified Employee, and Specified Em-ployee is not permitted a deduction or any otheradjustment to the 2010 Form 1040 reflecting therepayment. Beginning with the taxable year 2010,Specified Employee is treated as having previouslyincluded in income $100,000 of the amount deferredunder the plan for purposes of § 409A(c).

D. Excess Deferred Amount not Correctedin the Same Taxable Year

1. Relief for Amounts to which § VII.DApplies

With respect to amounts to which§ VII.D applies, the amount includible inincome under § 409A(a) as a result of afailure described in § VII.D.2(a) is limitedto the excess amount paid to the serviceprovider, and does not include any otherdeferred compensation under the plan,and the amount is includible in incomeonly when paid to the service provider inaccordance with this section. In addition,with respect to this amount includiblein income under § 409A(a), the serviceprovider is required to pay the additional20% tax, but is not required to pay thepremium interest tax. Provided that theservice provider includes such amountin income, pays the additional taxes andotherwise meets the requirements of thisnotice, for taxable years after the year ofthe failure the amount is treated as previ-ously included in income for purposes of§ 409A(c).

2. Amounts to which § VII.D Applies

This § VII.D applies if an opera-tional failure occurs during a serviceprovider’s taxable year that is describedin § VII.D.2(a) and the requirements of§ VII.D.2(b) through (c) and §§ VII.D.3and 4 are met.

(a) A failure is described in this§ VII.D.2(a) if, under the terms of the planand any applicable deferral election, and§ 409A, an amount of deferred compensa-tion under the plan should have been paidor made available to the service providerduring the service provider’s taxable year,or an amount is treated as deferred com-pensation under the plan that should havebeen paid or made available to the serviceprovider during the service provider’s tax-able year, but such amount erroneously isnot paid or made available to the serviceprovider;

(b) Sections IV.C, V.D and VI.C of thisnotice do not apply because relief is notavailable under such sections with respectto the failure, the failure is not correctedunder such sections, or otherwise;

(c) By the end of the service provider’ssecond taxable year following the taxableyear during which the failure occurred, theservice recipient pays the service providerthe amount that should have been paid ormade available to the service provider.

3. Reporting and Withholding

The service recipient must report suchpayment on a Form W–2 (or Form W–2c)or Form 1099 (or corrected Form 1099),as applicable, for the taxable year in whichthe payment was scheduled to be made un-der the terms of the plan (or, in the case ofan amount that should not have been de-ferred, the taxable year in which the pay-ment was scheduled to be made but for theerroneous deferral). If the service recipientproperly reports the payment as includiblein income under § 409A on a Form W–2,if applicable, for the year in which the pay-ment was scheduled to be made, includ-ing reporting such amount on Form W–2,Box 12 using Code Z, the service recipientwill not be subject to penalties or liabilityfor the failure to properly withhold under§ 3402(d). The service provider must in-clude such amount in income on and paythe additional taxes under § 409A(a) withan original or amended federal income taxreturn for the taxable year in which thepayment was scheduled to be made underthe terms of the plan (or, in the case of anamount that should not have been deferred,the taxable year in which the payment wasscheduled to be made but for the erroneousdeferral).

4. Adjustment for Earnings

The remaining account balance (orother deferred compensation under theplan) must be adjusted for earnings andmay be adjusted for losses retroactive tothe date the excess amount was incorrectlycredited to the service provider’s accountor otherwise incorrectly treated as de-ferred under the plan, provided that suchadjustment must be made on or before thelast day of the service provider’s taxableyear in which such amount was paid to theservice provider under § VII.D.2(c). Theservice recipient may not pay the serviceprovider interest, or otherwise compensatethe service provider for the use of suchfunds.

5. Example

It is assumed for purposes of the fol-lowing example that Employee is an in-dividual whose taxable year is the calen-dar year, at all relevant times Employeeis an insider with respect to Employer asdefined in § III.G of this notice, and Em-ployee and Employer both satisfy the ap-plicable requirements of §§ III and IX ofthis notice.

Example: Employee makes a timely election todefer 10% of a bonus payable in 2009 into an accountbalance plan. The bonus is $300,000. Employererroneously defers 20% of the bonus, or $60,000,and pays Employee $240,000 (instead of deferring$30,000 and paying Employee $270,000). Employerdiscovers the error on February 1, 2010, so that theexcess deferred amount of $30,000 is not corrected byDecember 31, 2009. On March 1, 2010, at which timeEmployee’s account balance includes $1,500 in earn-ings on the excess $30,000 credited to the account,Employer pays Employee $30,000 and Employee for-feits the $1,500 in earnings. Employer reports the$30,000 as income under § 409A on the 2009 FormW–2, Box 1 and Box 12, using Code Z. Provided thatEmployee reports such income and pays the applica-ble taxes, including the additional § 409A taxes, on atimely filed 2009 Form 1040 (or amended 2009 Form1040), and satisfies the other applicable requirementsof this § VII, Employee is permitted to include in in-come under § 409A only $30,000 and to pay onlythe additional 20% tax (or $6,000 in additional in-come tax), and not the premium interest tax. Begin-ning with the taxable year 2010, Specified Employeeis treated as having previously included in income$30,000 of the amount deferred under the plan forpurposes of § 409A(c).

VIII. SPECIAL TRANSITION RULEFOR NON-INSIDERS

With respect to a service provider thatwas not an insider at any time during the

2008–51 I.R.B. 1319 December 22, 2008

service provider’s taxable year in whicha failure occurred, such service providermay use the relief provided in § V.B, § V.Cor § V.D of this notice with respect toan operational failure addressed by suchsections that occurred on or before De-cember 31, 2007, in which case for pur-poses of applying such section the serviceprovider’s taxable year ending in 2009 willbe treated as the taxable year next follow-ing the taxable year during which the fail-ure occurred. With respect to an erro-neous early payment addressed by § V.B,if the original due date for the paymentwould have occurred on or before Decem-ber 31, 2009, the amount may be treatedfor purposes of applying § V.B as other-wise payable under the terms of the planduring the year immediately following theyear of the failure for purposes of qualify-ing for the relief.

IX. INFORMATION ANDREPORTING REQUIREMENTS

A. Information Required with Respectto Correction of an Operational Failurein the Same Taxable Year as the FailureOccurs

A service recipient described in § IVof this notice must attach to its timely-filed (including extensions) original fed-eral income tax return for its taxable yearin which the failure occurred a statemententitled “§ 409A Relief under § IV of No-tice 2008–113” setting out the informa-tion required by § IX.A.1 of this notice,and must provide to each service provideraffected by such failure a statement enti-tled “§ 409A Relief under § IV of Notice2008–113” setting out the information re-quired by § IX.A.2 of this notice by no laterthan the date (with extensions) on which itis required to provide an information re-turn (Form W–2 or Form 1099) to suchservice provider for the calendar year inwhich such failure occurred (or if no in-formation return is required for such ser-vice provider, not later than the January31 following the calendar year in whichsuch failure occurred). Notwithstandingthe foregoing, to qualify for the relief de-scribed in § IV.D of this notice (Correc-tion of Exercise Price of Otherwise Ex-cluded Stock Rights), the service recipientis not required to provide a statement tosuch service provider with respect to such

failure. In addition, each taxpayer relyingon the relief provided in § IV of this no-tice must make reasonable efforts to pro-vide notice to the examining agent uponthe commencement of an examination ofsuch taxpayer’s federal tax return that thetaxpayer was relying upon the relief pro-vided under this notice for years coveredby the examination (except in the case of aservice provider for whom a correction hasbeen made under § IV.D of this notice).

1. Attachment to Service Recipient TaxReturn for Failures Described in § IV

The service recipient must attach astatement to its federal income tax returnstating that it is relying upon § IV of thisnotice with respect to a correction of afailure to comply with § 409A and settingout the following information with respectto each such failure:

(a) The name and taxpayer identifica-tion number of each service provider af-fected by the failure and whether such ser-vice provider is an insider with respectto the service recipient. Where the sameor a substantially similar operational fail-ure has occurred with respect to multi-ple service providers, the information re-quired in § IX.A.1(b) through (e) of thisnotice may be supplied only once withrespect to such operational failure, pro-vided that the identification of each serviceprovider affected by the operational failurein this § IX.A.1(a) references such infor-mation and the amount involved in the op-erational failure with respect to such ser-vice provider.

(b) Identification of the nonqualifieddeferred compensation plan with respect towhich such failure occurred.

(c) A brief description of the failure andthe circumstances under which it occurred,including the amount involved and date onwhich the failure occurred.

(d) A brief description of the steps takento correct the failure and the date on whichsuch correction was completed.

(e) A statement that the operational fail-ure is eligible for the correction under theterms of this notice, and that the service re-cipient has taken all actions required, andotherwise met all requirements, for suchcorrection.

2. Information to be Provided to ServiceProvider for Failures Described in § IV

The service recipient must providethe following information to each serviceprovider affected by correction of a failureto comply with § 409A who is entitled torelief under § IV of this notice (other than§ IV.D of this notice (Correction of Exer-cise Price of Otherwise Excluded StockRights)) with respect to such failure:

(a) A statement that the service provideris entitled to the relief provided in § IVof this notice with respect to a failure tocomply with § 409A.

(b) The information described in§ IX.A.1(b) through (e) of this notice.

B. Information Required with Respect toRelief for Certain Operational Failures

A service recipient described in § V,§ VI, or § VII of this notice must attachto its timely-filed (including extensions)original federal income tax return for itstaxable year in which it discovers the fail-ure, and for a service recipient describedin § VIII of this notice its timely-failed(including extensions) original federalincome tax return for the taxable yearincluding January 1, 2009, a statemententitled “§ 409A Relief under § [INSERTAPPROPRIATE SECTION] of Notice2008–113” setting out the informationrequired by § IX.B.1 of this notice. Inaddition, not later than the date (with ex-tensions) on which it is required to providean information return (Form W–2 or 1099)for the calendar year in which it discoverssuch failure to a service provider who isaffected by such failure (or if no infor-mation return is required for such serviceprovider, not later than the January 31following the calendar year in which itdiscovers such failure), or in the case of aservice recipient described in § VIII, notlater than January 31, 2010, such servicerecipient must provide to each such ser-vice provider a statement entitled “§ 409ARelief under § [INSERT APPROPRIATESECTION] of Notice 2008–113” settingout the information required by § IX.B.2of this notice. A service provider who isrelying on the relief provided in § V, § VI,or § VII of this notice with respect to a fail-ure to comply with § 409A must attach tothe service provider’s timely-filed (includ-ing extensions) original federal income tax

December 22, 2008 1320 2008–51 I.R.B.

return for the year in which such failurewas discovered (or for a service providerwho is relying on the relief provided in§ VIII of this notice, the service provider’stimely-filed (including extensions) origi-nal federal income tax return for 2009) theinformation required by § IX.B.3 of thisnotice. In addition, each taxpayer relyingon the relief provided in § V, § VI, § VII or§ VIII of this notice must make reasonableefforts to provide notice to the examiningagent upon the commencement of an ex-amination of such taxpayer’s federal taxreturn that the taxpayer was relying uponthe relief provided under this notice foryears covered by the examination.

1. Attachment to Service Recipient TaxReturn for Failures Described in § V, § VI,§ VII or § VIII

The service recipient must attach astatement to its return setting out the fol-lowing information with respect to eachfailure described in § V, § VI, § VII or§ VIII of this notice:

(a) The name and taxpayer identifica-tion number of each service provider af-fected by the failure. Where the sameor a substantially similar operational fail-ure has occurred with respect to multi-ple service providers, the information re-quired in § IX.B.1(b) through (e) of thisnotice may be supplied only once withrespect to such operational failure, pro-vided that the identification of each serviceprovider affected by the operational failurein this § IX.B.1(a) references such infor-mation and the amount involved in the op-erational failure with respect to such ser-vice provider.

(b) Identification of the nonqualifieddeferred compensation plan with respect towhich such failure occurred.

(c) A brief description of the failure andthe circumstances under which it occurred,including the amount involved and date onwhich the failure occurred.

(d) A brief description of the steps takenby the service recipient to avoid a recur-rence of the failure, including the date onwhich such steps were implemented.

(e) A statement that the operational fail-ure is eligible for the correction under theterms of this notice, and that the service re-cipient has taken all actions required, andotherwise met all requirements, for suchcorrection.

2. Information to be Provided to ServiceProvider for Failures Described in § V,§ VI, § VII or § VIII

The service recipient must providethe following information to each serviceprovider affected by a failure to complywith § 409A who is entitled to relief under§ V, § VI, § VII or § VIII of this noticewith respect to such failure:

(a) A statement that the service provideris entitled to the relief provided in § V,§ VI, § VII, or § VIII of this notice (asapplicable) with respect to a failure tocomply with § 409A and that the serviceprovider must attach a copy of the state-ment to the service provider’s income taxreturn for the taxable year in which thefailure was discovered.

(b) The information described in§ IX.B.1(b) through (e) of this notice.

3. Attachment to Service Provider TaxReturn for Failures Described in § V, § VI,§ VII or § VIII

The service provider must attach to theservice provider’s income tax return a copyof the statement the service provider re-ceived from the service recipient with re-spect to each such failure.

X. EFFECT ON OTHERDOCUMENTS

For taxable years beginning on or afterJanuary 1, 2009, Notice 2007–100 is ob-soleted. Taxpayers may rely on this No-tice 2008–113 for taxable years beginningbefore January 1, 2009. For service re-cipients and service providers who are en-titled to relief under this notice, Notice2006–100, 2006–2 C.B. 1109 (relating toreporting and wage withholding for 2006),and Notice 2007–89, 2007–46 I.R.B. 998(relating to reporting and wage withhold-ing for 2007), are modified to conform tothe provisions of this notice with respectto (i) the amount that is required to be in-cluded in income by a service provider un-der section 409A(a), and (ii) the amountthat is required to be reported by the ser-vice recipient as an amount includible inincome under section 409A(a) on FormW–2, Box 1 and Box 12, using Code Z, orForm 1099–MISC, Box 7 and Box 15b, asapplicable.

XI. REQUEST FOR COMMENTS

The Treasury Department and the IRSare considering whether to extend theability of certain service providers to re-pay an incorrect payment of a deferredamount over an extended period if theservice provider would otherwise expe-rience an immediate and heavy financialneed as defined in §1.401(k)–1(d)(3)(iii)due to the repayment requirement to therelief provided in § VIII, subject to theservice provider submitting an appropriateextension of the statute of limitations onassessment with respect to the taxable yearin which the failure occurred. Commentsare requested on all aspects of such poten-tial relief, including whether such reliefwould be utilized and how such reliefwould be implemented.

The Treasury Department and the IRSare also considering whether a programproviding relief in the case of a plan doc-ument failure that is brought into compli-ance with § 409A would be both feasi-ble and advisable. To the extent such aprogram is adopted, the Treasury Depart-ment and the IRS intend that such guid-ance not allow taxpayers who sponsor orparticipate in a noncompliant plan an ad-vantage in comparison to taxpayers whosponsor or participate in a compliant plan,by providing the sponsor of, or the par-ticipants in, the noncompliant plan greaterflexibility to change the time and form ofpayment of deferred amounts than wouldhave been available if no such plan doc-ument failure had occurred. In addition,the Treasury Department and the IRS in-tend that such a program maintain strongincentives for taxpayers to comply in fullwith the requirements of § 409A.

The Treasury Department and the IRSrequest comments on all aspects of such apotential program, including how such aprogram would apply to provisions gov-erning the timing of deferral elections aswell as provisions governing the timesand forms of payments of amounts de-ferred. The Treasury Department and theIRS specifically request comments on thefollowing issues:

• What types of failures would be eli-gible for the relief (and what types offailures would not be eligible for therelief)?

2008–51 I.R.B. 1321 December 22, 2008

• Should relief be limited to minor ornonmaterial errors and if so how wouldthe materiality of a failure be deter-mined?

• To the extent eligibility for the reliefis contingent upon whether a noncom-pliant plan provision has been put intoeffect, or whether a noncompliant planprovision is applicable to or affectsan amount deferred, what standardswould apply to determine whethersuch a noncompliant plan provisionhas been put into effect or otherwiseapplies to or affects an amount de-ferred?

• What rules would govern the appro-priate correction for the noncompliantplan provision and how would suchrules avoid granting an impermissiblelate subsequent deferral election orelection to accelerate a payment?

• How would the correction and reliefapply if the correction were made dur-ing the service provider’s taxable yearand would there be any distinction be-tween amounts deferred before the cor-rection and amounts deferred in thesame year but after the correction?

• What information would serviceproviders and service recipients be re-quired to file with the IRS to make useof such correction procedure?

• What procedure would service recipi-ents be required to implement to pre-vent a recurrence of the same or a sub-stantially similar plan document fail-ure?

Comments must be submitted by March6, 2009. All materials submitted will beavailable for public inspection and copy-ing. Comments may be submitted to In-ternal Revenue Service, CC:PA:LPD:RU(Notice 2008–113), Room 5203, PO Box7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may alsobe hand-delivered Monday through Fri-day between the hours of 8 a.m. and4 p.m. to the Courier’s Desk at 1111Constitution Avenue, NW, Washington,DC 20224, Attn: CC:PA:LPD:RU (Notice2008–113), Room 5203. Submissionsmay also be sent electronically via theinternet to the following email address:Notice.comments@irscounsel.treas.gov.Include the notice number (Notice2008–113) in the subject line.

XII. PAPERWORK REDUCTIONACT

The collection of information containedin this notice has been reviewed and ap-proved by the Office of Management andBudget in accordance with the PaperworkReduction Act (44 USC 3507) under con-trol number 1545–2086.

An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information unless thecollection of information displays a validcontrol number.

The collection of information in this no-tice is in § IX. This information is requiredto determine whether the taxpayers claim-

ing the relief are eligible for the relief andthat the applicable requirements for reliefare met. The likely respondents are corpo-rations and individuals.

The estimated annual reporting and/orrecordkeeping burden is 5,000 hours.

The estimated annual burden per re-spondent/recordkeeper is .5 hours.

The estimated number of respondents is10,000.

The estimated annual frequency of re-sponse is on occasion.

Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally, tax return and tax returninformation are confidential, as requiredby § 6103.

XIII. DRAFTING INFORMATION

The principal author of this notice isStephen Tackney of the Office of Divi-sion Counsel/Associate Chief Counsel(Tax Exempt and Government Entities),although other Treasury and IRS officialsparticipated in its development. For fur-ther information on the provisions of thisnotice, contact Stephen Tackney at (202)927–9639 (not a toll-free number).

Tables for Figuring AmountExempt From Levy on Wages,Salary, and Other Income

Notice 2008–114

1. Table for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income(Forms 668-W(c), 668-W(c)(DO), 668-W(ICS)) 2009

Publication 1494, shown below, provides tables that show the amount of an individual’s income that is exempt from a noticeof levy used to collect delinquent tax in 2009.

(Amounts are for each pay period.)

December 22, 2008 1322 2008–51 I.R.B.

Filing Status: Single

Number of Exemptions Claimed on Statement

Pay Period 1 2 3 4 5 6 More Than 6

Daily 35.96 50.00 64.04 78.08 92.12 106.15 21.92 plus 14.04 foreach exemption

Weekly 179.81 250.00 320.19 390.38 460.58 530.77 109.62 plus 70.19 foreach exemption

Biweekly 359.62 500.00 640.38 780.77 921.15 1061.54 219.23 plus 140.38 foreach exemption

Semi-monthly

389.58 541.67 693.75 845.83 997.92 1150.00 237.50 plus 152.08 foreach exemption

Monthly 779.17 1083.33 1387.50 1691.67 1995.83 2300.00 475.00 plus 304.17 foreach exemption

Filing Status: Unmarried Head of Household

Number of Exemptions Claimed on Statement

Pay Period 1 2 3 4 5 6 More Than 6

Daily 46.15 60.19 74.23 88.27 102.31 116.35 32.12 plus 14.04 foreach exemption

Weekly 230.77 300.96 371.15 441.35 511.54 581.73 160.58 plus 70.19 foreach exemption

Biweekly 461.54 601.92 742.31 882.69 1023.08 1163.46 321.15 plus 140.38 foreach exemption

Semi-monthly

500.00 652.08 804.17 956.25 1108.33 1260.42 347.92 plus 152.08 foreach exemption

Monthly 1000.00 1304.17 1608.33 1912.50 2216.67 2520.83 695.83 plus 304.17 foreach exemption

Filing Status: Married Filing Joint Return (and Qualifying Widow(er)s)

Number of Exemptions Claimed on Statement

Pay Period 1 2 3 4 5 6 More Than 6

Daily 57.88 71.92 85.96 100.00 114.04 128.08 43.85 plus 14.04 foreach exemption

Weekly 289.42 359.62 429.81 500.00 570.19 640.38 219.23 plus 70.19 foreach exemption

Biweekly 578.85 719.23 859.62 1000.00 1140.38 1280.77 438.46 plus 140.38 foreach exemption

Semi-monthly

627.08 779.17 931.25 1083.33 1235.42 1387.50 475.00 plus 152.08 foreach exemption

Monthly 1254.17 1558.33 1862.50 2166.67 2470.83 2775.00 950.00 plus 304.17 foreach exemption

2008–51 I.R.B. 1323 December 22, 2008

Filing Status: Married Filing Separate Return

Number of Exemptions Claimed on Statement

Pay Period 1 2 3 4 5 6 More Than 6

Daily 35.96 50.00 64.04 78.08 92.12 106.15 21.92 plus 14.04 foreach exemption

Weekly 179.81 250.00 320.19 390.38 460.58 530.77 109.62 plus 70.19 foreach exemption

Biweekly 359.62 500.00 640.38 780.77 921.15 1061.54 219.23 plus 140.38 foreach exemption

Semi-monthly

389.58 541.67 693.75 845.83 997.92 1150.00 237.50 plus 152.08 foreach exemption

Monthly 779.17 1083.33 1387.50 1691.67 1995.83 2300.00 475.00 plus 304.17 foreach exemption

2. Table for Figuring Additional Exempt Amount for Taxpayers at Least 65 Years Old and/or Blind

Additional Exempt Amount

Filing Status * Daily Weekly Biweekly Semimonthly Monthly

Single or Headof Household

12

5.3810.77

26.9253.85

53.85107.69

58.33116.67

116.67233.33

Any OtherFiling Status

1234

4.238.46

12.6916.92

21.1542.3163.4684.62

42.3184.62

126.92169.23

45.8391.67

137.50183.33

91.67183.33275.00366.67

* ADDITIONAL STANDARD DEDUCTION claimed on Parts 3, 4, & 5 of levy.

Examples

These tables show the amount exempt from a levy on wages, salary, and other income.For example:

1. A single taxpayer who is paid weekly and claims three exemptions (including one for the taxpayer) has $320.19 exemptfrom levy.

2. If the taxpayer in number 1 is over 65 and writes 1 in the ADDITIONAL STANDARD DEDUCTION space on Parts 3, 4, & 5of the levy, $347.11 is exempt from this levy ($320.19 plus $26.92).

3. A taxpayer who is married, files jointly, is paid biweekly, and claims two exemptions (including one for the taxpayer) has$719.23 exempt from levy.

4. If the taxpayer in number 3 is over 65 and has a spouse who is blind, this taxpayer should write 2 in the ADDITIONALSTANDARD DEDUCTION space on Parts 3, 4, & 5 of the levy. Then, $803.85 is exempt from this levy ($719.23 plus $84.62).

December 22, 2008 1324 2008–51 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking and Notice ofPublic Hearing

Further Guidance on theApplication of Section 409Ato Nonqualified DeferredCompensation Plans

REG–148326–05

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document containsproposed regulations on the calculationof amounts includible in income undersection 409A(a) and the additional taxesimposed by such section with respect toservice providers participating in certainnonqualified deferred compensation plans.The regulations would affect such ser-vice providers and the service recipientsfor whom the service providers provideservices. This document also provides anotice of public hearing on these proposedregulations.

DATES: Written or electronic commentsmust be received by March 9, 2009. Out-lines of topics to be discussed at the publichearing scheduled for April 2, 2009, mustbe received by March 9, 2009.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–148326–05),room 5203, Internal Revenue Service,PO Box 7604, Ben Franklin Station,Washington, DC 20044. Submissions maybe hand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–148326–05),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronically,via the Federal eRulemakingPortal at www.Regulations.gov (IRSREG–148326–05). The public hearingwill be held in the auditorium, InternalRevenue Building, 1111 ConstitutionAvenue, NW, Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Stephen Tackney, at (202)927–9639; concerning submissions ofcomments, the hearing, and/or to be placedon the building access list to attend thehearing, Funmi Taylor at (202) 622–7190(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 409A was added to the InternalRevenue Code (Code) by section 885 ofthe American Jobs Creation Act of 2004,Public Law 108–357 (118 Stat. 1418).Section 409A generally provides that ifcertain requirements are not met at anytime during a taxable year, amounts de-ferred under a nonqualified deferred com-pensation plan for that year and all previ-ous taxable years are currently includiblein gross income to the extent not subjectto a substantial risk of forfeiture and notpreviously included in gross income. Sec-tion 409A also includes rules applicable tocertain trusts or similar arrangements asso-ciated with nonqualified deferred compen-sation.

On December 20, 2004, the IRS is-sued Notice 2005–1, 2005–1 C.B. 274,setting forth initial guidance on the ap-plication of section 409A, and providingtransition guidance in accordance with theterms of the statute. On April 10, 2007,the Treasury Department and the IRS is-sued final regulations under section 409A.(T.D. 9321, 2007–19 I.R.B. 1123 [72 FR19234], April 17, 2007). The final regu-lations are applicable for taxable years be-ginning after December 31, 2008. See No-tice 2007–86, 2007–46 I.R.B. 990. No-tice 2005–1 and the final regulations do notaddress the calculation of the amount in-cludible in income under section 409A if aplan fails to meet the requirements of sec-tion 409A and the calculation of the addi-tional taxes applicable to such income. OnNovember 30, 2006, the Treasury Depart-ment and the IRS issued Notice 2006–100,2006–2 C.B. 1109, providing interim guid-ance for taxable years beginning in 2005and 2006 on the calculation of the amountincludible in income if the requirements ofsection 409A were not met, and request-

ing comments on these issues for use informulating future guidance. On October23, 2007, the Treasury Department andthe IRS issued Notice 2007–89, 2007–46I.R.B. 998, providing similar interim guid-ance for taxable years beginning in 2007.See §601.601(d)(2)(ii)(b).

Commentators submitted a number ofcomments addressing the topics coveredby these proposed regulations in responseto Notice 2005–1, Notice 2006–100, No-tice 2007–89, and the regulations, all ofwhich were considered by the TreasuryDepartment and the IRS in formulatingthese proposed regulations.

Explanation of Provisions

I. Scope of Proposed Regulations

These proposed regulations address thecalculation of amounts includible in in-come under section 409A(a), and relatedissues including the calculation of the ad-ditional taxes applicable to such income.Section 409A(a) generally provides thatamounts deferred under a nonqualifieddeferred compensation plan in all yearsare includible in income unless certainrequirements are met. The requirementsunder section 409A(a) generally relate tothe time and form of payment of amountsdeferred under the plan, including theestablishment of the time and form of pay-ment through initial deferral elections andrestrictions on the ability to change thetime and form of payment through subse-quent deferral elections or the accelerationof payment schedules. As provided inthe regulations previously issued undersection 409A, a nonqualified deferredcompensation plan must comply with therequirements of section 409A(a) both inform and in operation.

Taxpayers may also be required to in-clude amounts in income under section409A(b). Section 409A(b) generally ap-plies to a transfer of assets to a trust orsimilar arrangement, or to a restriction ofassets, for purposes of paying nonquali-fied deferred compensation, if such trustor assets are located outside the UnitedStates, if such assets are transferred dur-ing a restricted period with respect to a sin-gle-employer defined benefit plan spon-sored by the service recipient, or if such

2008–51 I.R.B. 1325 December 22, 2008

assets are restricted to the provision of ben-efits under a nonqualified deferred com-pensation plan in connection with a changein the service recipient’s financial health.These proposed regulations do not addressthe application of section 409A(b), includ-ing the calculation of amounts includiblein income if the requirements of section409A(b) are not met. For guidance onthe calculation of such amounts for taxableyears beginning on or before January 1,2007, including the application of the Fed-eral income tax withholding requirements,see Notice 2007–89. The Treasury Depart-ment and the IRS anticipate issuing furtherinterim guidance for later taxable years onthe calculation of the amount includible inincome under section 409A(b) and the ap-plication of the Federal income tax with-holding requirements to such an amount.

II. Effect of a Failure to Comply withSection 409A(a) on Amounts Deferred inSubsequent Years

Commentators asked how section409A(a) applies if a plan fails to complywith section 409A(a) during a taxableyear and the service provider continues tohave amounts deferred under the plan insubsequent years during which the planotherwise complies with section 409A(a)both in form and in operation. The statu-tory language may be construed to providethat a failure is treated as continuing dur-ing taxable years beyond the year in whichthe initial failure occurred, if the failurecontinues to affect amounts deferred un-der the plan. For example, if an amounthas been improperly deferred under theplan, the statutory language could be con-strued to provide that the plan fails tocomply with section 409A(a) during alltaxable years during which the improp-erly deferred amounts remain deferred.However, this position could cause harshresults and would add administrative com-plexity. For example, a service providercould be required to include in income,and pay additional taxes on, amounts de-ferred over a number of taxable years evenif the sole failure to comply with section409A(a) occurred many years earlier. Inaddition, even if there were no failure inthe current year, to determine a taxpayer’sliability for income taxes with respect to

nonqualified deferred compensation for aparticular year, the taxpayer and the IRSwould need to examine the plan’s formand operation for every year in which theservice provider had an amount deferredunder the plan to determine if there wasa failure to comply with section 409A(a)during any of those years.

For these reasons, the proposed reg-ulations do not adopt this interpretationand instead generally would apply the ad-verse tax consequences that result froma failure to comply with section 409A(a)only with respect to amounts deferred un-der a plan in the year in which such non-compliance occurs and all previous tax-able years, to the extent such amounts arenot subject to a substantial risk of for-feiture and have not previously been in-cluded in income. Therefore, under theproposed regulations, a failure to meet therequirements of section 409A(a) during aservice provider’s taxable year generallywould not affect the taxation of amountsdeferred under the plan for a subsequenttaxable year during which the plan com-plies with section 409A(a) in form and inoperation with respect to all amounts de-ferred under the plan. This would applyeven though the amount deferred under theplan as of the end of such subsequent tax-able year includes amounts deferred in ear-lier years during which the plan failed tocomply with section 409A(a) (including,for example, amounts deferred pursuant toan untimely deferral election in the ear-lier year), as long as there was no fail-ure under the plan in a later year. Be-cause there would be no continuing or per-manent failure with respect to a plan thatfails to comply with section 409A(a) dur-ing an earlier year, each taxable year wouldbe analyzed independently to determine ifthere was a failure. As a result, assess-ment of tax liabilities due to a plan’s failureto comply with the requirements of sec-tion 409A(a) in a closed year would betime-barred. But, if a service provider failsto properly include amounts in income un-der section 409A(a) for a taxable year dur-ing which there was a failure to complywith section 409A(a), and assessment oftaxes with respect to such year becomesbarred by the statute of limitations, thenthe taxpayer’s duty of consistency wouldprevent the service provider from claim-

ing a tax benefit in a later year with respectto such amount (such as, for example, byclaiming any type of “basis” or “invest-ment in the contract” in the year the servicerecipient paid such amount to the serviceprovider pursuant to the plan’s terms).

Under the general rule in the proposedregulations, if all of a taxpayer’s deferredamounts under a plan are nonvested andthe taxpayer makes an impermissible de-ferral election or accelerates the time ofpayment with respect to some or all ofthe nonvested deferred amount, the non-vested deferred amount generally wouldnot be includible in income under section409A(a) in the year of the impermissi-ble change in time and form of payment(although if there were vested amountsdeferred under the plan, such amountswould be includible in income under sec-tion 409A(a)). In the subsequent taxableyear in which the service provider be-comes vested in the deferred amount, theplan might comply with section 409A(a)in form and in operation, so that under thegeneral rule no income inclusion would berequired and no additional taxes would bedue for that year as a result of the late de-ferral election or acceleration of payment.In proposing to adopt this interpretationof the statute, the Treasury Departmentand the IRS do not intend to create anopportunity for taxpayers who ignore therequirements of section 409A(a) with re-spect to nonvested amounts to avoid thepayment of taxes that would otherwise bedue as a result of such a failure to comply.To ensure that this rule does not becomea means for taxpayers to disregard therequirements of the statute, the proposedregulations would disregard a substantialrisk of forfeiture for purposes of determin-ing the amount includible in income undersection 409A1 with respect to certain non-vested deferred amounts, if the facts andcircumstances indicate that the servicerecipient has a pattern or practice of per-mitting such impermissible changes in thetime and form of payment with respect tononvested deferred amounts (regardless ofwhether such changes also apply to vesteddeferred amounts). If such a pattern orpractice exists, an amount deferred undera plan that is otherwise subject to a sub-stantial risk of forfeiture is not treated assubject to a substantial risk of forfeiture

1 Under section 409A(e)(5), the Treasury Department and the IRS have the authority to disregard a substantial risk of forfeiture where necessary to carry out the purposes of section 409A.

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if an impermissible change in the timeand form of payment (including an imper-missible initial deferral election) appliesto the amount deferred or if the facts andcircumstances indicate that the amountdeferred would be affected by such patternor practice.

III. Calculation of the Amount Deferredunder a Plan for the Taxable Year in whichthe Plan Fails to Meet the Requirementsof Section 409A(a) and all PrecedingTaxable Years

A. In general

Section 409A(a)(1)(A) generally pro-vides that if at any time during a taxableyear a nonqualified deferred compensa-tion plan fails to meet the requirementsof section 409A(a)(2) (payments), section409A(a)(3) (the acceleration of payments),or section 409A(a)(4) (deferral elections),or is not operated in accordance with suchrequirements, all compensation deferredunder the plan for the taxable year andall preceding taxable years is includible ingross income for the taxable year to theextent not subject to a substantial risk offorfeiture and not previously included ingross income. Accordingly, to calculatethe amount includible in income upon afailure to meet the requirements of sec-tion 409A(a), the first step is to determinethe total amount deferred under the planfor the service provider’s taxable year andall preceding taxable years. The secondstep is to calculate the portion of the to-tal amount deferred for the taxable year,if any, that is either subject to a substan-tial risk of forfeiture (nonvested) or hasbeen included in income in a previous tax-able year. The last step is to subtract theamount determined in step two from theamount determined in step one. The ex-cess of the amount determined in step oneover the amount determined in step twois the amount includible in income andsubject to additional income taxes for theyear as a result of the plan’s failure tocomply with section 409A(a). SectionsIII.B through III.D of this preamble ex-plain how the proposed regulations wouldaddress the first step in the process of de-termining the amount includible in incomeunder section 409A, calculating the totalamount deferred for the taxable year.

B. Total amount deferred

1. In General

In general, under the proposed regula-tions, the amount deferred under a plan2

for a taxable year and all preceding tax-able years would be referred to as the to-tal amount deferred for a taxable year andwould be determined as of the last day ofthe taxable year. Therefore, for calendaryear taxpayers, such as most individuals,the relevant calculation date would be De-cember 31. Determining the total amountdeferred for the taxable year as of the lastday of the taxable year during which aplan fails to comply with section 409A(a)would allow taxpayers to avoid the admin-istrative burden of tracking amounts de-ferred under a plan on a daily basis, be-cause adjustments would not be made toreflect notional earnings or losses or otherfluctuations in the amount payable underthe plan as they occur during the taxableyear, but would be applied only on a net ba-sis as of the last day of the taxable year. Forexample, if a service provider has a cal-endar year taxable year, and if the serviceprovider’s account balance under a plan is$105,000 as of July 1, but is only $100,000as of December 31 of the same year, duesolely to deemed investment losses (withno payments made under the plan duringthe year), the total amount deferred un-der the plan for that taxable year would be$100,000.

Similarly, the total amount deferred fora taxable year would not necessarily be thegreatest total amount deferred for any pre-vious year, even if no amount has beenpaid under the plan. For example, if a ser-vice provider has a calendar year taxableyear, and if the service provider’s accountbalance under a plan as of December 31,2010 is $105,000, as of December 31, 2011is $100,000, and as of December 31, 2012is $95,000, and if those decreases are duesolely to deemed investment losses (andno payments were made under the plan in2011 or 2012), then the total amount de-ferred for 2011 would be $100,000 and thetotal amount deferred for 2012 would be$95,000.

2. Treatment of Payments

If a service recipient pays an amount de-ferred under a plan during a taxable year,the amount remaining to be paid to (or onbehalf of) the service provider under theplan as of the last day of the taxable yearwill have been reduced as a result of suchpayment. To reasonably reflect the effectof payments made during a taxable year,the proposed regulations provide that thesum of all payments of amounts deferredunder a plan during a taxable year, includ-ing all payments that are substitutes for anamount deferred, would be added to theamounts deferred outstanding as of the lastday of the taxable year (determined in ac-cordance with the regulations) to calculatethe total amount deferred for such taxableyear. To lower the administrative burdenof the calculation, the proposed regulationsprovide that the addition of such paymentsto the total amount deferred for the taxableyear would not be increased by any inter-est or other amount to reflect the time valueof money. The total amount deferred for ataxable year would include all payments,regardless of whether the service recipientmade some or all of the payments in ac-cordance with the requirements of section409A(a). For example, if during a taxableyear an employee receives a single sumpayment of the entire amount deferred un-der a plan, the employee would have a totalamount deferred under the plan for the tax-able year equal to the amount paid.

3. Treatment of Deemed Losses

Because the total amount deferredwould be determined as of the last day ofthe taxable year, losses that occur duringa taxable year (due to losses on deemedinvestments, actuarial losses, and othersimilar reductions in the amount payableunder a plan) generally would be nettedwith any gains that occur during the sametaxable year (due to deemed investmentor actuarial gains, additional deferrals,or other additions to the amount payableunder the plan). To that extent, deemed in-vestment losses, actuarial losses, or othersimilar reductions could offset deemedinvestment or actuarial gains, additionaldeferrals, or other increases in the amountdeferred under the plan for purposes of de-termining the total amount deferred for the

2 For this purpose, the term plan refers to a plan as defined under §1.409A–1(c), including any applicable plan aggregation rules.

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taxable year. This would apply regardlessof whether a deemed loss occurs beforeor after the date of any specific failure tocomply with section 409A(a). For exam-ple, assume a service provider begins ataxable year with a $10,000 balance un-der an account balance plan. During theyear, the service provider has an additionaldeferral to the plan of $5,000 and incursnet deemed investment losses of $2,000.No payments are made pursuant to theplan during the year, the employee hasno vested legally binding right to furtherdeferrals to the plan, and there are no otherchanges to the account balance. The to-tal amount deferred for the taxable yearwould equal the $13,000 account balance($10,000 + $5,000 - $2,000) as of the lastday of the taxable year.

4. Treatment of Rights to DeemedEarnings on Amounts Deferred

Under section 409A(d)(5), income(whether actual or notional) attributableto deferred compensation constitutes de-ferred compensation for purposes of sec-tion 409A. See §1.409A–1(b)(2). Forexample, if a service provider must includea deferred amount in income because anaccount balance plan in which the ser-vice provider participates fails to satisfythe requirements of section 409A(a), no-tional earnings credited with respect tosuch amount constitute deferred compen-sation and are subject to section 409A.If the plan also fails to comply with therequirements of section 409A(a) duringa subsequent taxable year, the notionalearnings must be included in income andare subject to the additional taxes undersection 409A(a), notwithstanding that the“principal” amount of deferred compensa-tion has already been included in incomeunder section 409A(a) for a previous year.

In this respect, the treatment of earningson nonqualified deferred compensation forpurposes of section 409A is significantlydifferent from the treatment of such earn-ings for purposes of section 3121(v)(2)(application of Federal Insurance Contri-butions Act (FICA) tax to nonqualifieddeferred compensation). As a result, no-tional earnings ordinarily are deferredcompensation that is subject to section409A even if such earnings would not con-stitute wages for purposes of the FICA taxwhen paid to the service provider because

of the special timing rule under section3121(v)(2) and §31.3121(v)(2)–1(a)(2).Accordingly, the proposed regulationsprovide that earnings that are credited withrespect to deferred compensation duringa taxable year or that were credited inprevious taxable years, and earnings withrespect to deferred compensation that arepaid during such taxable year, must beincluded in determining the total amountdeferred for the taxable year.

5. Total Amount Deferred for a TaxableYear Relates to the Entire Taxable Year,Regardless of Date or Period of Failure

Section 409A(a)(1)(A)(i) states thatif at any time during a taxable year anonqualified deferred compensation planfails to meet the requirements of section409A(a), all compensation deferred underthe plan for the taxable year and all pre-ceding years shall be includible in grossincome for the taxable year to the extentnot subject to a substantial risk of forfei-ture (vested) and not previously includedin gross income. The statutory reference tothe deferred compensation required to beincluded in income under section 409A(a)does not distinguish between amounts de-ferred in a taxable year before a failure tomeet the requirements of section 409A(a),and amounts deferred in the same taxableyear after such failure. Accordingly, underthe proposed regulations the total amountdeferred under a plan for a taxable yearwould refer to the total amount deferredas of the last day of the taxable year, re-gardless of the date upon which a failureoccurs. For example, if a plan is amendedduring a service provider’s taxable yearto add a provision that fails to meet therequirements of section 409A(a), the totalamount deferred as of the last day of thetaxable year would be includible in in-come under section 409A(a). This wouldinclude all payments under the plan dur-ing the taxable year, including paymentsmade before the amendment (regardlessof whether such payments are made inaccordance with the requirements of sec-tion 409A(a)). Similarly, if the plan inoperation fails to meet the requirements ofsection 409A(a) during the taxable year,the total amount deferred for the taxableyear would include all payments underthe plan during the taxable year, including

payments made before and after the datethe failure occurred.

The proposed regulations provide thatamounts deferred under a plan during ataxable year in which a failure occursmust be included in income under sec-tion 409A(a) even if such deferrals occurafter the failure and are otherwise madein compliance with section 409A(a). Forexample, salary deferrals for periods dur-ing a taxable year after an impermissibleaccelerated payment under the same planduring the same taxable year would berequired to be included in the total amountdeferred for the taxable year and includedin income under section 409A(a), regard-less of whether the salary deferrals aremade in accordance with an otherwisecompliant deferral election.

6. Treatment of Short-Term Deferrals

Under §1.409A–1(b)(4), an arrange-ment may not provide for deferred com-pensation if the amount is payable, andis paid, during a limited period of timefollowing the later of the date the serviceprovider obtains a legally binding rightto the payment or the date such right isno longer subject to a substantial risk offorfeiture (generally referred to as the ap-plicable 21/2 month period). Whether anamount will be treated as a short-term de-ferral or as deferred compensation may notbe determinable as of the last day of theservice provider’s taxable year, becauseit may depend upon whether the amountis paid on or before the end of the appli-cable 21/2 month period. For purposes ofcalculating the total amount deferred fora taxable year, the proposed regulationsprovide that the right to a payment that,under the terms of the arrangement andthe facts and circumstances as of the lastday of the taxable year, may or may notbe a short-term deferral, is not includedin the total amount deferred. In addition,even if such amount is not paid by the endof the applicable 21/2 month period so thatthe amount would be deferred compensa-tion, the amount would not be includiblein the total amount deferred until the ser-vice provider’s taxable year in which theapplicable 21/2 month period expired. Forexample, assume that as of December 31,2010, an employee whose taxable yearis the calendar year is entitled to an an-nual bonus that is scheduled to be paid on

December 22, 2008 1328 2008–51 I.R.B.

March 15, 2011, and that the bonus wouldqualify as a short-term deferral if paid onor before the end of the applicable 21/2month period, which ends on March 15,2011. The bonus would not be included inthe total amount deferred for 2010. Thiswould be true regardless of whether thebonus is paid on or before March 15, 2011.However, the bonus would be includiblein the total amount deferred for 2011 if thebonus is not paid on or before March 15,2011.

C. Calculation of total amountdeferred — general principles

1. General Rule

Generally, the proposed regulationsprovide that the total amount deferred un-der a plan for a taxable year is the presentvalue as of the close of the last day ofa service provider’s taxable year of allamounts payable to the service providerunder the plan, plus amounts paid to theservice provider during the taxable year.For this purpose, present value generallywould mean the value as of the closeof the last day of the service provider’srelevant taxable year of the amount orseries of amounts due thereafter, whereeach such amount is multiplied by theprobability that the condition or condi-tions on which payment of the amount iscontingent would be satisfied (subject tospecial treatment for certain contingen-cies), discounted according to an assumedrate of interest to reflect the time valueof money. A discount for the probabilitythat the service provider will die beforecommencement of payments under theplan would be permitted to the extent thatthe payments would be forfeited upon theservice provider’s death. The proposedregulations provide that the present valuecannot be discounted for the probabilitythat payments will not be made (or will bereduced) because of the unfunded statusof the plan, the risk associated with anydeemed investment of amounts deferredunder the plan, the risk that the service re-cipient or another party will be unwillingor unable to pay amounts deferred underthe plan when due, the possibility of fu-ture plan amendments, the possibility of afuture change in the law, or similar risksor contingencies. The proposed regula-tions further provide that restrictions on

payment that will or may lapse with thepassage of time, such as a temporary riskof forfeiture that is not a substantial riskof forfeiture, are not taken into accountin determining present value. However,any potential additional deferrals contin-gent upon a bona fide requirement thatthe service provider perform services afterthe taxable year, such as potential salarydeferrals, service credits or additions dueto increases in compensation, would notbe taken into account in determining thetotal amount deferred for the taxable year.

For purposes of calculating the presentvalue of the benefit, the proposed regula-tions require the use of reasonable actu-arial assumptions and methods. Whetherassumptions and methods are reasonablefor this purpose would be determined as ofeach date the benefit is valued for purposesof determining the total amount deferred.

The proposed regulations also pro-vide certain rules relating to the creditingof earnings, generally providing that theschedule for crediting earnings will be re-spected if the earnings are credited at leastonce a year. In general, if the rules withrespect to the crediting of earnings aremet, any additional earnings that wouldbe credited after the end of the taxableyear only if the service provider continuedperforming services after the end of theyear would not be includible in the totalamount deferred for the year. If the rightto earnings is based on an unreasonablyhigh interest rate, the proposed regulationsgenerally would characterize the unrea-sonable portion of earnings as a currentright to additional deferred compensation.In addition, if earnings are based on a rateof return that does not qualify as a prede-termined actual investment or a reasonableinterest rate, the proposed regulations pro-vide that the general calculation rules asapplied to formula amounts would apply.

The proposed regulations provide othergeneral rules that address issues such asplan terms under which amounts may bepayable when a triggering event occurs,rather than on a fixed date, or plan termsunder which the amount payable is de-termined in accordance with a formula,rather than being set at a fixed amount.In addition, the proposed regulations pro-vide specific rules under which the totalamounts deferred under certain types ofnonqualified deferred compensation planswould be determined. The rules applica-

ble to specific types of plans would ap-ply in conjunction with the general rules.As a result, under the proposed regula-tions, an amount of deferred compensationmay be includible in income under section409A(a) even if the same amount wouldnot yet be includible in wages under sec-tion 3121(v)(2).

2. Rules Regarding Alternative Times andForms of Payment

To calculate the total amount deferredunder a nonqualified deferred compen-sation plan, it is necessary to determinethe time and form of payment pursuantto which the amount will be paid. Underthe proposed regulations, if an amountdeferred under a plan could be payablepursuant to more than one time and formof payment under the plan, the amountwould be treated as payable in the avail-able time and form of payment that has thehighest present value. For this purpose, atime and form of payment generally wouldbe an available time and form of paymentto the extent a deferred amount under theplan could be payable pursuant to suchtime and form of payment under the plan’sterms, provided that if there is a bona fiderequirement that the service provider con-tinue to perform services after the end ofthe taxable year to be eligible for the timeand form of payment, the time and form ofpayment would not be treated as available.If an alternative time and form of paymentis available only at the service recipient’sdiscretion, the time and form of paymentwould not be treated as available unless theservice provider has a legally binding rightunder the principles of §1.409A–1(b)(1) toany additional value that would be gener-ated by the service recipient’s exercise ofsuch discretion. If a service provider hasbegun receiving payments of an amountdeferred under a plan and neither the ser-vice provider nor the service recipient canchange the time and form of payment ofsuch deferred amount without the otherparty’s approval, then no other time andform of payment under the plan wouldbe treated as available if such approvalrequirement has substantive significance.

In certain instances, a service providerwill be eligible for an alternative timeand form of payment only if the ser-vice provider has a certain status as ofa future date. For example, a time and

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form of payment may be available onlyif the service provider is married at thetime the payment commences. The pro-posed regulations generally provide thatfor purposes of determining whether theservice provider will meet the eligibilityrequirements so that an alternative timeand form of payment is available, the ser-vice provider is assumed to continue inthe service provider’s status as of the lastday of the taxable year. However, if theeligibility requirement is not bona fideand does not serve a bona fide businesspurpose, the eligibility requirement wouldbe disregarded and the service providerwould be treated as eligible for the al-ternative time and form of payment. Forthis purpose, an eligibility condition basedupon the service provider’s marital status,parental status, or status as a U.S. citizenor lawful permanent resident would bepresumed to be bona fide and to serve abona fide business purpose.

If the calculation of the present value ofthe amount payable to a service providerunder a plan requires assumptions relatingto the timing of the payment because thepayment date is, or could be, a triggeringevent rather than a specified date, the pro-posed regulations specify certain assump-tions that must be applied to make suchcalculation. First, the possibility that a par-ticular payment trigger would occur gener-ally would not be taken into account if theright to the payment would be subject toa substantial risk of forfeiture if that pay-ment trigger were the only specified pay-ment trigger. For example, if an amountis payable upon the earlier of the attain-ment of a specified age or an involuntaryseparation from service (as defined in the§1.409A–1(n)), the present value of theamount payable upon involuntary separa-tion from service would not be taken intoaccount if the payment would be subjectto a substantial risk of forfeiture if thatwere the only payment trigger. However,if multiple triggers with respect to the samepayment would, applied individually, con-stitute substantial risks of forfeiture, suchtriggers would not be disregarded underthis rule unless all such triggers, applied inthe aggregate, would also constitute a sub-stantial risk of forfeiture. Second, the pos-sibility that an unforeseeable emergency,as defined in §1.409A–3(i)(3), would oc-cur and result in a payment also would not

be taken into account for purposes of cal-culating the amount deferred.

If an amount is payable upon a serviceprovider’s death, it generally would notbe necessary to make assumptions con-cerning when the service provider woulddie because any additional value due tothe amount becoming payable upon theservice provider’s death generally wouldbe treated as an amount payable under adeath benefit plan, and amounts payableunder a death benefit plan are not deferredcompensation for purposes of section409A(a). Similarly, such assumptionsgenerally would not be necessary for anamount payable upon a service provider’sdisability, because any additional valuedue to the amount becoming payable uponthe service provider’s disability gener-ally would be payable under a disabilityplan, and amounts payable under a dis-ability plan are not deferred compensa-tion for purposes of section 409A. See§1.409A–1(a)(5).

In other cases where it is necessary tomake assumptions concerning when a pay-ment trigger would occur to determine theamount deferred under a plan, taxpayersgenerally would be required to assume thatthe payment trigger would occur at theearliest possible time that the conditionsunder which the amount would becomepayable reasonably could occur, based onthe facts and circumstances as of the lastday of the taxable year. However, the pro-posed regulations provide a special rulefor amounts payable due to the serviceprovider’s separation from service, termi-nation of employment, or other event re-quiring the service provider’s reduction orcessation of services for the service recip-ient. In such a case, the total amount de-ferred would be calculated as if the serviceprovider had met the required reduction orcessation of services as of the close of thelast day of the service provider’s taxableyear for which such calculation was beingmade. These rules would apply regardlessof whether the payment trigger has or hasnot occurred as of any future date uponwhich the amount deferred for a prior tax-able year was being determined.

The Treasury Department and the IRSrecognize that for some service providers,the earliest possible time that a paymenttrigger reasonably could occur will not bethe most likely time the trigger will oc-cur. Similarly, the Treasury Department

and the IRS recognize that for many ser-vice providers, the assumption that the ser-vice provider ceases providing services asof the end of the taxable year may not berealistic. The Treasury Department and theIRS request comments on alternative stan-dards that could be utilized for these pay-ment triggers.

An alternative approach might presumea date upon which the service providerwill separate from service such as, forexample, 100 months after the last dayof the service provider’s taxable year forwhich the amount deferred is being cal-culated. Cf. §1.280G–1 Q&A 24(c)(4).Such a standard, however, would notreflect the value of additional deferredcompensation that would be paid only ifthe service provider separates from servicebefore the end of the 100-month period,such as an early retirement subsidy ora window benefit, unless special ruleswere developed to address such situations.Another issue that arises is whether sucha standard should apply if the serviceprovider is likely to retire during the next100 months, such as if a service providerhas attained a certain age, number ofyears of service, or level of financialindependence. However, the TreasuryDepartment and the IRS are concernedwhether an approach involving theapplication of individualized standards todetermine the probability that a particularservice provider will separate from servicewill be administrable in practice.

3. Treatment of Rights to FormulaAmounts

Once the date that a payment will oc-cur has been fixed (either as a specifieddate under the plan’s terms or throughapplication of the rules in the proposedregulations), it is necessary to quantifythe amount of the payment to which theservice provider will be entitled to cal-culate the total amount deferred under anonqualified deferred compensation plan.However, certain plans may define theamount payable by a formula or othermethod that is based on factors that mayvary in future years. In general, if, at theend of the service provider’s taxable year,the amount to be paid in a future year is aformula amount, the proposed regulationsprovide that the amount payable in thefuture year for purposes of calculating the

December 22, 2008 1330 2008–51 I.R.B.

total amount deferred must be determinedusing reasonable assumptions.

A deferred amount generally would bea formula amount subject to the reason-able assumptions standard if calculatingthe payment amount is dependent uponfactors that are not determinable after tak-ing into consideration all of the assump-tions and other calculation rules providedin the proposed regulations. For example,a future payment equal to one percent ofa corporation’s net profits over five cal-endar years generally would be a formulaamount until the last day of the fifth year,because the corporation’s net profits overthe five calendar years could not be de-termined by applying the assumptions andrules set out in the proposed regulationsuntil the end of the fifth calendar year.

A deferred amount would not be a for-mula amount at the end of the taxableyear merely because the information nec-essary to determine the amount is not read-ily available, if such information exists atthe end of such taxable year. For example,if a deferred amount is based upon the ser-vice recipient’s profits for its taxable yearthat coincides with the service provider’staxable year, the amount would be consid-ered a non-formula amount at the end ofthe taxable year because the informationnecessary to determine the service recipi-ent’s profits exists, although such informa-tion may not be immediately accessible.

The right to have a deferred amountcredited with reasonable earnings that mayvary, for example because the earnings arebased on the value of a deemed invest-ment, would not affect whether the rightto the underlying deferred amount is a for-mula amount. In addition, the amount ofearnings to which the service provider hasbecome entitled at the end of a particu-lar taxable year would not be treated asa formula amount, regardless of whethersuch earnings could subsequently be re-duced by future losses. For example, as-sume a service provider has a $10,000 ac-count under an account balance plan, to bepaid out in three years subject to earningsbased on a mutual fund designed to repli-cate the performance of the S&P 500 in-dex. At the end of Year 1, the accountbalance is $10,500. For Year 1, the ser-vice provider would have a total amountdeferred equal to $10,500, notwithstand-ing that the amount could be reduced by

future losses based on losses in the mutualfund.

D. Calculation of total amountsdeferred — specific types of plans

1. Account Balance Plans

Under the proposed regulations, theamount deferred under an account balanceplan for a taxable year generally equals theaggregate balance of all accounts underthe plan as of the close of the last day ofthe taxable year, plus any amounts paidfrom such plan during the taxable year,so long as the aggregate account balanceis determined using not more than a rea-sonable interest rate or the return on apredetermined actual investment. Thisrule would apply regardless of whether theapplicable interest rate used to determinethe earnings was higher or lower thanthe applicable Federal rate (AFR) undersection 1274(d), provided that the interestrate was no more than a reasonable rate ofinterest. For a description of the proposedrules on how to calculate the total amountdeferred if the right to earnings is basedon an unreasonably high interest rate, seesection III.C.1 of this preamble.

2. Nonaccount Balance Plans

Under the proposed regulations, the to-tal amount deferred for a taxable year un-der a nonaccount balance plan generallyis calculated under the general calculationrule. See section III.C of this preamble.For example, if a service provider has theright to be paid on a specified future date afixed amount that is not credited with earn-ings, the total amount deferred for a yeargenerally would be the present value as ofthe last day of the service provider’s tax-able year of the amount to which the ser-vice provider has a right to be paid in thefuture year (assuming no payments weremade under the plan during the year). In-creases in the present value of the paymentin subsequent years due to the passage oftime would be treated as earnings in theyears in which such increases occur. Forexample, a right to a payment of $10,000 inYear 3 may have a present value in Year 1equal to $8,900, and a present value in Year2 equal to $9,434, so that the total amountdeferred in Year 1 would be $8,900, thetotal amount deferred in Year 2 would be

$9,434, and the total amount deferred inYear 3 would be $10,000 (assuming nopayments were made during any year ex-cept Year 3). Any potential additional ser-vice credits or increases in compensationafter the end of the taxable year for whichthe calculation is being made would not betaken into account in determining the totalamount deferred for the taxable year.

3. Stock Rights

In general, the proposed regulationsprovide that the total amount deferredunder an outstanding stock right is theamount of money and the fair marketvalue of the property that the serviceprovider would receive by exercising theright on the last day of the taxable year,reduced by the amount (if any) the serviceprovider must pay to exercise the rightand any amount the service provider paidfor the right, which is commonly referredto as the spread. Accordingly, for an out-standing stock option, the total amountdeferred generally would equal the un-derlying stock’s fair market value on thelast day of the taxable year, less the sumof the exercise price and any amount paidfor the stock option. For an outstandingstock appreciation right, the total amountdeferred generally would equal the under-lying stock’s fair market value on the lastday of the taxable year, less the sum of theexercise price and any amount paid for thestock appreciation right. For this purpose,the stock’s fair market value would be de-termined applying the principles set forthin §1.409A–1(b)(5).

The Treasury Department and the IRSrecognize that the spread generally is lessthan the fair market value of the stockright, which is used for purposes of de-termining the amount taxable under otherCode provisions such as section 83 (if astock option has a readily ascertainable fairmarket value), section 4999, and section457(f). However, because these types ofstock rights typically will fail to complywith section 409A(a) in multiple years, ataxpayer who holds such a stock right gen-erally will be required to include amountsin income under section 409A in more thanone taxable year. Therefore, the TreasuryDepartment and the IRS believe that it ismore appropriate to use the spread for pur-poses of applying section 409A(a) to stockrights.

2008–51 I.R.B. 1331 December 22, 2008

4. Separation Pay Arrangements

A deferred amount that is payable onlyupon an involuntary separation from ser-vice generally will be treated as subject toa substantial risk of forfeiture until the ser-vice provider involuntarily separates fromservice. Accordingly, under the proposedregulations the amount of deferred com-pensation generally would not be requiredto be calculated until the service providerhas involuntarily separated from service.In addition, if the amount were payableupon either an involuntary separation fromservice or some other trigger, such as afixed date, the possibility of payment uponan involuntary separation from servicegenerally would be ignored for purposesof determining the total amount deferredunder the arrangement. See section III.C.2of this preamble. Once an involuntaryseparation from service has occurred, theamount deferred under the plan wouldbe determined using the rules that wouldapply to the schedule of payments if theright to payment were not contingent uponan involuntary separation from service.For example, if the amounts payable areinstallment payments and the remain-ing installment payments include interestcredited at a reasonable rate, the totalamount deferred under the plan wouldbe determined under the rules governingaccount balance plans. If more than onetype of deferred compensation arrange-ment were provided under the separationpay agreement, the amount deferred undereach arrangement would be determinedusing the rules applicable to that type ofarrangement. The total amount deferredfor the taxable year would be the sum of allof the amounts deferred under the variousarrangements constituting the plan.

5. Reimbursement Arrangements

The proposed regulations provide amethod of calculating the amount deferredunder a reimbursement arrangement, in-cluding an arrangement where the benefitis provided as an in-kind benefit from theservice recipient or the service recipientwill pay directly the third-party providerof the goods or services to the serviceprovider. For example, the amount de-ferred under an arrangement providinga specified number of hours of financialplanning services after a service provider’s

separation from service would be de-termined using the rules applicable toreimbursement arrangements, regardlessof whether the service recipient reim-burses the service provider for the serviceprovider’s expenses in purchasing suchservices, provides the financial planningservices directly to the service provider,or pays a third-party financial planner toprovide such services. The rules for reim-bursement arrangements would apply toall such types of arrangements, includingarrangements that would not be disag-gregated from a nonaccount balance planunder §1.409A–1(c)(2)(i)(E) because theamounts subject to reimbursement exceedthe applicable limits.

The proposed calculation rules providethat if a service provider has a right to re-imbursements but only up to a specifiedmaximum amount, it is presumed that thetaxpayer will incur the maximum amountof expenses eligible for reimbursement, atthe earliest possible time such expensesmay be incurred and payable at the earli-est possible time the amount may be reim-bursed under the plan’s terms. The serviceprovider could rebut the presumption if theservice provider demonstrates by clear andconvincing evidence that it is unreason-able to assume that the service providerwould expend (or would have expended)the maximum amount of expenses eligi-ble for reimbursement. For example, ifa service provider is entitled to the reim-bursement of country club dues the serviceprovider incurs in the next taxable year, notto exceed $30,000, if the service providercan demonstrate that the most expensivecountry club within reasonable geographicproximity of the service provider’s resi-dence and work location will cost $20,000per year, and that the service provider’slevel of compensation and financial re-sources make it unreasonable to assumethat the service provider would travel pe-riodically to the locales of other, more ex-pensive country clubs, the service providercan calculate the amount deferred basedupon the $20,000 being eligible for reim-bursement. The presumption of maximumutilization of expenses eligible for reim-bursement generally would not apply ifthe expenses subject to reimbursement aremedical expenses.

If a right to reimbursement is not sub-ject to a maximum amount, the taxpayerwould be treated as having deferred a

formula amount, provided that the tax-payer would be required to calculate theamount based on the maximum amountthat reasonably could be expended andreimbursed. The amount would be consid-ered a nonformula amount as soon as thetaxpayer incurs the expense that is subjectto reimbursement, in an amount equal tothe reimbursement to which the taxpayeris entitled. For example, a right to thereimbursement of half of the expenses theservice provider incurs to purchase a boatwithout any limitation with respect to thecost would be treated as a deferral of aformula amount, until such time as theservice provider purchases the boat.

6. Split-Dollar Life InsuranceArrangements

The amount deferred under a split-dol-lar life insurance arrangement would bedetermined based upon the amount thatwould be required to be included in in-come in a future year under the applicablesplit-dollar life insurance rules. Determi-nation of the amount includible in incomewould depend upon the Federal tax regimeand guidance applicable to such arrange-ment. If the split-dollar life insurancearrangement is not subject to §1.61–22 or§1.7872–15 due to application of the effec-tive date provisions under §1.61–22(j), theamount payable would be determined byreference to Notice 2002–8, 2002–1 C.B.398, and any other applicable guidance. Ifthe split-dollar life insurance arrangementis subject to §1.61–22 or §1.7872–15,the amount payable would be determinedby reference to such regulations, basedupon the type of arrangement. For thispurpose, the amount includible in incomegenerally would be determined by apply-ing the split-dollar life insurance rulesto the arrangement in conjunction withthe general rules providing assumptionson payment dates of deferred amounts.However, in the case of an arrangementsubject to §1.7872–15, to the extent therules regarding time and form of paymentand other payment assumptions underthese proposed regulations conflict withthe provisions of §1.7872–15, the provi-sions of §1.7872–15 would apply insteadof the conflicting rules under these pro-posed regulations. As provided in Notice2007–34, 2007–1 C.B. 996, the portion ofthe benefit provided under the split-dollar

December 22, 2008 1332 2008–51 I.R.B.

life insurance arrangement consisting ofthe cost of current life insurance protectionis not treated as deferred compensation forthis purpose. See §601.601(d)(2)(ii)(b).

7. Foreign Arrangements

Although certain foreign arrangementsare a separate category under the plan ag-gregation rules (§1.409A–1(c)(2)(i)(G)),the amounts deferred under such ar-rangements would be determined usingthe same rules that would apply if thearrangements were not foreign arrange-ments. For example, the total amountdeferred by a United States citizen partic-ipating in a salary deferral arrangementin France that meets the requirements of§1.409A–1(c)(2)(i)(G), but that otherwisewould constitute an elective account bal-ance plan under §1.409A–1(c)(2)(i)(A),would be determined using the rules ap-plicable to account balance plans.

8. Other Plans

The calculation of the total amount de-ferred under a plan that does not fall intoany of the enunciated categories (and ac-cordingly is treated as a separate plan un-der §1.409A–1(c)(2)(i)(I)), would be de-termined by applying the general calcula-tion rules.

E. Calculation of amounts includible inincome

This section III.E of the preamble ad-dresses the second step in determining theamount includible in income under section409A for a taxable year — the determi-nation of the portion of the total amountdeferred for a taxable year that was eithersubject to a substantial risk of forfeiture orhad previously been included in income.That portion of the total amount deferredfor the taxable year would not be includi-ble in income under section 409A.

1. Determination of the Portion of theTotal Amount Deferred for a Taxable Yearthat is Subject to a Substantial Risk ofForfeiture

In general, the proposed regulationsprovide that the portion of the total amountdeferred for a taxable year that is subject toa substantial risk of forfeiture (nonvested)is determined as of the last day of the ser-vice provider’s taxable year. Accordingly,

all amounts that vest during the taxableyear in which a failure occurs would betreated as vested for purposes of section409A(a), regardless of whether the vestingevent occurs before or after the failure tomeet the requirements of section 409A(a).For example, if a plan fails to complywith section 409A(a) due to an operationalfailure on July 1 of a taxable year, and thesubstantial risk of forfeiture applicable toan amount deferred under the plan lapsesas of October 1 of the same taxable year,that amount would be treated as a vestedamount for purposes of determining theamount includible in income for the tax-able year.

2. Determination of the Portion of theTotal Amount Deferred for a TaxableYear that has been Previously Included inIncome

For a deferred amount to be treatedas previously included in income, theproposed regulations would require thatthe service provider actually and prop-erly have included the amount in incomein accordance with a provision of theInternal Revenue Code. This would in-clude amounts reflected on an original oramended return filed before expiration ofthe applicable statute of limitations on as-sessment and amounts included in incomeas part of an audit or closing agreementprocess. In addition, a deferred amountwould be treated as an amount previouslyincluded in income only until the amountis paid. Accordingly, if a deferred amountis paid in the same taxable year in whichan amount is included in income undersection 409A, or all or a portion of anamount previously included in income isallocable to a payment made under theplan (see section VI.A of this preamble),in subsequent taxable years that amountwould not be treated as an amount previ-ously included in income. For example, ifan employee includes $100,000 in incomeunder section 409A(a), and $10,000 ofthe amount includible in income consistsof a payment under the plan during thetaxable year, only $90,000 would remainto be treated as a deferred amount previ-ously included in income. Similarly, ifin the next year the employee receives apayment, to the extent any or all of that$90,000 amount previously included inincome is allocated to that payment so

that all or a portion of the payment is notincludible in gross income, the amountallocated would no longer be treated as anamount previously included in income.

F. Treatment of failures continuing duringmore than one taxable year

A plan term that fails to meet the re-quirements of section 409A(a) may be re-tained in the plan over multiple taxableyears. In addition, operational failuresmay occur in multiple years. This sectionIII.F of the preamble discusses how section409A(a) applies in such cases.

Each of the service provider’s taxableyears would be analyzed independentlyto determine if amounts were includiblein income under section 409A(a). Seesection II of this preamble. Thus, forany taxable year during which a failureoccurs, all amounts deferred under theplan would be includible in income unlessthe amount has previously been includedin income or is subject to a substantialrisk of forfeiture. Generally, this meansthat a service provider who includes inincome under section 409A(a) all amountsdeferred under a plan for a taxable yearwould not be relieved of the requirementto include amounts in income for an earliertaxable year in which a failure also oc-curred. It would undermine the statutorypurpose to allow a service provider to in-clude an amount in income under section409A(a) (or otherwise) on a current basiswith respect to a failure that occurred ina prior taxable year and thereby eliminatethe taxes owed for the earlier year, espe-cially if intervening payments of deferredamounts have reduced the total amountdeferred as of the end of such currentyear. In addition, this rule generally wouldprohibit a service provider from select-ing from among several previous taxableyears the most favorable year in which toinclude income. However, if an amountwas actually and properly included in in-come under section 409A(a) in a previousyear, the amount would be treated as anamount previously in income for purposesof all subsequent years. Accordingly, thisrule would never make the same amountincludible in income twice under section409A(a).

For example, assume an employeeparticipates in a nonqualified deferredcompensation plan and defers $10,000

2008–51 I.R.B. 1333 December 22, 2008

each year, credited annually with interestat 5 percent (assumed to be reasonable forpurposes of this example), and receives nopayments under the plan. The employee’stotal amount deferred would be $10,500for Year 1, $21,525 for Year 2, and $33,101for Year 3. If the nonqualified deferredcompensation plan fails to meet the re-quirements of section 409A(a) in eachyear, the employee would be required toinclude $10,500 in income under section409A(a) for Year 1, $11,025 in income forYear 2, and $11,576 in income for Year3. If the employee includes $33,101 inincome under section 409A(a) for Year3, the employee would not have properlyreported income for Year 1 and Year 2.However, an amount included in incomefor Year 3 would be treated as previouslyincluded in income for purposes of anyfurther failures in subsequent years. Inaddition, if the employee subsequentlyproperly includes amounts in income forYear 1 and Year 2 on amended returns, theemployee could claim a refund of the taxpaid on the excess amounts included inincome for Year 3. Similar consequencesapply to the employer. If the employerfails to report and withhold on amounts in-cludible in income under section 409A(a)in Year 1 and Year 2, the employer couldnot avoid liability for the failure to with-hold in Year 1 and Year 2 by reporting thefull amount and withholding in Year 3.

Because each taxable year would be an-alyzed independently, the IRS could electto audit and assess with respect to a singletaxable year, and require inclusion of allamounts deferred under the plan throughthat taxable year (even if failures also oc-curred in prior taxable years). Under thosecircumstances, the taxpayer could simplyinclude amounts in income under section409A(a) for that taxable year. However,before expiration of the applicable statuteof limitations, the taxpayer could amendreturns for previous taxable years and in-clude in income amounts required to beincluded under section 409A(a), loweringthe amount includible in income undersection 409A(a) for the audited taxableyear because, for purposes of that taxableyear, those amounts would have been in-cluded in income in previous years. Forexample, an audit of Year 3 in the exampleabove could result in an adjustment re-quiring $33,101 to be included in income

under section 409A(a). However, beforeexpiration of the applicable statute of lim-itations, the employee could amend theemployee’s Year 1 and Year 2 Federal taxreturns to include $10,500 in income undersection 409A(a) for Year 1, and $11,025 inincome under section 409A(a) for Year 2,and accordingly include only $11,576 inincome under section 409A(a) for Year 3.However, the employee would be requiredto pay the additional section 409A(a) taxesfor Year 1 and Year 2, including the pre-mium interest tax. In addition, if amountsdeferred under the plan had been paid inYear 1 or Year 2, the employee wouldbe required to include those additionalamounts in income under section 409A(a)for the year paid (meaning, if the paymenthad been included in income for the yearin which it was paid, the employee wouldbe required to amend the previously filedtax returns to pay the additional section409A(a) taxes on such income).

IV. Application of Additional 20 PercentTax

Section 409A(a)(1)(B)(i)(II) providesthat if compensation is required to beincluded in gross income under section409A(a)(1)(A) for a taxable year, theincome tax imposed is increased by anamount equal to 20 percent of the com-pensation that is required to be includedin gross income. This amount is an ad-ditional income tax, subject to the rulesgoverning the assessment, collection, andpayment of income tax, and is not an ex-cise tax.

V. Application of Premium Interest Tax

A. In general

Section 409A(a)(1)(B)(i)(I) providesthat if compensation is required to beincluded in gross income under section409A(a)(1)(A) for a taxable year, theincome tax imposed is increased by anamount equal to the amount of interest de-termined under section 409A(a)(1)(B)(ii).This amount is an additional income tax,subject to the rules governing assessment,collection, and payment of income tax,and is not an excise tax or interest on anunderpayment. Section 409A(a)(1)(B)(ii)provides that this premium interest tax isdetermined as the amount of interest at

the underpayment rate (established undersection 6621) plus one percentage pointon the underpayments that would haveoccurred had the deferred compensationbeen includible in gross income for thetaxable year in which first deferred or, iflater, the first taxable year in which suchdeferred compensation is not subject toa substantial risk of forfeiture (vested).Thus, section 409A(a)(1)(B) requires thatthe premium interest tax be applied tohypothetical underpayments where the hy-pothetical underpayments are determinedby first allocating the amounts deferredunder the plan required to be included inincome under section 409A(a) to the initialyear (or years) the amount was deferred orvested, then determining the hypotheticalunderpayment that would have resultedhad such amounts been includible in in-come at that time, and then determiningthe interest that would be due upon thathypothetical underpayment based upon apremium interest rate equal to the under-payment rate plus one percentage point.

B. Amounts to which the premium interesttax applies

Section 409A(a)(1)(B)(ii) provides foran additional tax based upon the inter-est that would be applied to the resultingunderpayments of tax if the deferred com-pensation includible in income undersection 409A(a) had been includible inincome in previous years. Because thetotal amount deferred for the taxable yearin which a failure occurs (the current year)may be less than the amounts deferred un-der the same plan in a previous year due topayments or deemed investment or otherlosses in the previous year, so that a por-tion of the amount deferred in the previousyear would not be includible in incomeunder section 409A(a) for the current year,commentators have asked what amountsdeferred under the plan must be taken intoaccount in determining the premium in-terest tax. Section 409A(a)(1)(B)(i) refersfirst to the compensation required to beincluded in gross income under section409A(a)(1)(A). Accordingly, under theproposed regulations the amount requiredto be included in income under section409A(a) for the taxable year is the onlydeferred amount required to be allocatedto previous taxable years for purposes of

December 22, 2008 1334 2008–51 I.R.B.

determining the premium interest tax un-der section 409A(a)(1)(B)(i)(I).

For example, assume an employee whoparticipates in a plan has a total amountdeferred in Year 1 of $100,000 and a totalamount deferred in Year 2 of $80,000 dueto deemed investment losses in Year 2. Ifthe plan fails to meet the requirements ofsection 409A(a) in Year 2 (and not Year1), the employee is required to include$80,000 in income under section 409A(a).In calculating the premium interest tax, theemployee must allocate only the $80,000required to be included in income undersection 409A(a) to the year or years theamount was first deferred or vested, eventhough additional amounts were deferredunder the plan in previous taxable years.

C. Identification of initial years of deferralfor includible amounts

1. Identification of Amounts Deferredin a Particular Taxable Year — GeneralPrinciples

To calculate the premium underpay-ment interest tax, the taxable year or yearsduring which the amount required to beincluded in income was first deferred orfirst vested must be determined. The pro-posed regulations provide that the amountdeferred during a particular taxable yeargenerally is the excess (if any) of thevested total amount deferred for that tax-able year over the vested total amountdeferred for the immediately precedingtaxable year. For example, if a serviceprovider first participated in a plan in thetaxable year 2010 and has a vested totalamount deferred under the plan for 2010of $10,000, a vested total amount deferredfor 2011 of $15,000, and a vested totalamount deferred for 2012 of $25,000, thenthe service provider would be treated ashaving first deferred $10,000 during 2010,$5,000 during 2011, and $10,000 during2012.

2. Identification of Initial Years ofDeferral — Treatment of AmountsPreviously Included in Income, Payments,and Investment Losses

The general rule would apply in caseswhere during previous taxable years therehave been no payments under the plan,no net deemed investment or other losses,

and no amounts otherwise included in in-come. If a service provider has receiveda payment, incurred net deemed losses, orincluded an amount in income, the generalrule would need to be modified. For ex-ample, assume that the vested total amountdeferred for Year 1 is $100,000, for Year2 is $200,000 (including a $50,000 pay-ment), and for Year 3 is $250,000. If thereis a failure to meet the requirements ofsection 409A(a) in Year 3, the serviceprovider would be required to include$250,000 in income. The service providerwould also need to determine the year oryears during which the $250,000 was firstdeferred and vested for purposes of calcu-lating the premium interest tax. The issuethen arises whether the $50,000 paymentin Year 2 was a payment of an amountfirst deferred and vested in Year 1 or Year2. If the $50,000 payment is treated as apayment of an amount first deferred andvested in Year 1, then only $50,000 ofthe $100,000 deferred in Year 1 would re-main to be treated as part of the $250,000includible in income in Year 3. In con-trast, if the $50,000 payment is treated asa payment of an amount first deferred inYear 2, then the entire $100,000 deferredin Year 1 would remain to be treated aspart of the $250,000. Similar issues arisewith respect to the treatment of deemedinvestment losses and amounts previouslyincluded in income.

Under the calculation method set forthin the proposed regulations, payments,deemed investment or other losses, andamounts included in income during tax-able years before the year in which thefailure occurs, generally are attributedto amounts deferred and vested in theearliest year or years in which there areamounts deferred. The proposed calcula-tion method generally achieves this resultby reducing the amount deferred for eachyear preceding the payment or deemedinvestment or other loss, and treatingonly the remaining deferred amounts asthe source of the outstanding deferralsand payments includible in income undersection 409A for the year in which thefailure occurs. This proposed rule gener-ally should result in the lowest possibleamount of premium interest tax, becausedeferred amounts includible in income un-der section 409A would be treated as firstdeferred and vested in the latest possible

years, resulting in less premium intereston the hypothetical underpayments.

D. Calculation of the hypotheticalunderpayment

The hypothetical underpayment wouldbe calculated as if the amount were paidto the service provider as a cash paymentof compensation during the taxable year.Further, the hypothetical underpaymentwould be calculated based on the tax-payer’s taxable income, credits, filing sta-tus, and other tax information for the year,based on the original return the taxpayerfiled for such year, as adjusted as a resultof any examination for such year or anyamended return the taxpayer filed for suchyear that was accepted by the IRS. The hy-pothetical underpayment would reflect theeffect that such additional compensationwould have had on the amount of Federalincome tax owed by the taxpayer for suchyear, including the continued availabilityof any deductions taken, and the use ofany carryovers such as carryover losses.For purposes of calculating a hypothet-ical underpayment in a subsequent year(whether or not a portion of the deferredamount was first deferred and vested in thesubsequent year), any changes to the tax-payer’s Federal income tax liability for thesubsequent year that would have occurredif the portion of the deferred amount thatwas first deferred and vested during theprevious taxable year had been includedin the taxpayer’s income for the previousyear would be taken into account. Forexample, if in calculating the hypotheticalunderpayment for one year, an additionalamount of unused charitable contributiondeductions is absorbed, the use of theadditional charitable contributions wouldbe reflected in determining the hypothet-ical underpayment for a subsequent year(meaning that the same portion of the char-itable contribution could not be deductedtwice in determining the hypothetical un-derpayments for more than one year).

Calculation of the premium interest taxwould take into account only the conse-quences the additional income would havehad on the Federal income tax due basedon items of income and deduction, cred-its, filing status and similar informationexisting as of the end of the taxable yearat issue. Other potential effects of theadditional compensation payment on ser-

2008–51 I.R.B. 1335 December 22, 2008

vice provider or service recipient actionsor elections would not be taken into ac-count, including how such additional com-pensation could have affected participationin an employee benefit plan or other ar-rangement. For example, the impact suchadditional compensation would have hadon contributions to a qualified plan, evenif the additional compensation would haveaffected the amount the service providerwould have been permitted or required tocontribute, would be disregarded.

E. Potential safe harbor calculationmethods

The Treasury Department and the IRSrecognize that calculation of the premiumunderpayment interest tax may be cum-bersome, potentially involving the recal-culation of several years’ tax returns. Inresponse, the Treasury Department and theIRS are considering whether safe harborcalculation methods could be devised thatwould reduce the calculation burden butstill result in an appropriate amount of taxapplicable to the amount includible in in-come under section 409A(a). Specifically,the Treasury Department and the IRS re-quest comments on calculation methodsthat would more easily identify the taxableyear or years during which an amount in-cludible in income under section 409A(a)was first deferred and vested, and thatwould more easily determine the hypo-thetical underpayments applicable to suchyear or years. Comments should considerboth how the safe harbor method wouldbe applied by taxpayers, and the extent towhich such methods could be applied bythe IRS in the examination context.

VI. Treatment of Payments, Forfeitures, orPermanent Losses of Deferred Amountsin Taxable Years after the Amount isIncluded in Income under Section 409A(a)

A. Payments of deferred compensation intaxable years after the inclusion of suchamounts in income under section 409A(a)

Section 409A(c) provides that anyamount included in gross income undersection 409A is not required to be includedin gross income under any other provisionof the Code or any other rule of law laterthan the time provided in section 409A.Accordingly, if a service provider includesan amount in income under section 409A,

the proposed regulations provide for a typeof deemed “basis” or “investment in thecontract” such that the amount would notbe required to be included in income again(for example, when the amount was actu-ally paid). For this purpose, the amountpreviously included in income would betreated as the inclusion in income of anamount deferred under the plan, but wouldnot be allocated to any specific amountdeferred under the plan. Accordingly, ifan amount under the plan would be in-cludible in income if section 409A weredisregarded (for example, because anamount is paid under the plan), the amountpreviously included in income would beimmediately applied to the amount paidunder the plan such that the amount paidwould not be required to be included ingross income a second time.

For example, assume that in Year 1 anemployee defers $10,000 under a salarydeferral elective account balance plan andis required to include that amount in in-come under section 409A. Assume thatin Year 2 the employee defers $15,000under the same salary deferral electiveaccount balance plan, and an additional$5,000 under a bonus deferral electiveaccount balance plan, both of which arecompliant with section 409A. Assume thatin Year 3 the employee receives a pay-ment of $5,000 under the bonus deferralelective account balance plan. Becausethe payment would be treated for purposesof section 409A as made from a singleelective account balance plan in which theemployee participated, and because theemployee has already included $10,000 inincome under section 409A due to partic-ipation in the plan, the employee wouldapply $5,000 of the $10,000 that was pre-viously included in income to the $5,000payment and not include the $5,000 pay-ment in gross income in Year 3 (or anysubsequent year). The remaining amountpreviously included in income would be$5,000.

The employee could not elect the extentto which the amount previously includedin income would be applied in this context.Rather, the amount previously included inincome would be required to be appliedimmediately to the extent an amount de-ferred under the same plan would other-wise become includible in income undera Code section other than section 409A.The inclusion of any amount in income and

the resulting amount previously includedin income for subsequent years would notaffect the potential for earnings related tosuch amounts to be subject to section 409Aor to be required to be included in incomeunder section 409A.

B. Permanent forfeiture or loss of adeferred amount previously included inincome under section 409A(a)

The application of section 409A(a) mayrequire inclusion in income of amountsthat the service provider ultimately neverreceives. This result may occur under fourdifferent circumstances. First, because anonqualified deferred compensation plangenerally involves an unfunded, unsecuredpromise of a service recipient to pay com-pensation in a future year, the funds to paythe deferred amount may not be availablein the future year. For example, the ser-vice recipient may be insolvent, bankruptor have ceased to exist at the time the pay-ment is due.

Second, some amounts of deferredcompensation may be included in incomeunder section 409A(a) if the amounts aresubject to a risk of forfeiture, but the riskof forfeiture does not qualify as a sub-stantial risk of forfeiture. For example, adeferred amount payable only if the ser-vice provider does not compete with theservice recipient for a defined period is notsubject to a substantial risk of forfeiture.However, if the service provider actuallycompetes with the service recipient, theservice provider may forfeit the right tothe amount.

Third, the deferred amount may be sub-ject to deemed investment losses. If lossesoccur after the deferred amount has beenincluded in income under section 409A(a),the amount paid to the service providermay be less than the amount included inincome.

Fourth, in the case of a formula amount,the calculation of the deferred amountmay result in the inclusion in income un-der section 409A(a) of an amount that isgreater than the amount ultimately paid.For example, if a service provider re-ceives a right to a certain percentage of theservice recipient’s profits payable at sep-aration from service, and determines thatthe total amount deferred under the plan is$100,000, once the profits are calculated

December 22, 2008 1336 2008–51 I.R.B.

the service provider may be entitled to alesser amount.

1. Effect on Service Provider

The proposed regulations provide thata service provider who is required to in-clude an amount in income under section409A(a) with respect to a deferred amountunder a nonqualified deferred compen-sation plan is entitled to a deduction atthe time the service provider’s legallybinding right to all deferred compensationunder the plan (including all arrangementstreated as a single plan under the aggrega-tion rules) is permanently forfeited underthe plan’s terms, or the right to such com-pensation is otherwise permanently lost.The available deduction would equal theexcess of the amount included in incomeunder section 409A(a) in a previous yearover any amount actually or construc-tively received by the service provider. Aright to an amount would not be treatedas permanently lost merely because thedeferred amount had decreased, for ex-ample due to deemed investment losses,if the service provider retains a right toan amount deferred under the plan. Inaddition, a right to an amount would notbe treated as permanently forfeited orotherwise lost if the obligation to makesuch payment is substituted for anotherdeferred amount or obligation to make apayment in a future year. However, theright to an amount would be treated as per-manently lost if the right to the payment ofthe amount becomes wholly worthless. Aservice provider would not be entitled to adeduction with respect to an amount pre-viously included in income under section409A(a) if the service provider retains aright to any amount deferred under all ar-rangements treated as a single plan under§1.409A–1(c)(2). However, if the entiredeferred amount payable under the planhas been paid out and the service recipienthas no remaining liability to the serviceprovider under the plan, any remainingunpaid deferred amount that had previ-ously been included in income would betreated as permanently lost.

For example, if at the end of Year 1an employee has an account balance of$100,000 which is required to be includedin income under section 409A, and at theend of Year 2 an employee has an accountbalance of $90,000 due to notional invest-

ment losses, the employee would not beentitled to a deduction for Year 2. How-ever, if in Year 3 the entire account bal-ance of $95,000 is paid to the employee, sothere no longer are any amounts deferredunder the plan (determined after applyingapplicable aggregation rules) and nothingremains to be paid to the employee, the em-ployee would be entitled to a $5,000 de-duction for Year 3.

In the case of a service provider thatis an employee, the available deductiongenerally would be treated as a miscella-neous itemized deduction, subject to thededuction limitations applicable to suchexpenses. Section 1341 would not be ap-plicable to such deduction because inclu-sion of an amount in income as a resultof noncompliance with section 409A(a)would not constitute receipt of an amountto which it appeared that the taxpayer hadan unrestricted right in the taxable year ofinclusion. In the first circumstance listedabove, a service provider that does not re-ceive payment of deferred compensationbecause of the bankruptcy or insolvency ofthe service recipient retains the legal rightto the income even though the income isnot collectible. In each of the three othercircumstances in which such a deductionbecomes available, the deferred compen-sation is not paid because of an event thatoccurred after the taxable year in whichthe amount deferred was included in in-come under section 409A, rather than fromthe absence of a right to the deferred com-pensation in the year in which it was in-cludible in gross income. Finally, certainof such circumstances, such as the actualamount received differing from the amountincluded in income because the amount de-ferred was a formula amount, result fromthe inherent uncertainties in valuing rightsto such amounts, rather than from a lack ofa claim of right to income.

2. Effect on Service Recipient

If a service provider is entitled to a de-duction with respect to a deferred amountincluded in income under section 409A(a)that is subsequently permanently forfeitedor otherwise lost, to the extent the servicerecipient has benefited from a deduction orincreased the basis of an asset because thedeferred amount was included in the ser-vice provider’s gross income, or such in-clusion by the service provider has other-

wise reduced or could otherwise reduce theservice recipient’s gross income, the ser-vice recipient may be required to recognizeincome under the tax benefit rule and sec-tion 111, or make other appropriate adjust-ments to reflect that the deferred amountincluded in income by the service providerunder section 409A(a) has been perma-nently forfeited or otherwise lost, and thuswill not be paid by the service recipient.

VII. Service Provider Income Inclusionand Additional Taxes and ServiceRecipient Reporting and WithholdingObligations

A. Service provider income inclusion

The Treasury Department and the IRSanticipate issuing interim guidance during2008 addressing the extent to which tax-payers may rely on the proposed regula-tions with respect to the calculation of theamounts includible in income under sec-tion 409A(a) and the calculation of the ad-ditional taxes under section 409A(a). Theinterim guidance is also expected to ad-dress the calculation of the amounts in-cludible in income and additional taxesunder section 409A(b) and service recip-ient reporting and withholding obligationswith respect to amounts includible in in-come under section 409A(a) or (b) for tax-able years beginning before the final regu-lations become applicable. The TreasuryDepartment and the IRS anticipate thatsuch interim guidance will provide thattaxpayers may rely upon the proposed reg-ulations in their entirety (but that taxpayersmay not rely on part, but not all, of the pro-posed regulations).

B. Annual deferral reporting

Section 885(b) of the Act amendedsections 6041 and 6051 to require thatan employer or payer report all defer-rals for the year under a nonqualifieddeferred compensation plan on a FormW–2, “Wage and Tax Statement” or a Form1099–MISC, “Miscellaneous Income”,regardless of whether such deferred com-pensation is includible in gross incomeunder section 409A(a) (annual deferralreporting). Notice 2007–89 permanentlywaives this requirement for 2007 FormsW–2 and Forms 1099. Notice 2006–100permanently waives this requirement for2005 and 2006 Forms W–2 and Forms

2008–51 I.R.B. 1337 December 22, 2008

1099. The Treasury Department and theIRS anticipate that this reporting willbe implemented beginning with the firsttaxable year for which these proposed reg-ulations are finalized and effective. TheTreasury Department and the IRS furtheranticipate that the annual deferral report-ing rules will be based upon the principlesset forth in these regulations as finalized,except that taxpayers will not be requiredto report deferred amounts that are notreasonably ascertainable (as defined in§31.3121(v)(2)–1(e)(4)(i)(B)) until suchamounts become reasonably ascertainable.The Treasury Department and the IRSanticipate that the deferred amounts re-quired to be reported will reflect earningson the amounts deferred in previous years,if the amount of such earnings is reason-ably ascertainable, because section 409Aspecifically treats earnings on deferredamounts as additional deferred amounts.The Treasury Department and the IRSrequest comments on the potential appli-cation of the standards set forth in theseregulations to this reporting requirement,including suggestions for possible adapta-tions or modifications that may decreasethe administrative burden of compliancewhile maintaining the integrity of the in-formation reported.

C. Income inclusion reporting and incometax withholding

Section 885(b) of the Act also amendedsection 3401(a) to provide that the term“wages” includes any amount includiblein the gross income of an employee un-der section 409A, and amended section6041 to require that a payer report amountsincludible in gross income under section409A that are not treated as wages un-der section 3401(a) (income inclusion re-porting). Notice 2005–1 provides that anemployer should report amounts includi-ble in gross income under section 409Aand in wages under section 3401(a) in box1 of Form W–2 as wages paid to the em-ployee during the year and subject to in-come tax withholding, and that the em-ployer should also report such amountsin box 12 of Form W–2 using code Z.Notice 2005–1 also provides that a payershould report amounts includible in grossincome under section 409A and not treatedas wages under section 3401(a) as nonem-ployee compensation in box 7 of Form

1099–MISC, and should also report suchamounts in box 15b of Form 1099–MISC.Notice 2006–100 provided guidance on in-come inclusion reporting for the 2005 and2006 Forms W–2 and Forms 1099. Notice2007–89 provided guidance on income in-clusion reporting for the 2007 Forms W–2and Forms 1099. The Treasury Depart-ment and the IRS anticipate issuing furtherinterim guidance during 2008 on incomeinclusion reporting for 2008 Forms W–2and Forms 1099 for taxable years begin-ning before the final regulations becomeapplicable. The Treasury Department andthe IRS anticipate that such interim guid-ance will provide that taxpayers may relyupon the proposed regulations in their en-tirety (but that taxpayers may not rely onpart, but not all, of the proposed regula-tions).

Amounts includible in an employee’sincome under section 409A also are treatedas wages for purposes of section 3401.Notice 2007–89 provides guidance on aservice recipient’s income tax withhold-ing obligations for 2007. The TreasuryDepartment and the IRS anticipate issuingfurther interim guidance during 2008 ona service recipient’s income tax withhold-ing obligations for calendar years begin-ning before the final regulations becomeapplicable. The Treasury Department andthe IRS anticipate that such interim guid-ance will provide that taxpayers may relyupon the proposed regulations in their en-tirety (but that taxpayers may not rely onpart, but not all, of the proposed regula-tions).

Proposed Effective Date

These regulations are proposed to begenerally applicable for taxable years be-ginning on or after the issuance of finalregulations. Before the applicability dateof the final regulations, taxpayers may relyon these proposed regulations only to theextent provided in further guidance.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatoryassessment is not required. It has alsobeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these regu-lations, and because the regulation doesnot impose a collection of informationon small entities, the Regulatory Flexi-bility Act (5 U.S.C. chapter 6) does notapply. Pursuant to section 7805(f) of theCode, this notice of proposed rulemakingwill be submitted to the Chief Counselfor Advocacy of the Small BusinessAdministration for comment on its impacton small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signed origi-nal and eight (8) copies) or electronic com-ments that are submitted timely to the IRS.The IRS and Treasury Department requestcomments on the clarity of the proposedrules and how they can be made easier tounderstand. All comments will be avail-able for public inspection and copying.

A public hearing has been scheduled forApril 2, 2009 at 10:00 a.m., in the audi-torium. Due to building security proce-dures, visitors must enter at the Consti-tution Avenue entrance. In addition, allvisitors must present photo identificationto enter the building. Because of accessrestrictions, visitors will not be admittedbeyond the immediate entrance area morethan 30 minutes before the hearing starts.For information about having your nameplaced on the building access list to attendthe hearing, see the “FOR FURTHER IN-FORMATION CONTACT” section of thispreamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written or electronic comments andan outline of the topics to be discussedand the time to be devoted to each topic(a signed original and eight (8) copies) byMarch 9, 2009. A period of 10 minuteswill be allotted to each person for makingcomments. An agenda showing the sched-uling of the speakers will be prepared af-ter the deadline for receiving outlines haspassed. Copies of the agenda will be avail-able free of charge at the hearing.

Drafting Information

The principal author of these regula-tions is Stephen Tackney of the Office of

December 22, 2008 1338 2008–51 I.R.B.

Division Counsel/Associate Chief Coun-sel (Tax Exempt and Government Enti-ties). However, other personnel from theIRS and the Treasury Department partici-pated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:

Part 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.409A–0 is amended

by adding entries for §1.409A–4 to read asfollows:

§1.409A–0 Table of contents.

* * * * *§1.409A–4 Calculation of amount in-

cludible in income and additional incometaxes.

(a) Amount includible in income due tofailure to meet the requirements of section409A(a).

(1) In general.(i) Calculation formula.(ii) Each taxable year analyzed inde-

pendently.(A) In general.(B) Treatment of certain deferred

amounts otherwise subject to a substantialrisk of forfeiture.

(iii) Examples.(2) Identification of the portion of the

total amount deferred for a taxable yearthat is subject to a substantial risk of for-feiture.

(i) In general.(ii) Example.(3) Identification of amount previously

included in income.(i) In general.(ii) Examples.(b) The total amount deferred under a

plan for a taxable year.(1) Application of general rules and

specific rules for specific types of plans.(2) General definition of total amount

deferred.(i) General calculation rules.

(ii) Actuarial assumptions and methods.(A) Requirement of reasonable actuar-

ial assumptions and methods.(B) Use of an unreasonable actuarial as-

sumption or method.(iii) Crediting of earnings and losses.(iv) Application of the general calcula-

tion rules to formula amounts.(A) In general.(B) Examples.(v) Treatment of payment restrictions.(vi) Treatment of alternative times and

forms of a future payment.(A) In general.(B) Effect of status of service provider

on available times and forms of payment.(vii) Treatment of payment triggers

based upon events.(A) In general.(B) Certain payment triggers disre-

garded.(viii) Treatment of amounts that may

qualify as short-term deferrals.(ix) Examples.(3) Account balance plans.(i) In general.(ii) Unreasonable rate of return.(A) Application.(B) Unreasonably high interest rate.(C) Other rates of return.(4) Reimbursement and in-kind benefit

arrangements.(5) Split-dollar life insurance arrange-

ments.(6) Stock rights.(7) Anti-abuse provision.(c) Additional 20 percent tax under sec-

tion 409A(a)(1)(B)(i)(II).(d) Premium interest tax under section

409A(a)(1)(B)(i)(I).(1) In general.(2) Identification of taxable year de-

ferred amount was first deferred or vested.(i) Method of identification.(ii) Examples.(3) Calculation of hypothetical under-

payment for the taxable year during whicha deferred amount was first deferred andvested.

(i) Calculation method.(ii) Examples.(4) Calculation of hypothetical pre-

mium underpayment interest.(i) Calculation method.(ii) Examples.(e) Amounts includible in income under

section 409A(b) [Reserved].

(f) Application of amounts included inincome under section 409A to payments ofamounts deferred.

(1) In general.(2) Application of the plan aggregation

rules.(3) Examples.(g) Forfeiture or other permanent loss

of right to deferred compensation.(1) Availability of deduction to the ser-

vice provider.(2) Application of the plan aggregation

rules.(3) Examples.(h) Effective/applicability date.

* * * * *Par. 3. Section 1.409A–4 is added to

read as follows:

§1.409A–4 Calculation of amountincludible in income and additionalincome taxes.

(a) Amount includible in income due tofailure to meet the requirements of section409A(a)—(1) In general—(i) Calculationformula. The amount includible in incomefor a service provider’s taxable year dueto a failure to meet the requirements ofsection 409A(a) with respect to a plan isthe excess (if any) of—

(A) The service provider’s total amountdeferred under the plan for the taxableyear, including the amount of any pay-ments of amounts deferred under the planto (or on behalf of) the service providerduring such taxable year; over

(B) The portion of such amount, if any,that is either subject to a substantial risk offorfeiture (as defined in §1.409A–1(d) andapplying paragraph (a)(1)(ii)(B) of thissection) or has been previously included inincome (as defined in §1.409A–4(a)(3)).

(ii) Each taxable year analyzed inde-pendently—(A) In general. An amountis includible in income under section409A(a) for a taxable year only if a planfails to meet the requirements of sec-tion 409A(a) during such taxable year.Whether an amount is includible in in-come for a taxable year due to a failure tomeet the requirements of section 409A(a)during such taxable year is determined in-dependently of whether such amounts arealso includible in income due to a failure tomeet the requirements of section 409A(a)in a previous or subsequent taxable year.

2008–51 I.R.B. 1339 December 22, 2008

Accordingly, an amount may be includiblein income for a taxable year during whicha plan fails to meet the requirements ofsection 409A(a), even if the same amountwas includible in income in a previous tax-able year, except to the extent provided in§1.409A–4(a)(3) (identification of amountpreviously included in income).

(B) Treatment of certain deferredamounts otherwise subject to a substantialrisk of forfeiture. For purposes of deter-mining the amount includible in incomeunder section 409A(a) and paragraph(a)(1)(i) of this section, if the facts andcircumstances indicate that a service recip-ient has a pattern or practice of permittingimpermissible changes in the time andform of payment with respect to nonvesteddeferred amounts under one or more plans,an amount deferred under a plan that isotherwise subject to a substantial risk offorfeiture is not treated as subject to asubstantial risk of forfeiture if an imper-missible change in the time and form ofpayment (including an impermissible ini-tial deferral election) applies to the amountdeferred or if the facts and circumstancesindicate that the amount deferred wouldbe affected by such pattern or practice.

(iii) Examples. The following exam-ples illustrate the provisions of this para-graph (a)(1). For each of the examples,Employee A is an individual taxpayer witha calendar year taxable year. Employee Ahas a total amount deferred under a non-qualified deferred compensation plan of $0in 2010, $100,000 in 2011, and $250,000in 2012. No payments are made under theplan. The plan under which the amountsare deferred fails to meet the requirementsof section 409A(a) during 2011 and 2012.The examples read as follows:

Example 1. With respect to Employee A, at notime is any deferred amount subject to a substantialrisk of forfeiture. Employee A has $100,000 in-cludible in income under section 409A(a) for 2011,because no portion of the total deferred amount for2011 is subject to a substantial risk of forfeitureor has previously been included in income. If that$100,000 is included in income for 2011, EmployeeA has $150,000 includible in income under section409A(a) for 2012 because for the taxable year 2012the $100,000 is previously included in income (seeparagraphs (a)(1)(i)(B) and (a)(3) of this section). Ifthat $100,000 is not included in income for 2011,Employee A has $250,000 includible in incomeunder section 409A(a) for 2012. Employee A doesnot avoid the requirement to include $100,000 inincome under section 409A(a) for 2011 by including$250,000 in income under section 409A(a) for 2012.

Example 2. The same facts as Example 1, exceptthat, with respect to Employee A, the statute of limi-tations on assessments has expired for 2011, but hasnot expired for 2012. Employee A has $250,000 in-cludible in income under section 409A(a) for 2012,because no portion of the total deferred amount for2012 is subject to a substantial risk of forfeiture orhas previously been included in income.

(2) Identification of the portion of thetotal amount deferred for a taxable yearthat is subject to a substantial risk of for-feiture—(i) In general. The portion of thetotal amount deferred for a taxable yearthat is subject to a substantial risk of for-feiture (as defined in §1.409A–1(d)) is de-termined as of the last day of the serviceprovider’s taxable year. Accordingly, anamount may be includible in income un-der section 409A(a) for a taxable year evenif such amount is subject to a substantialrisk of forfeiture during the taxable year ifthe substantial risk of forfeiture lapses dur-ing such taxable year, including if the sub-stantial risk of forfeiture lapses after thedate the nonqualified deferred compensa-tion plan under which the amount is de-ferred first fails to meet the requirementsof section 409A(a).

(ii) Example. The following exampleillustrates the provisions of this paragraph(a)(2):

Employee B is an individual taxpayer with acalendar year taxable year. Employee B has a totalamount deferred under a nonqualified deferred com-pensation plan of $0 for 2010, $100,000 for 2011,and $250,000 for 2012. No payments are made underthe plan. Under the terms of the plan, if EmployeeB voluntarily separates from service before July 1,2012, Employee B will forfeit 50 percent of the Em-ployee B’s total amount deferred under the plan. IfEmployee B voluntarily separates from service afterJune 30, 2012 but before July 1, 2013, Employee Bwill forfeit 20 percent of the total amount deferredunder the plan. If Employee B voluntarily separatesfrom service after June 30, 2013, Employee B willnot forfeit any amount deferred under the plan. As ofDecember 31, 2011, 50 percent of the total amountdeferred under the plan ($50,000) is subject to a sub-stantial risk of forfeiture, and the remaining amountdeferred under the plan ($50,000) is not subject toa substantial risk of forfeiture. As of December 31,2012, 20 percent of the total amount deferred underthe plan ($50,000) is subject to a substantial risk offorfeiture, and the remaining amount deferred underthe plan ($200,000) is not subject to a substantial riskof forfeiture. At all times the terms of the plan meetthe requirements of section 409A(a) and the applica-ble regulations, and through May 31, 2012, the planis operated in a manner that complies with the termsof the plan. On June 1, 2012, the plan is operated in amanner that fails to meet the requirements of section409A(a). For purposes of determining the amountincludible in income under section 409A(a), exceptas provided in paragraph (a)(1)(ii)(B) of this section,

the portion of the total amount deferred for 2012 thatis subject to a substantial risk of forfeiture is $50,000(20 percent of $250,000).

(3) Identification of amount previouslyincluded in income—(i) In general. Forpurposes of this section, an amount is pre-viously included in income only if the ser-vice provider has included the amount inincome under an applicable provision ofthe Internal Revenue Code for a previoustaxable year. An amount is treated as in-cluded in income for a taxable year only tothe extent that the amount was properly in-cludible in income and the service provideractually included the amount in income(including on an original or amended re-turn or as a result of an IRS examina-tion or a final decision of a court of com-petent jurisdiction). For future taxableyears, the amount previously included inincome is reduced to reflect any amountthat was paid during the taxable year forwhich the amount was included in income,any amount allocated to a payment madeunder the plan under paragraph (f) of thissection, and any amount deductible underparagraph (g) of this section.

(ii) Examples. The following examplesillustrate the provisions of this paragraph(a)(3). For all of the examples, EmployeeC is an individual taxpayer with a calendaryear taxable year. Employee C has a to-tal amount deferred under a nonqualifieddeferred compensation plan of $0 in 2010,$100,000 in 2011, and $250,000 in 2012.With respect to Employee C, the statute oflimitations on assessments has not expiredfor 2011 or 2012. Except as otherwise ex-plicitly provided in the following exam-ples, Employee C has not included in in-come for 2011 on any original or amendedtax return any amount deferred under theplan, none of the $250,000 total amountdeferred for 2012 has previously been in-cluded in income, no payments are madeunder the plan, and at no time is any de-ferred amount subject to a substantial riskof forfeiture. The plan under which theamounts are deferred fails to meet the re-quirements of section 409A(a) during 2011and 2012. The examples read as follows:

Example 1. After filing an original Federal in-come tax return for 2011 that did not include anyamount in income under section 409A(a), on April 1,2013, Employee C files an amended Federal incometax return for 2011 and properly includes $100,000 inincome under section 409A(a) for 2011. For purposesof determining the amount includible in income undersection 409A(a) for 2012, $100,000 of the $250,000

December 22, 2008 1340 2008–51 I.R.B.

total amount deferred for 2012 has previously beenincluded in income with respect to the plan. For2012, Employee C includes in income $150,000 un-der section 409A(a) on Employee C’s original Fed-eral income tax return. As of January 1, 2013, theamount that Employee C has previously included inincome under section 409A(a) with respect to the planis $250,000.

Example 2. The facts are the same as in Example1, except that Employee C receives a $10,000 pay-ment in 2011 so that the total amount deferred for2012 is $240,000. For purposes of determining theamount includible in income under section 409A(a)for 2012, the $100,000 amount previously includedin income is reduced by the $10,000 payment so that$90,000 of the $240,000 total amount deferred for2012 has previously been included in income. For2012, Employee C includes in income $150,000 un-der section 409A(a) on Employee C’s original Fed-eral income tax return. As of January 1, 2013, theamount that Employee C has previously included inincome under section 409A(a) with respect to the planis $240,000.

Example 3. The facts are the same as in Ex-ample 2. Due to deemed investment losses during2013, Employee C has an $80,000 total amount de-ferred under the plan for 2013. On December 31,2013, Employee C’s total amount deferred ($80,000)is paid to Employee C as a single sum payment. Pur-suant to paragraph (f) of this section, $80,000 of the$240,000 amount previously included in income is al-located to the $80,000 payment so that none of the$80,000 is includible in income. In addition, pur-suant to paragraph (g) of this section, Employee Cis entitled to deduct $160,000 for 2013 equal to theremaining amount previously included in income theright to which is permanently lost. Because the en-tire $240,000 amount previously included in incomehas been allocated to a payment under paragraph (f)of this section or was deductible under paragraph (g)of this section, no portion of such amount is treated aspreviously included in income for 2014 or any subse-quent taxable year. As of January 1, 2014, the amountthat Employee C has previously included in incomeunder section 409A(a) with respect to the plan is $0.

(b) The total amount deferred undera plan for a taxable year—(1) Applica-tion of general rules and specific rulesfor specific types of plans. Paragraph(b)(2) of this section provides generalrules governing the determination of thetotal amount deferred under a plan for ataxable year, including the treatment ofplans providing for alternative times andforms of payment and plans providingfor certain payments the amount of whichis determined by a formula that includesone or more variables dependent uponfuture events (formula amounts). Para-graphs (b)(3) through (b)(6) of this sectionprovide specific rules governing the de-termination of the total amount deferredunder certain types of plans. Except asotherwise provided, any applicable rulesof paragraphs (b)(3) through (b)(6) of this

section are applied in conjunction with thegeneral rules provided in paragraph (b)(2)of this section.

(2) General definition of total amountdeferred—(i) General calculation rules.Except as otherwise provided, the totalamount deferred for a taxable year equalsthe present value of the future paymentsto which the service provider has a legallybinding right under the plan as of the lastday of the taxable year, plus the amount ofany payments of amounts deferred underthe plan to (or on behalf of) the serviceprovider during such taxable year. Forpurposes of this section, present valuemeans the value, as of a specified date, ofan amount or series of amounts due there-after, determined in accordance with therules and assumptions of this paragraph(b)(2), as applicable, where each amountis multiplied by the probability that thecondition or conditions on which paymentof the amount is contingent will be satis-fied, also determined in accordance withthe rules and assumptions set forth in thisparagraph (b)(2), as applicable, discountedaccording to an assumed rate of interest toreflect the time value of money. For thispurpose, a discount for the probability thatan employee will die before commence-ment of benefit payments is permitted,but only to the extent that benefits willbe forfeited upon death. In addition, thepresent value cannot be discounted forthe probability that payments will not bemade (or will be reduced) because of theunfunded status of the plan, the risk associ-ated with any deemed or actual investmentof amounts deferred under the plan, therisk that the service recipient, the trustee,or another party will be unwilling or un-able to pay, the possibility of future planamendments, the possibility of a futurechange in the law, or similar risks or con-tingencies. If the amount payable under aplan or the value of a benefit under a planis expressed in a currency other than theU.S. dollar, the total amount deferred istranslated from foreign currency into U.S.dollars at the spot exchange rate on thelast day of the service provider’s taxableyear. No adjustment is made to the totalamount deferred to reflect the risk that thecurrency in which the amount payable orthe value of the benefit is expressed mayin the future increase or decrease in valuewith respect to the U.S. dollar or any othercurrency.

(ii) Actuarial assumptions and meth-ods—(A) Requirement of reasonable actu-arial assumptions and methods. For pur-poses of this section, the present valuemust be determined as of the last day ofthe service provider’s taxable year usingactuarial assumptions and methods that arereasonable as of that date, including an in-terest rate for purposes of discounting forpresent value that is reasonable as of thatdate.

(B) Use of an unreasonable actuarialassumption or method. If any actuarial as-sumption or method used to determine thetotal amount deferred for a taxable yearunder a plan is not reasonable, as deter-mined by the Commissioner, then the to-tal amount deferred is determined by theapplication of the AFR and, if applicable,the applicable mortality table under sec-tion 417(e)(3)(A)(ii)(I) (the 417(e) mortal-ity table), both determined as of the lastmonth of the taxable year for which theamount deferred is being determined. Forpurposes of this section, AFR means theappropriate applicable Federal rate (as de-fined pursuant to section 1274(d)) basedon annual compounding, for the last monthof the taxable year for which the amountincludible in income is being determined.The period for which excess interest willbe credited, beginning with the last day ofthe taxable year and ending with the datethe excess interest will no longer be cred-ited (determined in accordance with thepayment timing assumptions set forth inparagraph (b)(2)(vi) and (vii) of this sec-tion) is used to determine the appropriateAFR (short-term, mid-term, or long-term).

(iii) Crediting of earnings and losses.The earnings and losses credited undera plan as of the last day of the serviceprovider’s taxable year pursuant to theplan are given effect only to the extent theplan’s terms reasonably reflect the valueof the service provider’s rights under theplan. For example, a plan’s method ofdetermining the amount of such earningsor losses generally will be respected forpurposes of determining the total amountdeferred for the taxable year, providedthat the earnings and losses are credited atleast once per taxable year. If earnings andlosses are not credited at least annually, thetotal amount deferred is calculated as if theearnings or losses were credited as of thelast day of the taxable year. In addition,any change in the schedule for crediting

2008–51 I.R.B. 1341 December 22, 2008

earnings during the taxable year for whichthe total amount deferred is calculatedthat would reduce the earnings creditedfor a taxable year in which an amount isrequired to be included in income undersection 409A(a) is disregarded for suchtaxable year. For example, if a plan isamended during a taxable year that is a cal-endar year to change the date for creditingearnings from December 31 to July 1 ofthat year and the plan fails to meet the re-quirements of section 409A(a) during thatyear, the amendment is disregarded forpurposes of determining the total amountdeferred for the year and December 31 istreated as the date for crediting earningsand losses. If no further changes are madeto the plan with respect to the crediting ofearnings and losses, for subsequent tax-able years, July 1 is treated as the date forcrediting earnings and losses.

(iv) Application of the general calcu-lation rules to formula amounts—(A) Ingeneral. With respect to a right to a pay-ment to which this paragraph applies, theamount payable for purposes of determin-ing the total amount deferred for the tax-able year must be determined based onall of the facts and circumstances exist-ing as of the close of the last day of thetaxable year. Such determination must re-flect reasonable, good faith assumptionswith respect to any contingencies as to theamount of the payment, both with respectto each contingency and with respect toall contingencies in the aggregate. An as-sumption based on the facts and circum-stances as of the close of the last day ofa taxable year may be reasonable evenif the facts and circumstances change ina subsequent year so that if the amountpayable were determined for such subse-quent year, the amount payable would bea greater (or lesser) amount. In such acase, the increase (or decrease) due to thechange in the facts and circumstances istreated as earnings (or losses). This para-graph (b)(2)(iv) applies to the extent thatthe amount payable in a future taxable yearis dependent upon factors that, after apply-ing the assumptions and other rules set outin this section, are not determinable as ofthe end of the taxable year for which thetotal amount deferred is being calculated,so that the amount payable may not read-ily be determined as of the end of suchtaxable year under the other provisions ofthis section. If a portion of a deferred

amount is determinable under the otherrules of this paragraph (b)(2), the determi-nation of the amount deferred with respectto such portion must be determined underthe rules applicable to amounts that are notformula amounts, and only the balance ofthe deferred amount is determined underthis paragraph.

(B) Examples. The following examplesillustrate the provisions of this paragraph(b)(2)(iv):

Example 1. On January 1, 2020, a serviceprovider receives a legally binding right to a paymentof one percent of the service recipient’s net profits forthe calendar years 2020, 2021, and 2022, payable onthe later of January 1, 2024 or the service provider’sseparation from service. The amount payable is aformula amount and this paragraph (b)(2)(iv) applies.

Example 2. On January 1, 2020, a serviceprovider receives a legally binding right to a paymentof the greater of one percent of the service recipient’snet profits for the calendar years 2020, 2021, and2022 or $10,000, payable on the later of January1, 2024 or the service provider’s separation fromservice. The portion of the amount payable that isa $10,000 payment, payable at the later of January1, 2024 or the service provider’s separation fromservice, is not a formula amount. The portion ofthe amount payable that is the excess, if any, of onepercent of the service recipient’s net profits for thecalendar years 2020, 2021, and 2022 over $10,000is a formula amount and this paragraph (b)(2)(iv)applies.

Example 3. On January 1, 2020, a serviceprovider receives a legally binding right to paymentequal to the value of 10,000 shares of service recipi-ent stock, payable on the later of January 1, 2024 orthe service provider’s separation from service. Be-cause the amount payable may increase or decreaseonly due to a change in value of a predeterminedactual investment (10,000 shares of service recipientstock), the amount payable is not treated as a formulaamount and this paragraph (b)(2)(iv) does not apply.

(v) Treatment of payment restrictions.Except as specifically provided, a restric-tion on the payment of all or part of a de-ferred amount that will or may lapse underthe terms of the plan, including a risk offorfeiture that is not a substantial risk offorfeiture as defined in §1.409A–1(d) or isdisregarded under §1.409A–4(a)(1)(ii)(B),is ignored for purposes of determining thetotal amount deferred under the plan. Ac-cordingly, in calculating the total amountdeferred, there is no reduction to accountfor a risk that the amount may be forfeitedif the risk of forfeiture is not a substan-tial risk of forfeiture. For example, if anamount deferred is subject to forfeiture un-der a noncompetition provision applicablefor a prescribed period, the forfeiture pro-vision is disregarded for purposes of de-

termining the total amount deferred for thetaxable year.

(vi) Treatment of alternative times andforms of a future payment—(A) In gen-eral. For purposes of determining the totalamount deferred for a taxable year, if pay-ment of a deferred amount may be madeat alternative times or in alternative forms,each amount deferred under the plan istreated as payable at the time and underthe form of payment for which the presentvalue is highest. A time and form of pay-ment is available to the extent a deferredamount under the plan may be payablein such time and form of payment underthe plan’s terms. If the service recipi-ent has commenced payment of a deferredamount in a time and form of paymentunder the plan, or the service provider orservice recipient has elected a time andform of payment under the plan, and underthe plan’s terms neither party can changesuch time and form of payment withoutthe consent of the other party (and suchconsent requirement has substantive sig-nificance), the time and form of paymentelected or the time and form of paymentin which payments have commenced istreated as the sole available time and formof payment for such amount. If an alter-native time and form of payment is avail-able only at the service recipient’s discre-tion, the time and form of payment is notavailable unless the service provider has alegally binding right under the principlesof §1.409A–1(b)(1) to any additional valuethat would be generated by the service re-cipient’s exercise of such discretion. Forpurposes of determining the value of eachavailable time and form of payment, theassumptions and methods described in thisparagraph (b)(2)(vi) are applied, and thenthe value of each available time and formof payment is determined in accordancewith the other applicable rules provided inparagraph (b) of this section.

(B) Effect of status of service provideron available times and forms of payment.For purposes of determining whether atime and form of payment is available, ifeligibility for a time and form of paymentdepends upon the service provider’s statusas of a future date, the service provideris assumed to continue in the serviceprovider’s status as of the last day of thetaxable year. However, if the eligibilityrequirement is not bona fide and does notserve a bona fide business purpose, the

December 22, 2008 1342 2008–51 I.R.B.

eligibility requirement will be disregardedand the service provider will be treatedas eligible for the alternative time andform of payment. For this purpose, aneligibility condition based upon the ser-vice provider’s marital status (includingstatus as a registered domestic partner orsimilar requirement), parental status, orstatus as a U.S. citizen or lawful perma-nent resident under section 7701(b)(6) ispresumed to be bona fide and serve a bonafide business purpose. Notwithstandingthe foregoing, if eligibility for a certaintime or form of payment includes a bonafide requirement that the service providerprovide additional services after the endof the taxable year, the time and form ofpayment is not treated as an available timeand form of payment. The rules of thisparagraph (b)(2)(vi)(B) apply regardlessof whether the service provider’s statuschanges during a subsequent taxable year.

(vii) Treatment of payment triggersbased upon events—(A) In general. Forpurposes of determining the total amountdeferred for a taxable year, if a paymenttrigger has occurred on or before the lastday of the taxable year, a deferred amountpayable upon such trigger is treated aspayable at the time the payment is sched-uled to be made under the terms of theplan. If the payment trigger has not oc-curred on or before the last day of thetaxable year, the trigger is treated as occur-ring on the earliest possible date the triggerreasonably could occur based on the factsand circumstances as of the last day of thetaxable year, and the deferred amount istreated as payable based upon the sched-ule of payments that would be triggeredby such occurrence. Notwithstanding theforegoing, if the payment trigger requiresa separation from service, a termination ofemployment, or other similar reduction orcessation of services, the service provideris treated as meeting such requirement asof the last day of the taxable year. Forpurposes of determining the earliest datethe payment trigger reasonably could oc-cur, whether the payment trigger actuallyoccurs in a subsequent taxable year is dis-regarded. For purposes of this paragraph(b)(2)(vii), a payment trigger means anevent (not including the mere passage oftime) upon which an amount may becomepayable. Generally if an amount wouldbe payable in a different time and formof payment depending upon some char-

acteristic of an event, each type of eventupon which an amount would becomepayable is treated as a separate paymenttrigger. For example, if an amount wouldbe payable as a single sum payment if onesubsidiary corporation of a service recipi-ent that consists of multiple corporationsis sold, but as an installment payment ifanother subsidiary corporation of the sameservice recipient is sold, then the sale ofthe one subsidiary corporation is treatedas a separate payment trigger from the saleof the other subsidiary corporation.

(B) Certain payment triggers disre-garded. The possibility that the followingpayment triggers will occur in the futureis disregarded for purposes of determin-ing the total amount deferred (but not forpurposes of determining whether the planotherwise complies with the requirementsof section 409A(a)):

(1) A payment trigger that, if the trig-ger were the sole trigger determining whenthe amount would become payable, wouldcause the amount to be subject to a sub-stantial risk of forfeiture, provided thatif there is more than one payment trig-ger applicable to an amount that other-wise would be disregarded under this para-graph (b)(2)(vii)(B)(1), none of such pay-ment triggers will be disregarded unless allsuch payment triggers, if applied in combi-nation as the only payment triggers, wouldalso cause the amount to be subject to asubstantial risk of forfeiture.

(2) An unforeseeable emergency (as de-fined in §1.409A–3(i)(3)).

(viii) Treatment of amounts that mayqualify as short-term deferrals. For pur-poses of calculating the total amountdeferred for a taxable year, the right to apayment that, under the terms of the ar-rangement and the facts and circumstancesas of the last day of the taxable year, maybe a short-term deferral as defined un-der §1.409A–1(b)(4), is not included inthe total amount deferred. In addition,even if such amount is not paid by theend of the applicable 21/2 month periodso that the amount is deferred compensa-tion, the amount is not includible in thetotal amount deferred until the serviceprovider’s taxable year in which the appli-cable 21/2 month period expires.

(ix) Examples. The following exam-ples illustrate the provisions of paragraphs(b)(2)(vi) through (viii) of this section. Forall of the examples, the service provider

is an individual taxpayer who is an em-ployee of the service recipient, the serviceprovider has a calendar year taxable year,and the total amount deferred is being cal-culated for the taxable year ending Decem-ber 31, 2010. In each case, the serviceprovider is not entitled to earnings on theamount deferred. The examples read asfollows:

Example 1. Employee D, who is employed byEmployer Z, is entitled to commence receiving pay-ments at age 65. The plan provides that EmployeeD will receive a single sum payment, except that, af-ter Employee D attains age 62 but before EmployeeD attains age 64 (whether or not Employee D is thenemployed by Employer Z), Employee D can elect toreceive payments as a single life annuity. EmployeeD is age 54 as of December 31, 2010. For purposesof determining the available times and forms of pay-ment, Employee D is assumed to survive to age 62and be eligible to elect a single life annuity. Accord-ingly, for purposes of determining the total amountdeferred for 2010, the amount is treated as payable aseither a single sum payment or a single life annuity,whichever is more valuable.

Example 2. Employee E is entitled to a single lifeannuity commencing on January 1, 2020 if EmployeeE is not married as of January 1, 2020. Employee Eis entitled to either a single life annuity or a subsi-dized joint and survivor annuity commencing on Jan-uary 1, 2020 if Employee E is married as of January1, 2020. Employee E is not married as of Decem-ber 31, 2010. For purposes of determining the totalamount deferred for 2010, Employee E is assumed toremain unmarried indefinitely, so that the subsidizedjoint and survivor annuity is not an available formof payment. Accordingly, for purposes of determin-ing the total amount deferred for 2010, the amount istreated as payable as a single life annuity commenc-ing January 1, 2020.

Example 3. Employee F is entitled to a series ofthree payments of $1,000 due on January 1, 2020,January 1, 2021, and January 1, 2022. Under theplan’s terms, Employer X has the discretion to accel-erate one or more of the payments, provided that nopayment may be made before January 1, 2020. Be-cause there is no reduction in the amount payable ifa payment is accelerated, an accelerated payment ismore valuable than a payment made in accordancewith the three-year schedule of payments. If Em-ployee F does not have a legally binding right to asingle sum payment on January 1, 2020 (or any otherform of accelerated payment), then an acceleratedpayment is not an available time and form of paymentand, for purposes of determining the total amount de-ferred for 2010, the amount is treated as payable asa series of three payments of $1,000 on January 1,2020, January 1, 2021, and January 1, 2022.

Example 4. The facts are the same as in Exam-ple 3, except that Employer X has no discretion toaccelerate one or more of the payments. Rather, Em-ployee F has the right to accelerate one or more of thepayments provided that a payment may not be paid atany date before the later of January 1, 2020 or thedate 12 months after the date of such election. Asof December 31, 2010, the earliest date upon whichEmployee F may elect to have a payment made is Jan-

2008–51 I.R.B. 1343 December 22, 2008

uary 1, 2020. Because there is no reduction in theamount payable if a payment is accelerated, the earli-est possible date of payment is the most valuable timeand form of payment. Accordingly, for purposes ofdetermining the total amount deferred for 2010, theamount is treated as payable as a single sum paymentof $3,000 on January 1, 2020.

Example 5. Employee G is entitled to a singlesum payment upon separation from service if Em-ployee G separates from service before January 1,2020 and a single life annuity if Employee G sep-arates from service after December 31, 2019. Asof December 31, 2010, Employee G has not sepa-rated from service. Under paragraph (b)(2)(vi)(A)of this section, the total amount deferred is deter-mined based upon the amount that would be payableif Employee G separated from service on December31, 2010. Accordingly, the single life annuity is nottreated as an available time and form of payment, sothat the amount is treated as payable as a single sumpayment upon separation from service.

Example 6. Employee H is entitled to a singlesum payment of deferred compensation upon the ear-lier of January 1, 2020 or an unforeseeable emer-gency. Because the payment upon an unforeseeableemergency is disregarded, for purposes of determin-ing the total amount deferred, the deferred amount istreated as payable only on January 1, 2020.

Example 7. Employee I is entitled to a singlesum payment of deferred compensation upon the ear-lier of January 1, 2020 or Employee I’s involuntaryseparation from service. Under the facts and cir-cumstances existing at the time the right to the pay-ment was granted, if the deferred amount had beenpayable only upon Employee I’s involuntary separa-tion from service, the amount would have been sub-ject to a substantial risk of forfeiture. Under para-graph (b)(2)(iv)(B) of this section, the right to a pay-ment upon the Employee I’s involuntary separationfrom service is disregarded, and the amount is treatedas payable only on January 1, 2020.

Example 8. Employee J is entitled to a singlesum payment of deferred compensation upon the ear-lier of January 1, 2020 or Employee J’s separationfrom service. As of December 31, 2010, EmployeeJ has not separated from service. Under paragraph(b)(2)(vi)(A) of this section, the total amount deferredis determined based upon the amount that would bepayable if Employee J separated from service on De-cember 31, 2010 and therefore had the right to re-ceive the payment on December 31, 2010. The totalamount deferred for 2010 is the greater of the amountthat would be payable on December 31, 2010 or thepresent value of the amount that would be payable onJanuary 1, 2020.

Example 9. Employee K is entitled to a singlesum payment of deferred compensation upon theearlier of January 1, 2020 or the first day of thethird month following Employee K’s separation fromservice. As of December 31, 2010, Employee Khas not separated from service. Under paragraph(b)(2)(vi)(A) of this section, the total amount de-ferred is determined based upon the amount thatwould be payable if Employee K separated fromservice on December 31, 2010, and therefore hada right to a payment on March 1, 2011. The totalamount deferred for 2010 is the greater of the presentvalue as of December 31, 2010 of the amount thatwould be payable on March 1, 2011 or the present

value as of December 31, 2010 of the amount thatwould be payable on January 1, 2020.

Example 10. Employee L is entitled to a singlesum payment of deferred compensation upon the ear-lier of January 1, 2020 or a separation from servicethat occurs on or before July 1, 2010. As of Decem-ber 31, 2010, Employee L has not separated from ser-vice. For purposes of determining the total amountdeferred, the right to be paid upon a separation fromservice on or before July 1, 2010 is ignored becauseit is no longer a possible payment trigger, and theamount is treated as payable only on January 1, 2020.

Example 11. Employee M is entitled to a singlesum payment of deferred compensation upon theearliest of the date Employee M dies, Employee Mattains age 65, or a child of Employee M becomesa full-time student at an accredited college or uni-versity (whether or not Employee M continues to beemployed on such date). As of December 31, 2010,Employee M has a 10-year old child who is in thefifth grade. For purposes of determining the totalamount deferred, the earliest time that the paymentreasonably could be due upon Employee M’s childentering a college or university is August 1, 2018.Thus, the total amount deferred for 2010 is the morevaluable of the amount that would be payable onthe Employee M’s 65th birthday and the amount thatwould be payable on August 1, 2018. Because anyadditional value that would be payable upon Em-ployee M’s death is a death benefit excluded from thedefinition of deferred compensation under section409A(d)(1)(B) and §1.409A–1(a)(5), that additionalvalue, if any, is not required to be calculated.

(3) Account balance plans—(i) In gen-eral. For purposes of this section, ifbenefits are provided under a nonquali-fied deferred compensation plan that isdescribed in §1.409A–1(c)(2)(i)(A) or (B)(an account balance plan), the presentvalue of the amount payable equals theamount credited to the service provider’saccount as of the last day of the taxableyear, including both the principal amountcredited to the account, and any earnings orlosses attributable to the principal amountscredited to the account through the lastday of the taxable year. For purposesof this section, earnings or losses meansany increase or decrease in the amountcredited to a service provider’s accountthat is attributable to amounts previouslycredited to the service provider’s account,regardless of whether the plan denomi-nates that increase or decrease as earningsor losses. For rules related to the creditingof earnings, see paragraph (b)(2)(iii) ofthis section. For rules relating to earningsbased on an unreasonable interest rate or arate of return based on an investment otherthan a single predetermined actual invest-ment or a single reasonable interest rate,see paragraph (b)(3)(ii) of this section.

(ii) Unreasonable rate of return—(A)Application. This paragraph (b)(3)(ii)applies to an account balance plan underwhich the amount of earnings or lossescredited is not based on either a prede-termined actual investment, within themeaning of §31.3121(v)(2)–1(d)(2)(i)(B)of this chapter, or a rate of interestthat is not higher than a reasonablerate of interest, within the meaning of§31.3121(v)(2)–1(d)(2)(i)(C) of this chap-ter, as determined by the Commissioner.

(B) Unreasonably high interest rate. Ifthe earnings or losses to be credited undera plan are based on an unreasonably highrate of interest, the amount deferred un-der the plan is equal to the present valueas of the end of the taxable year (using areasonable interest rate) of the amount thatwill be credited to the service recipient’saccount using the unreasonably high ratefor the entire period for which the unrea-sonably high interest will be credited un-der the plan, beginning with the last dayof such taxable year and ending with thedate the unreasonably high interest will nolonger be credited (determined in accor-dance with the payment timing assump-tions set forth in paragraph (b)(2)(vi) and(vii) of this section). If the service recip-ient fails to use a reasonable interest rateto determine the amount includible in in-come, AFR will be used. For purposesof this section, AFR means the appropri-ate applicable Federal rate (as defined pur-suant to section 1274(d)) based on annualcompounding, for the last month of the tax-able year for which the amount includi-ble in income is being determined. Theperiod described in the first sentence ofthis paragraph (b)(3)(ii)(B) is used to de-termine the appropriate AFR (short-term,mid-term, or long-term). For purposesof this paragraph (b)(3)(ii)(B), an unrea-sonably high interest rate includes a fixedinterest rate that exceeds an interest ratethat is reasonable, within the meaning of§31.3121(v)(2)–1(d)(2)(i)(C) of this chap-ter.

(C) Other rates of return. If the amountof earnings or losses credited is basedon a rate of return that is not an un-reasonably high interest rate, within themeaning of paragraph (b)(3)(ii)(B) of thissection, but is also not a predeterminedactual investment, within the meaning of§31.3121(v)(2)–1(d)(2)(i)(B) of this chap-ter or a rate of interest that is no more than

December 22, 2008 1344 2008–51 I.R.B.

a reasonable rate of interest, within themeaning of §31.3121(v)(2)–1(d)(2)(i)(C)of this chapter, the amount payable is aformula amount.

(4) Reimbursement and in-kind ben-efit arrangements. For purposes of thissection, if benefits for a service providerare provided under a nonqualified de-ferred compensation plan described in§1.409A–1(c)(2)(i)(E) (a reimbursementarrangement), or under a nonqualified de-ferred compensation plan that would bedescribed in §1.409A–1(c)(2)(i)(E) exceptthat the amounts, separately or in the ag-gregate, constitute a substantial portion ofeither the overall compensation earned bythe service provider for performing ser-vices for the service recipient or the overallcompensation received due to a separationfrom service, the arrangement is treatedas providing for a formula amount to theextent that the expenses to be reimbursedare not explicitly identified to be a specificamount. Notwithstanding the foregoing,if the expenses eligible for reimbursementare limited, it is presumed that the limitreflects the reasonable amount of eligibleexpenses that the service provider willincur at the earliest possible date duringthe time period to which the limit applies,and for which the service provider willrequest reimbursement at the earliest pos-sible date that the service provider mayrequest reimbursement. This presumptionmay be rebutted only by demonstratingby clear and convincing evidence thatit is unreasonable to assume that a ser-vice provider would incur such amountof expenses during the applicable timeperiod. This presumption is not appli-cable to any reimbursement arrangementto which §1.409A–3(i)(1)(iv)(B) applies(certain medical reimbursement arrange-ments). In addition, this paragraph (b)(4)also applies to an arrangement providing aservice provider a right to in-kind benefitsfrom the service recipient, or a paymentby the service recipient directly to the per-son providing the goods or services to theservice provider.

(5) Split-dollar life insurance arrange-ments. For purposes of this section, if ben-efits for a service provider are provided un-der a nonqualified deferred compensationplan described in §1.409A–1(c)(2)(i)(F)(a split-dollar life insurance arrangement),the amount of the future payment to whichthe service provider is entitled is treated

as the amount that would be includiblein income under §1.61–22 or §1.7872–15(as applicable) or, if those regulations arenot applicable, the amount that would beincludible in income under any other ap-plicable guidance. For this purpose, thepayment timing assumptions set forth inparagraph (b)(2)(vi) and (vii) of this sec-tion generally apply. However, in the caseof an arrangement subject to §1.7872–15,to the extent the assumptions set forthin paragraph (b)(2)(vi) and (vii) of thissection conflict with the provisions of§1.7872–15, the provisions of §1.7872–15apply, and the conflicting assumptions setforth in paragraph (b)(2)(vi) and (vii) ofthis section do not apply. In either case, forpurposes of determining the total amountdeferred under the plan for the taxableyear, the benefits under the split-dollar lifeinsurance arrangement are included onlyto the extent that the right to such benefitsconstitutes a right to deferred compensa-tion under §1.409A–1(b).

(6) Stock rights. If a stock right hasnot been exercised during the service re-cipient’s taxable year, and remains out-standing as of the last day of the serviceprovider’s taxable year for which the to-tal amount deferred is being calculated,the total amount deferred under the stockright for such taxable year is the excessof the fair market value of the underly-ing stock on the last day of the serviceprovider’s taxable year (determined in ac-cordance with §1.409A–1(b)(5)(iv)) overthe sum of the stock right’s exercise priceplus any amount paid for the stock right.If a stock right has been exercised dur-ing the service provider’s taxable year, thepayment amount for purposes of calculat-ing the total amount deferred for the tax-able year under the stock right is the ex-cess of the fair market value of the under-lying stock (as determined in accordancewith §1.409A–1(b)(5)(iv)) on the date ofexercise over the sum of the exercise priceof the stock right and any amount paid forthe stock right.

(7) Anti-abuse provision. The Commis-sioner may disregard all or part of the rulesof paragraphs (b)(2) through (b)(6) of thissection or all or part of the plan’s terms ifthe Commissioner determines based on allof the facts and circumstances that the planterms have been established to eliminate orminimize the total amount deferred underthe plan determined in accordance with the

rules of paragraphs (b)(2) through (b)(6) ofthis section and if the rules of paragraphs(b)(2) through (b)(6) of this section wereapplied or such plan terms were given ef-fect, the total amount deferred would notreasonably reflect the present value of theright. For example, if a plan provides that adeferred amount is payable upon a separa-tion from service but also contains a provi-sion that the amount will be forfeited upona separation from service occurring on thelast day of the service provider’s taxableyear (so that the application of paragraph(b)(2)(vii)(A) of this section treating theservice provider as separating from serviceon the last day of the taxable year for pur-poses of determining the timing of the pay-ment in calculating the total amount de-ferred would result in a zero amount de-ferred), the latter provision will be disre-garded.

(c) Additional 20 percent tax under sec-tion 409A(a)(1)(B)(i)(II). With respect toan amount required to be included in in-come under section 409A(a) for a taxableyear, the amount is subject to an addi-tional income tax equal to 20 percent of theamount required to be included in incomeunder section 409A(a).

(d) Premium interest tax under section409A(a)(1)(B)(i)(I)—(1) In general. Withrespect to an amount required to be in-cluded in income under section 409A(a)for a taxable year, the amount is subjectto an additional income tax equal to theamount of interest at the underpaymentrate plus one percentage point on the un-derpayments that would have occurred hadthe deferred compensation been includiblein the service provider’s gross income forthe taxable year in which first deferred or,if later, the first taxable year in which suchdeferred compensation is not subject to asubstantial risk of forfeiture. The amountrequired to be allocated to determine theadditional tax described in this paragraph(d) is the amount required to be included inincome under section 409A(a) for the tax-able year, regardless of whether additionalamounts were deferred under the plan inprevious years.

(2) Identification of taxable yeardeferred amount was first deferred orvested—(i) Method of identification. Thefollowing method is applied for purposesof determining the taxable year or years inwhich an amount required to be includedin income under section 409A(a) was first

2008–51 I.R.B. 1345 December 22, 2008

deferred and not subject to a substantialrisk of forfeiture.

(A) For each taxable year preceding thetaxable year for which the deferred amountis includible in income (the current tax-able year) in which the service providerhad an amount deferred under the plan thatwas not subject to a substantial risk of for-feiture (vested), ending with the later ofthe first taxable year in which the serviceprovider had no vested amount deferred orthe first taxable year beginning after De-cember 31, 2004, calculate the vested totalamount deferred for such year. For eachyear, include any deferred amount that waspreviously included in income under para-graph (a)(3) of this section but has not beenpaid, but exclude any amount paid to (or onbehalf of) the service provider during suchtaxable year.

(B) Identify any payments made underthe plan to (or on behalf of) the serviceprovider for each taxable year identified inparagraph (d)(2)(i)(A) of this section.

(C) Identify any deemed net invest-ment losses or other net decreases in theamount deferred (other than as a resultof a payment) applicable to amounts thatare vested for the current taxable year andeach preceding taxable year identified inparagraph (d)(2)(i)(A) of this section.

(D) Starting with the first taxable yearduring which there was a payment iden-tified under paragraph (d)(2)(i)(B) of thissection or a loss identified under paragraph(d)(2)(i)(C) of this section (or both), sub-tract the total payments and loss for suchtaxable year from the amount determined

under paragraph (d)(2)(i)(A) of this sec-tion for the earliest taxable year beforesuch year in which there is such an amount,and from the amount determined underparagraph (d)(2)(i)(A) of this section foreach subsequent taxable year ending be-fore the taxable year in which the paymentwas made or the loss incurred. Do not re-duce any taxable year-end balance belowzero.

(E) Repeat this process for each sub-sequent taxable year during which therewas a payment identified under paragraph(d)(2)(i)(B) of this section or a loss iden-tified under paragraph (d)(2)(i)(C) of thissection (or both).

(F) For each taxable year identified inparagraph (d)(2)(i)(A) of this section, de-termine the excess (if any) of the remain-ing amount deferred for the taxable yearover the remaining amount deferred for theprevious taxable year. Treat the amountdeferred in taxable years beginning beforeJanuary 1, 2005 as zero.

(G) Determine how much of the totalamount deferred for the current taxableyear was previously included in income inaccordance with paragraph (a)(3) of thissection.

(H) Subtract the amount determinedin paragraph (d)(2)(i)(G) of this sectionfrom the excess amount determined inparagraph (d)(2)(i)(F) of this section forthe earliest taxable year in which there isany such excess amount, but do not reducethe balance below zero. If the amount de-termined in paragraph (d)(2)(i)(G) of thissection exceeds the amount determined

in paragraph (d)(2)(i)(F) of this sectionfor that earliest taxable year, subtract theexcess from the amount determined inparagraph (d)(2)(i)(F) of this section forthe next succeeding taxable year, but donot reduce the balance below zero. Re-peat this process until the excess has beenreduced to zero. The balance remainingwith respect to each taxable year identifiedin paragraph (d)(2)(i)(A) of this sectionis the portion of the amount includiblein income under section 409A(a) in thecurrent taxable year that was first deferredand vested in that taxable year.

(ii) Examples. The following exam-ples illustrate the provisions of paragraph(d)(2) of this section. In all of the follow-ing examples, the service provider is anindividual taxpayer with a calendar yeartaxable year who elects to defer a por-tion of the bonus that would otherwise bepayable to the service provider in each ofYear 1 through Year 4. All amounts de-ferred are deferred under the same plan,and no amount deferred under the plan isever subject to a substantial risk of forfei-ture. The plan does not fail to meet the re-quirements of section 409A(a) in any yearprior to Year 4, and no amounts deferredunder the plan are otherwise includible inincome until Year 4, except for paymentsactually made to the service provider. Theservice provider had no amount deferredunder the plan prior to Year 1. The planfails to meet the requirements of section409A(a) in Year 4. The examples read asfollows:

Example 1.

Year 1 Year 2 Year 3 Year 4

Opening Total Amount 0 110 275 495

Bonus Deferral 100 150 200 250

Net Gains (Losses) 10 15 20 25

Payments 0 0 0 0

Closing Total Amount 110 275 495 770

(i) The amount required to be included in incomeunder section 409A is 770. To calculate the premiuminterest tax, the 770 must be allocated to the year

or years in which the amount was first deferred andvested.

(ii) Step A. Identification of vested total amountdeferred excluding payments and including deferredamounts previously included in income.

Year 1 Year 2 Year 3

110 275 495

December 22, 2008 1346 2008–51 I.R.B.

(iii) Step B. Identification of any payments foreach year other than Year 4.

Year 1 Year 2 Year 3

0 0 0

(iv) Step C. Identification of any other decreasesattributable to vested amounts.

Year 1 Year 2 Year 3 Year 4

0 0 0 0

(v) Steps D and E. Subtraction of payments anddecreases from amounts deferred.

Year 1 Year 2 Year 3

110 275 495-0 -0 -0

110 275 495

(vi) Step F. Subtraction of previous year totalfrom each year’s total.

Year 1 Year 2 Year 3

110 275 495-0 -110 -275

110 165 220

(vii) Because no amount was previously includedin income, Step G does not apply. Accordingly, the770 is allocated such that 110 is treated as first de-

ferred and vested in Year 1, 165 in Year 2, and 220in Year 3. The remainder (275) is treated as first de-ferred in Year 4, but is not required to be allocated for

purposes of the premium interest tax because there isno hypothetical underpayment for such year.

Example 2.

Year 1 Year 2 Year 3 Year 4

Opening Total Amount 0 110 235 365

Bonus Deferral 100 150 200 250

Net Gains (Losses) 10 (25) (30) 25

Payments 0 0 (40) (50)

Closing Total Amount 110 235 365 590

(i) The amount that is includible in income undersection 409A(a) for Year 4 is the closing total amount(590), plus the amounts paid during Year 4 that wereincludible in income (50) or 640. To calculate the

premium interest tax, the 640 must be allocated to theyear or years in which the amount was first deferredand vested.

(ii) Step A. Identification of vested total amountdeferred excluding payments and including deferredamounts previously included in income.

Year 1 Year 2 Year 3

110 235 365

(iii) Step B. Identification of any payments foreach year other than Year 4

Year 1 Year 2 Year 3

0 0 (40)

2008–51 I.R.B. 1347 December 22, 2008

(iv) Step C. Identification of any other decreasesattributable to vested amounts

Year 1 Year 2 Year 3 Year 4

0 (25) (30) 0

(v) Steps D and E. Subtraction of payments anddecreases from amounts deferred

Year 1 Year 2 Year 3

110 235 365-25(Year 2) -40(Year 3)-40(Year 3) -30(Year 3)-30(Year 3)

15 165 365

(vi) Step F. Subtraction of previous year totalfrom each year’s total.

Year 1 Year 2 Year 3

15 165 365-0 -15 -165

15 150 200

(vii) Because no amount was previously includedin income, Step G does not apply. Accordingly, the640 is allocated such that 15 is treated as first deferredand vested in Year 1, 150 in Year 2, and 200 in Year3. The remaining amount includible in income undersection 409A for Year 4 (275) is treated as first de-ferred in Year 4, but is not required to be allocated for

purposes of the premium interest tax because there isno hypothetical underpayment for Year 4.

Example 3. (i) The facts are the same as in Exam-ple 2 except 125 was previously included in incomeunder paragraph (a)(3) of this section. Accordingly,of the 590 closing total amount for Year 4 plus the 50payment during Year 4, or 640, only 515 (640 - 125)

must be included in income under section 409A(a).To calculate the premium interest tax, the 125 mustbe allocated to the year or years in which such amountwas first deferred.

(ii) Step G. Allocation of amounts previously in-cluded in income.

Year 1 Year 2 Year 3

15 150 200-15 -110 -0

0 40 200

(iii) Accordingly, for purposes of calculating thepremium interest tax, the 125 previously included inincome is allocated so that of the 515 includible inincome under section 409A(a), 0 is treated as firstdeferred and vested in Year 1, 40 in Year 2, and 200in Year 3.

(3) Calculation of hypothetical under-payment for the taxable year during whicha deferred amount was first deferred andvested—(i) Calculation method. The hy-pothetical underpayment for a taxable yearis determined by treating as an additionalcash payment of compensation to the ser-vice provider for such taxable year, theamount determined pursuant to paragraph(d)(2) of this section to be the portion ofthe amount includible in income undersection 409A(a) that was first deferredand vested during such taxable year. Thehypothetical underpayment is calculated

based on the service provider’s taxableincome, credits, filing status, and othertax information for the year, based on theservice provider’s original return filed forsuch year, as adjusted by any examinationfor such year or any amended return theservice provider filed for such year thatwas accepted by the Commissioner. Thehypothetical underpayment must reflectthe effect that such additional compen-sation would have had on the serviceprovider’s Federal income tax liabilityfor such year, including the continuedavailability of any deductions taken, andthe use of any carryovers such as carry-over losses. For purposes of calculatinga hypothetical underpayment in a subse-quent year (whether or not a portion of theamount includible in income under section

409A(a) was first deferred and vested inthe subsequent year), any changes to theservice provider’s Federal income tax lia-bility for the subsequent year that wouldhave occurred if the portion of the amountthat was first deferred and vested duringthe previous taxable year had been in-cluded in the service provider’s incomefor the previous year must be taken intoaccount. Assumptions not based on theservice provider’s taxable income, credits,filing status, and other tax information forthe year, based on the service provider’soriginal return for such year, as adjustedby any examination for such year or anyamended return the service provider filedfor such year that was accepted by theCommissioner, may not be applied. Forexample, the service provider may not

December 22, 2008 1348 2008–51 I.R.B.

assume that some of the additional com-pensation would have been deferred underthe terms of a qualified plan. If the serviceprovider’s Federal income tax liabilityfor the taxable year in which an amountrequired to be included in income undersection 409A(a) was first deferred andvested is adjusted (for example, by anamended return or IRS examination), andthe adjustment affects the amount of thehypothetical underpayment, the serviceprovider must recalculate the hypotheticalunderpayment and adjust the amount ofpremium interest tax due with respect tosuch inclusion in income under section409A(a), as appropriate.

(ii) Examples. The following exam-ples illustrate the provisions of paragraph(d)(3)(i) of this section. In all of thefollowing examples, Employee N is anindividual taxpayer with a calendar yeartaxable year. For the year 2020, Em-ployee N has a total amount deferred of$100,000 which is includible in incomeunder section 409A(a). For purposes ofdetermining the premium interest tax, as-sume that $30,000 was first deferred andvested in 2018, $35,000 was first deferredand vested in 2019, and $35,000 was firstdeferred and vested in 2020. The first yearthat Employee N had a vested deferredamount under the plan was 2018. Theexamples read as follows:

Example 1. For the taxable years 2018 and 2019,Employee N has no carryover losses or other itemsa change in which could affect the adjusted gross in-come for a subsequent taxable year. Employee N de-termines the hypothetical underpayment for 2018 byassuming an additional cash compensation paymentof $30,000 for 2018, and determining the hypotheti-cal underpayment of Federal income tax that wouldresult. Employee N determines the hypothetical un-derpayment for 2019 by assuming an additional cashcompensation payment of $35,000 in 2019, and de-termining the hypothetical underpayment of Federalincome tax for 2019 that would result. There is nohypothetical underpayment with respect to hypothet-ical income in 2020 because the tax payment wouldnot have been due until 2021. Therefore, EmployeeN is not required to determine a hypothetical under-payment for 2020.

Example 2. The facts are the same as in Exam-ple 1, except that in 2018, Employee N had an ex-cess charitable contribution the deduction of whichwas not permitted under section 170(b), and whichwas carried over to subsequent taxable years undersection 170(d). For purposes of determining the hy-pothetical underpayment for 2018, Employee N usesthe charitable contribution deduction that otherwisewould have been available if the $30,000 compen-sation payment had actually been made. EmployeeN must then calculate the hypothetical underpaymentfor all subsequent years in a manner that eliminates

the portion of any carryovers of excess contributionsunder section 170(d) related to the charitable contri-bution in 2018 that would not have been available insuch subsequent years as a result of having been de-ducted in 2018.

Example 3. The facts are the same as in Example2, except that in 2021 the IRS examines EmployeeN’s 2018 return and determines that Employee N had$20,000 in unreported income for that year. In ad-dition to paying the tax deficiency owed for 2018,Employee N must redetermine the hypothetical un-derpayment for 2018 and recalculate the premium in-terest tax owed for 2020.

(4) Calculation of hypothetical pre-mium underpayment interest—(i) Calcu-lation method. The amount of hypotheticalpremium underpayment interest is deter-mined for any taxable year by applyingthe applicable rate of interest under sec-tion 6621 plus one percentage point todetermine the underpayment interest un-der section 6601 that would be due forsuch underpayment as of the last day ofthe taxable year for which the amountdeferred is includible in income under sec-tion 409A(a). The amount of additionalincome tax under paragraph (d)(2) of thissection with respect to an amount requiredto be included in income under section409A(a) is the sum of all of the hypothet-ical premium underpayment interest forall years in which there was determined ahypothetical underpayment.

(ii) Examples. The following examplesillustrate the provisions of this paragraph(d)(4). In each of these examples, theservice provider is an individual taxpayerwith a calendar year taxable year. At alltimes the total amount deferred under thenonqualified deferred compensation planis not subject to a substantial risk of for-feiture. The examples read as follows:

Example 1. Employee O has a total amountdeferred under a nonqualified deferred compensa-tion plan for 2010 of $100,000. The entire deferredamount was first deferred in 2006. For purposes ofcalculating the hypothetical premium underpaymentinterest tax, Employee O first must determine thehypothetical underpayment for taxable years 2006through 2009 under the rules of paragraph (d)(3) ofthis section. Then Employee O must determine theunderpayment interest under section 6601 that wouldhave accrued, calculated using the applicable under-payment interest rate under section 6621 increasedby one percentage point, applied through December31, 2010. That amount is the premium interest taxthat is due for 2010.

Example 2. Employee P has a total amount de-ferred under a nonqualified deferred compensationplan for 2010 of $100,000. $60,000 of that deferredamount was first deferred in 2006. $30,000 of thatamount was first deferred in 2008. $10,000 of thatamount was first deferred in 2010. For purposes of

calculating the hypothetical premium underpaymentinterest tax, Employee P first must determine thehypothetical underpayment for taxable years 2006through 2009 under the rules of paragraph (d)(3) ofthis section applying $60,000 of hypothetical addi-tional compensation for 2006, and applying $30,000of hypothetical additional compensation for 2008.The $10,000 of hypothetical additional compensationin 2010 would not result in a hypothetical underpay-ment because the Federal income tax applicable tothat hypothetical additional compensation would notyet be due. Second, Employee P must determine theunderpayment interest under section 6601 that wouldhave accrued, calculated using the applicable under-payment interest rate under section 6621 increasedby one percentage point, applied through December31, 2010, for both the hypothetical underpaymentoccurring in 2006 and the hypothetical underpaymentoccurring in 2008. The sum of those two amounts isthe premium interest tax that is due for 2010.

(e) Amounts includible in income undersection 409A(b) [Reserved].

(f) Application of amounts included inincome under section 409A to paymentsof amounts deferred—(1) In general. Sec-tion 409A(c) provides that any amountincluded in gross income under section409A is not required to be included ingross income under any other provision ofthis chapter or any other rule of law laterthan the time provided in this section. Anamount included in income under section409A that has neither been paid in thetaxable year the amount was included inincome under section 409A nor served asthe basis for a deduction under paragraph(g) of this section is allocated to the firstpayment of an amount deferred under theplan in any year subsequent to the yearthe amount was included in income undersection 409A. To the extent the amountincluded in income under section 409Aexceeds such payment, the excess is allo-cated to the next payment of an amountdeferred under the plan. This process isrepeated until the entire amount includedin income under section 409A has beenpaid or the service provider has becomeentitled to a deduction under paragraph (g)of this section.

(2) Application of the plan aggrega-tion rules. The plan aggregation rules of§1.409A–1(c)(2) apply to the allocationof amounts previously included in incomeunder section 409A to payments madeunder the plan. Accordingly, referencesto an amount deferred under a plan, ora payment of an amount deferred undera plan, refer to an amount deferred or apayment made under all arrangements inwhich a service provider participates that

2008–51 I.R.B. 1349 December 22, 2008

together are treated as a single plan under§1.409A–1(c)(2).

(3) Examples. The following exam-ples illustrate the provisions of this sec-tion. In each of these examples, the serviceprovider is an individual taxpayer with acalendar year taxable year. Each serviceprovider has a total amount deferred un-der a nonqualified deferred compensationplan of $0 for 2010, a total amount de-ferred under the plan of $100,000 for 2011,a total amount deferred under the plan of$250,000 for 2012, and a total amount de-ferred under the plan of $400,000 for 2013.At all times the total amount deferred un-der the plan is not subject to a substantialrisk of forfeiture. During 2011, the planfails to comply with section 409A(a) andeach service provider includes $100,000in income under section 409A. Except asotherwise provided in the following exam-ples, the service provider does not receiveany payments of amounts deferred underthe plan. The examples read as follows:

Example 1. During 2012, Employee Q receivesa $10,000 payment under the plan. During 2013,Employee Q receives a $150,000 payment under theplan. For 2012, $10,000 of the $100,000 includedin income under section 409A(a) is allocated underparagraph (f)(1) of this section to the $10,000 pay-ment, so that no amount is includible in gross incomeas a result of such payment and Employee Q retains$90,000 of amounts previously included in incomeunder the plan to allocate to future plan payments.For 2013, the remaining $90,000 included in incomeunder section 409A(a) is allocated to the $150,000payment, so that only $60,000 is includible in incomeas a result of such payment.

Example 2. During 2012, Employee R receives a$10,000 payment under the plan. During 2014, Em-ployee R receives a $50,000 payment, equaling theentire amount deferred under the plan. For 2012,$10,000 of the $100,000 previously included in in-come is allocated pursuant to paragraph (f)(1) of thissection to the $10,000 payment, so that no amount isincludible in gross income as a result of such pay-ment. For 2014, $50,000 of the $90,000 remain-ing amount previously included in income is allo-cated pursuant to paragraph (f)(1) of this section tothe $50,000 payment, so that no amount is includiblein gross income as a result of such payment. Pro-vided that the requirements of paragraph (g) of thissection are otherwise met, Employee R is entitled toa deduction for 2014 equal to the remaining amount($40,000) that was previously included in income un-der section 409A(a) that has not been allocated to apayment under the plan.

(g) Forfeiture or other permanent lossof right to deferred compensation—(1)Availability of deduction to the serviceprovider. If a service provider has in-cluded a deferred amount in income undersection 409A, but has not actually received

payment of such deferred amount or oth-erwise allocated the amount included inincome under paragraph (f) of this section,the service provider is entitled to a deduc-tion for the taxable year in which the rightto that amount of deferred compensationis permanently forfeited under the plan’sterms or the right to the payment of theamount is otherwise permanently lost. Thededuction to which the service provideris entitled equals the deferred amount in-cluded in income under section 409A ina previous year, less any portion of suchdeferred amount previously included inincome under section 409A that was allo-cated under paragraph (f) of this sectionto amounts paid under the plan, includingany deferred amount paid in the year theright to any remaining deferred compensa-tion is permanently forfeited or otherwiselost. For this purpose, a mere diminutionin the deferred amount under the plan dueto deemed investment loss, actuarial re-duction, or other decrease in the amountdeferred is not treated as a permanent for-feiture or loss of the right if the serviceprovider retains the right to an amountdeferred under the plan (whether or notsuch right is subject to a substantial risk offorfeiture as defined in §1.409A–1(d)). Inaddition, a deferred amount is not treatedas permanently forfeited or otherwise lostif the obligation to make the payment ofsuch deferred amount is substituted foranother deferred amount or obligation tomake a payment in a future year. However,a deferred amount is treated as perma-nently lost if the service provider’s rightto receive the payment of the deferredamount becomes wholly worthless duringthe taxable year. Whether the right to thepayment of a deferred amount has becomewholly worthless is determined based onall the facts and circumstances existingas of the last day of the relevant serviceprovider taxable year.

(2) Application of the plan aggrega-tion rules. For purposes of determiningwhether the right to a deferred amountis permanently forfeited or otherwise lost,the plan aggregation rules of §1.409A–1(c)apply. Accordingly, if the right to an iden-tified deferred amount under a plan is per-manently forfeited or otherwise lost, but anadditional amount remains deferred underthe plan, the service provider is not entitledto a deduction.

(3) Examples. The following examplesillustrate the provisions of this paragraph(g). In each example, the service provideris an individual taxpayer who has a calen-dar year taxable year and the service recip-ient does not experience bankruptcy at anytime or otherwise discharge any obligationto make a payment of a deferred amount,except as expressly provided in the exam-ple. The examples read as follows:

Example 1. For 2010, Employee S has a totalamount deferred under an elective account bal-ance plan of $1,000,000. The plan fails to meetthe requirements of section 409A(a) during 2010and Employee S includes $1,000,000 in incomeunder section 409A(a) for the year 2010. In 2011,Employee S experiences investment losses but nopayments before July 1, 2011, such that Employee S’saccount balance under the plan is $500,000. On July1, 2011, Employee S separates from service and re-ceives a $500,000 payment equal to the entire amountdeferred under the plan, and retains no other rightto deferred compensation under the plan (includingall arrangements aggregated with the arrangementunder which the payment was made). For 2011, Em-ployee S is entitled to deduct $500,000 (which is theamount Employee S previously included in incomeunder section 409A(a) ($1,000,000) less the amountactually received by Employee S ($500,000)).

Example 2. For 2010, Employee T has a totalamount deferred under an elective account balanceplan of $1,000,000. The plan fails to meet the require-ments of section 409A(a) for 2010 and Employee Tincludes $1,000,000 in income under section 409A(a)for 2010. For 2011, Employee T has a total amountdeferred under the plan of $500,000, due solely to thedeemed investment losses attributable to EmployeeT’s account balance (with no payments being madeduring 2011). Because Employee T retains the rightto an amount deferred under the plan, Employee T isnot entitled to a deduction for 2011 as a result of thedeemed investment losses.

Example 3. For 2010, Employee U has a to-tal amount deferred under an elective account bal-ance plan of $1,000,000. The elective account bal-ance plan consists of one arrangement providing forsalary deferrals with an amount deferred for 2010of $600,000, and another arrangement providing forbonus deferrals with an amount deferred for 2010 of$400,000. The plan fails to meet the requirementsof section 409A(a) during 2010 and Employee U in-cludes $1,000,000 in income under section 409A(a)for 2010. On July 1, 2011, Employee U’s account bal-ance attributable to the salary deferral arrangementis $500,000, the reduction of which is due solely todeemed investment losses in 2011 and not any pay-ments. On July 1, 2011, Employee U is paid the$500,000 equaling the entire account balance attrib-utable to the salary deferral arrangement. On Decem-ber 31, 2011, Employee U has an account balance at-tributable to the bonus deferral arrangement equal to$300,000. Because Employee U retains an amountdeferred under the elective account balance plan, Em-ployee U is not entitled to a deduction for 2011 as aresult of the deemed investment losses.

(h) Effective/applicability date. Therules of this section apply to taxable years

December 22, 2008 1350 2008–51 I.R.B.

ending on or after the date of publicationof the Treasury decision adopting theserules as final regulation in the FederalRegister.

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on December 5,2008, 8:45 a.m., and published in the issue of the FederalRegister for December 8, 2008, 72 F.R. 74380)

Substantiation and ReportingRequirements for Cashand Noncash CharitableContribution Deductions;Hearing

Announcement 2008–122

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of public hearing on pro-posed rulemaking.

SUMMARY: This document provides no-tice of a public hearing on proposed regu-lations (REG–140029–07, 2008–40 I.R.B.828) relating to the substantiation and re-porting requirements for cash and noncashcharitable contributions under section 170of the Internal Revenue Code. The reg-ulations reflect the enactment of provi-sions of the American Jobs Creation Actof 2004 and the Pension Protection Act of2006. The regulations provide guidanceto individuals, partnerships, and corpora-tions that make charitable contributions,and will affect any donor claiming a de-duction for a charitable contribution afterthe date these regulations are published asfinal regulations in the Federal Register.

DATES: The public hearing is being heldon Friday, January 23, 2009, at 10:00 a.m.The IRS must receive outlines of the topicsto be discussed at the public hearing byTuesday, December 23, 2008.

ADDRESSES: The public hearing is beingheld in the IRS Auditorium, Internal Rev-enue Service Building, 1111 ConstitutionAvenue, NW, Washington, DC 20224.

Send Submissions to CC:PA:LPD:PR(REG–140029–07), room 5205, InternalRevenue Service, P.O. Box 7604, BenFranklin Station, Washington, DC 20044.Submissions may be hand-delivered Mon-day through Friday to CC:PA:LPD:PR(REG–140029–07), Courier’s Desk, In-ternal Revenue Service, 1111 Constitu-tion Avenue, NW, Washington, DC, orsent electronically via the Federal eRule-making Portal at www.regulations.gov(IRS-REG–140029–07).

FOR FURTHER INFORMATIONCONTACT: Concerning the regulations,Susan J. Kassell (202) 622–5020; concern-ing submissions of comments, the hearingand/or to be placed on the building accesslist to attend the hearing Funmi Taylor at(202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

The subject of the public hearingis the notice of proposed rulemaking(REG–140029–07) that was published inthe Federal Register on Thursday, August7, 2008 (73 FR 45908).

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing thatsubmitted written comments by November5, 2008, must submit an outline of the top-ics to be addressed and the amount of timeto be denoted to each topic (Signed origi-nal and eight (8) copies)

A period of 10 minutes is allotted toeach person for presenting oral comments.After the deadline for receiving out-lines has passed, the IRS will prepare anagenda containing the schedule of speak-ers. Copies of the agenda will be madeavailable, free of charge, at the hearing orin the Freedom of Information ReadingRoom (FOIA RR) (Room 1621) whichis located at the 11th and PennsylvaniaAvenue, NW, entrance, 1111 constitutionAvenue, NW, Washington, DC.

Because of access restrictions, the IRSwill not admit visitors beyond the imme-diate entrance area more than 30 minutesbefore the hearing starts. For informa-tion about having your name placed onthe building access list to attend the hear-ing, see the “FOR FURTHER INFORMA-TION CONTACT” section of this docu-ment.

LaNita Van Dyke,Chief, Publications and

Regulations Branch,Legal Processing Division,

Associate Chief Counsel(Procedure and Administration).

(Filed by the Office of the Federal Register on November 26,2008, 8:45 a.m., and published in the issue of the FederalRegister for November 28, 2008, 73 F.R. 72398)

Section 7428(c) Validationof Certain ContributionsMade During Pendencyof Declaratory JudgmentProceedings

Announcement 2008–123

This announcement serves notice to po-tential donors that the organization listedbelow has recently filed a timely declara-tory judgment suit under section 7428 ofthe Code, challenging revocation of itsstatus as an eligible donee under section170(c)(2).

Protection under section 7428(c) of theCode begins on the date that the noticeof revocation is published in the InternalRevenue Bulletin and ends on the dateon which a court first determines that anorganization is not described in section170(c)(2), as more particularly set forth insection 7428(c)(1).

In the case of individual contributors,the maximum amount of contributionsprotected during this period is limited to$1,000.00, with a husband and wife beingtreated as one contributor. This protec-tion is not extended to any individual whowas responsible, in whole or in part, forthe acts or omissions of the organizationthat were the basis for the revocation.This protection also applies (but withoutlimitation as to amount) to organizationsdescribed in section 170(c)(2) which areexempt from tax under section 501(a). Ifthe organization ultimately prevails in itsdeclaratory judgment suit, deductibilityof contributions would be subject to thenormal limitations set forth under section170.

HelpAmerica, Inc.Montgomery Village, MD

National Credit Counseling Services, Inc.Orlando, FL

2008–51 I.R.B. 1351 December 22, 2008

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe 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 the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.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—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

December 22, 2008 i 2008–51 I.R.B.

Numerical Finding List1

Bulletins 2008–27 through 2008–51

Announcements:

2008-62, 2008-27 I.R.B. 74

2008-63, 2008-28 I.R.B. 114

2008-64, 2008-28 I.R.B. 114

2008-65, 2008-31 I.R.B. 279

2008-66, 2008-29 I.R.B. 164

2008-67, 2008-29 I.R.B. 164

2008-68, 2008-30 I.R.B. 244

2008-69, 2008-32 I.R.B. 318

2008-70, 2008-32 I.R.B. 318

2008-71, 2008-32 I.R.B. 321

2008-72, 2008-32 I.R.B. 321

2008-73, 2008-33 I.R.B. 391

2008-74, 2008-33 I.R.B. 392

2008-75, 2008-33 I.R.B. 392

2008-76, 2008-33 I.R.B. 393

2008-77, 2008-33 I.R.B. 394

2008-78, 2008-34 I.R.B. 453

2008-79, 2008-35 I.R.B. 568

2008-80, 2008-37 I.R.B. 706

2008-81, 2008-37 I.R.B. 706

2008-82, 2008-37 I.R.B. 708

2008-83, 2008-37 I.R.B. 709

2008-84, 2008-38 I.R.B. 748

2008-85, 2008-38 I.R.B. 749

2008-86, 2008-40 I.R.B. 843

2008-87, 2008-40 I.R.B. 843

2008-88, 2008-40 I.R.B. 843

2008-89, 2008-40 I.R.B. 844

2008-90, 2008-41 I.R.B. 896

2008-91, 2008-42 I.R.B. 963

2008-92, 2008-42 I.R.B. 963

2008-93, 2008-41 I.R.B. 896

2008-94, 2008-42 I.R.B. 964

2008-95, 2008-42 I.R.B. 964

2008-96, 2008-43 I.R.B. 1010

2008-97, 2008-43 I.R.B. 1010

2008-98, 2008-44 I.R.B. 1087

2008-99, 2008-44 I.R.B. 1089

2008-100, 2008-44 I.R.B. 1090

2008-101, 2008-44 I.R.B. 1090

2008-102, 2008-43 I.R.B. 1011

2008-103, 2008-46 I.R.B. 1161

2008-104, 2008-45 I.R.B. 1136

2008-105, 2008-48 I.R.B. 1219

2008-106, 2008-45 I.R.B. 1137

2008-107, 2008-46 I.R.B. 1162

2008-108, 2008-46 I.R.B. 1165

2008-109, 2008-46 I.R.B. 1166

2008-110, 2008-48 I.R.B. 1224

2008-111, 2008-48 I.R.B. 1224

2008-112, 2008-47 I.R.B. 1199

2008-113, 2008-47 I.R.B. 1199

Announcements— Continued:

2008-114, 2008-48 I.R.B. 1226

2008-115, 2008-48 I.R.B. 1228

2008-116, 2008-48 I.R.B. 1230

2008-117, 2008-49 I.R.B. 1258

2008-118, 2008-49 I.R.B. 1258

2008-119, 2008-50 I.R.B. 1295

2008-120, 2008-50 I.R.B. 1295

2008-121, 2008-50 I.R.B. 1296

2008-122, 2008-51 I.R.B. 1351

2008-123, 2008-51 I.R.B. 1351

Court Decisions:

2087, 2008-41 I.R.B. 845

Notices:

2008-55, 2008-27 I.R.B. 11

2008-56, 2008-28 I.R.B. 79

2008-57, 2008-28 I.R.B. 80

2008-58, 2008-28 I.R.B. 81

2008-59, 2008-29 I.R.B. 123

2008-60, 2008-30 I.R.B. 178

2008-61, 2008-30 I.R.B. 180

2008-62, 2008-29 I.R.B. 130

2008-63, 2008-31 I.R.B. 261

2008-64, 2008-31 I.R.B. 268

2008-65, 2008-30 I.R.B. 182

2008-66, 2008-31 I.R.B. 270

2008-67, 2008-32 I.R.B. 307

2008-68, 2008-34 I.R.B. 418

2008-69, 2008-34 I.R.B. 419

2008-70, 2008-36 I.R.B. 575

2008-71, 2008-35 I.R.B. 462

2008-72, 2008-43 I.R.B. 998

2008-73, 2008-38 I.R.B. 717

2008-74, 2008-38 I.R.B. 718

2008-75, 2008-38 I.R.B. 719

2008-76, 2008-39 I.R.B. 768

2008-77, 2008-40 I.R.B. 814

2008-78, 2008-41 I.R.B. 851

2008-79, 2008-40 I.R.B. 815

2008-80, 2008-40 I.R.B. 820

2008-81, 2008-41 I.R.B. 852

2008-82, 2008-41 I.R.B. 853

2008-83, 2008-42 I.R.B. 905

2008-84, 2008-41 I.R.B. 855

2008-85, 2008-42 I.R.B. 905

2008-86, 2008-42 I.R.B. 925

2008-87, 2008-42 I.R.B. 930

2008-88, 2008-42 I.R.B. 933

2008-89, 2008-43 I.R.B. 999

2008-90, 2008-43 I.R.B. 1000

2008-91, 2008-43 I.R.B. 1001

2008-92, 2008-43 I.R.B. 1001

2008-93, 2008-43 I.R.B. 1002

2008-94, 2008-44 I.R.B. 1070

Notices— Continued:

2008-95, 2008-44 I.R.B. 1076

2008-96, 2008-44 I.R.B. 1077

2008-97, 2008-44 I.R.B. 1080

2008-98, 2008-44 I.R.B. 1080

2008-99, 2008-47 I.R.B. 1194

2008-100, 2008-44 I.R.B. 1081

2008-101, 2008-44 I.R.B. 1082

2008-102, 2008-45 I.R.B. 1106

2008-103, 2008-46 I.R.B. 1156

2008-104, 2008-51 I.R.B. 1298

2008-105, 2008-48 I.R.B. 1208

2008-106, 2008-49 I.R.B. 1239

2008-107, 2008-50 I.R.B. 1265

2008-108, 2008-50 I.R.B. 1275

2008-109, 2008-50 I.R.B. 1282

2008-110, 2008-51 I.R.B. 1298

2008-111, 2008-51 I.R.B. 1299

2008-112, 2008-51 I.R.B. 1301

2008-113, 2008-51 I.R.B. 1305

2008-114, 2008-51 I.R.B. 1322

Proposed Regulations:

REG-209006-89, 2008-41 I.R.B. 867

REG-157711-02, 2008-44 I.R.B. 1087

REG-143544-04, 2008-42 I.R.B. 947

REG-160868-04, 2008-45 I.R.B. 1115

REG-161695-04, 2008-37 I.R.B. 699

REG-164965-04, 2008-34 I.R.B. 450

REG-142339-05, 2008-45 I.R.B. 1116

REG-143453-05, 2008-32 I.R.B. 310

REG-146895-05, 2008-37 I.R.B. 700

REG-148326-05, 2008-51 I.R.B. 1325

REG-155087-05, 2008-38 I.R.B. 726

REG-164370-05, 2008-46 I.R.B. 1157

REG-142680-06, 2008-35 I.R.B. 565

REG-156779-06, 2008-46 I.R.B. 1160

REG-120476-07, 2008-36 I.R.B. 679

REG-120844-07, 2008-39 I.R.B. 770

REG-128841-07, 2008-45 I.R.B. 1124

REG-129243-07, 2008-27 I.R.B. 32

REG-138355-07, 2008-32 I.R.B. 311

REG-140029-07, 2008-40 I.R.B. 828

REG-142040-07, 2008-34 I.R.B. 451

REG-142333-07, 2008-43 I.R.B. 1008

REG-149404-07, 2008-40 I.R.B. 839

REG-149405-07, 2008-27 I.R.B. 73

REG-100464-08, 2008-32 I.R.B. 313

REG-101258-08, 2008-28 I.R.B. 111

REG-102122-08, 2008-31 I.R.B. 278

REG-102822-08, 2008-38 I.R.B. 744

REG-103146-08, 2008-37 I.R.B. 701

REG-106251-08, 2008-39 I.R.B. 774

REG-107318-08, 2008-45 I.R.B. 1131

REG-115457-08, 2008-33 I.R.B. 390

REG-118327-08, 2008-48 I.R.B. 1218

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin2008–26, dated June 30, 2008.

2008–51 I.R.B. ii December 22, 2008

Proposed Regulations— Continued:

REG-121698-08, 2008-29 I.R.B. 163

Revenue Procedures:

2008-32, 2008-28 I.R.B. 82

2008-33, 2008-28 I.R.B. 93

2008-34, 2008-27 I.R.B. 13

2008-35, 2008-29 I.R.B. 132

2008-36, 2008-33 I.R.B. 340

2008-37, 2008-29 I.R.B. 137

2008-38, 2008-29 I.R.B. 139

2008-39, 2008-29 I.R.B. 143

2008-40, 2008-29 I.R.B. 151

2008-41, 2008-29 I.R.B. 155

2008-42, 2008-29 I.R.B. 160

2008-43, 2008-30 I.R.B. 186

2008-44, 2008-30 I.R.B. 187

2008-45, 2008-30 I.R.B. 224

2008-46, 2008-30 I.R.B. 238

2008-47, 2008-31 I.R.B. 272

2008-48, 2008-36 I.R.B. 586

2008-49, 2008-34 I.R.B. 423

2008-50, 2008-35 I.R.B. 464

2008-51, 2008-35 I.R.B. 562

2008-52, 2008-36 I.R.B. 587

2008-53, 2008-36 I.R.B. 678

2008-54, 2008-38 I.R.B. 722

2008-55, 2008-39 I.R.B. 768

2008-56, 2008-40 I.R.B. 826

2008-57, 2008-41 I.R.B. 855

2008-58, 2008-41 I.R.B. 856

2008-59, 2008-41 I.R.B. 857

2008-60, 2008-43 I.R.B. 1006

2008-61, 2008-42 I.R.B. 934

2008-62, 2008-42 I.R.B. 935

2008-63, 2008-42 I.R.B. 946

2008-64, 2008-47 I.R.B. 1195

2008-65, 2008-44 I.R.B. 1082

2008-66, 2008-45 I.R.B. 1107

2008-67, 2008-48 I.R.B. 1211

2008-69, 2008-48 I.R.B. 1217

2008-70, 2008-49 I.R.B. 1240

2008-71, 2008-49 I.R.B. 1251

2008-72, 2008-50 I.R.B. 1286

Revenue Rulings:

2008-32, 2008-27 I.R.B. 6

2008-33, 2008-27 I.R.B. 8

2008-34, 2008-28 I.R.B. 76

2008-35, 2008-29 I.R.B. 116

2008-36, 2008-30 I.R.B. 165

2008-37, 2008-28 I.R.B. 77

2008-38, 2008-31 I.R.B. 249

2008-39, 2008-31 I.R.B. 252

2008-40, 2008-30 I.R.B. 166

2008-41, 2008-30 I.R.B. 170

2008-42, 2008-30 I.R.B. 175

2008-43, 2008-31 I.R.B. 258

Revenue Rulings— Continued:

2008-44, 2008-32 I.R.B. 292

2008-45, 2008-34 I.R.B. 403

2008-46, 2008-36 I.R.B. 572

2008-47, 2008-39 I.R.B. 760

2008-48, 2008-38 I.R.B. 713

2008-49, 2008-40 I.R.B. 811

2008-50, 2008-45 I.R.B. 1098

2008-51, 2008-47 I.R.B. 1171

2008-52, 2008-49 I.R.B. 1233

2008-53, 2008-49 I.R.B. 1231

Social Security Contribution and BenefitBase; Domestic Employee CoverageThreshold:

2008-103, 2008-46 I.R.B. 1156

Treasury Decisions:

9401, 2008-27 I.R.B. 1

9402, 2008-31 I.R.B. 254

9403, 2008-32 I.R.B. 285

9404, 2008-32 I.R.B. 280

9405, 2008-32 I.R.B. 293

9406, 2008-32 I.R.B. 287

9407, 2008-33 I.R.B. 330

9408, 2008-33 I.R.B. 323

9409, 2008-29 I.R.B. 118

9410, 2008-34 I.R.B. 414

9411, 2008-34 I.R.B. 398

9412, 2008-37 I.R.B. 687

9413, 2008-34 I.R.B. 404

9414, 2008-35 I.R.B. 454

9415, 2008-36 I.R.B. 570

9416, 2008-46 I.R.B. 1142

9417, 2008-37 I.R.B. 693

9418, 2008-38 I.R.B. 713

9419, 2008-40 I.R.B. 790

9420, 2008-39 I.R.B. 750

9421, 2008-39 I.R.B. 755

9422, 2008-42 I.R.B. 898

9423, 2008-43 I.R.B. 966

9424, 2008-44 I.R.B. 1012

9425, 2008-45 I.R.B. 1100

9426, 2008-46 I.R.B. 1153

9427, 2008-47 I.R.B. 1179

9428, 2008-47 I.R.B. 1174

9429, 2008-47 I.R.B. 1167

9430, 2008-48 I.R.B. 1205

9431, 2008-49 I.R.B. 1235

9432, 2008-49 I.R.B. 1236

9433, 2008-50 I.R.B. 1263

December 22, 2008 iii 2008–51 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2008–27 through 2008–51

Announcements:

2008-19

Superseded by

Ann. 2008-95, 2008-42 I.R.B. 964

2008-63

Superseded by

Rev. Proc. 2008-72, 2008-50 I.R.B. 1286

2008-64

Corrected by

Ann. 2008-71, 2008-32 I.R.B. 321

2008-72

Corrected by

Ann. 2008-78, 2008-34 I.R.B. 453

Notices:

88-80

Modified by

Notice 2008-79, 2008-40 I.R.B. 815

99-48

Superseded by

Rev. Proc. 2008-40, 2008-29 I.R.B. 151

2000-9

Obsoleted by

Rev. Proc. 2008-41, 2008-29 I.R.B. 155

2001-16

Clarified by

Notice 2008-111, 2008-51 I.R.B. 1299

2004-2

Amplified by

Notice 2008-59, 2008-29 I.R.B. 123

2004-50

Amplified by

Notice 2008-59, 2008-29 I.R.B. 123

2005-11

Superseded by

T.D. 9425, 2008-45 I.R.B. 1100

2005-91

Obsoleted by

T.D. 9422, 2008-42 I.R.B. 898

2006-88

Modified and superseded by

Notice 2008-60, 2008-30 I.R.B. 178

2006-100

Modified by

Notice 2008-113, 2008-51 I.R.B. 1305

2007-2

Modified by

Notice 2008-104, 2008-51 I.R.B. 1298

Notices— Continued:

2007-22

Amplified by

Notice 2008-59, 2008-29 I.R.B. 123

2007-36

Clarified, modified, and amplified by

Rev. Proc. 2008-54, 2008-38 I.R.B. 722

2007-52

Updated and amplified by

Notice 2008-96, 2008-44 I.R.B. 1077

2007-53

Updated by

Notice 2008-97, 2008-44 I.R.B. 1080

2007-89

Modified by

Notice 2008-113, 2008-51 I.R.B. 1305

2007-100

Obsoleted by

Notice 2008-113, 2008-51 I.R.B. 1305

2008-20

Superseded by

Notice 2008-111, 2008-51 I.R.B. 1299

2008-41

Amended and supplemented by

Notice 2008-88, 2008-42 I.R.B. 933

Proposed Regulations:

REG-161695-04

Corrected by

Ann. 2008-92, 2008-42 I.R.B. 963

REG-143453-05

Hearing cancelled by

Ann. 2008-96, 2008-43 I.R.B. 1010

REG-155087-05

Hearing scheduled by

Ann. 2008-117, 2008-49 I.R.B. 1258

REG-129243-07

Corrected by

Ann. 2008-75, 2008-33 I.R.B. 392

REG-140029-07

Hearing scheduled by

Ann. 2008-122, 2008-51 I.R.B. 1351

REG-151135-07

Hearing scheduled by

Ann. 2008-64, 2008-28 I.R.B. 114

REG-101258-08

Corrected by

Ann. 2008-73, 2008-33 I.R.B. 391

REG-102822-08

Hearing cancelled by

Ann. 2008-116, 2008-48 I.R.B. 1230

Proposed Regulations— Continued:

REG-103146-08

Hearing scheduled by

Ann. 2008-102, 2008-43 I.R.B. 1011

REG-106251-08

Hearing scheduled by

Ann. 2008-121, 2008-50 I.R.B. 1296

REG-115457-08

Hearing scheduled by

Ann. 2008-108, 2008-46 I.R.B. 1165

Revenue Procedures:

92-25

Superseded by

Rev. Proc. 2008-41, 2008-29 I.R.B. 155

92-83

Obsoleted by

Rev. Proc. 2008-37, 2008-29 I.R.B. 137

2001-10

Section 6.02(1)(a) modified and amplified by

Rev. Proc. 2008-52, 2008-36 I.R.B. 587

2001-42

Superseded by

Rev. Proc. 2008-39, 2008-29 I.R.B. 143

2002-9

Clarified, modified, amplified, and superseded by

Rev. Proc. 2008-52, 2008-36 I.R.B. 587

Modified and amplified by

Rev. Proc. 2008-43, 2008-30 I.R.B. 186

2002-28

Section 7.02(1)(a) modified and amplified by

Rev. Proc. 2008-52, 2008-36 I.R.B. 587

2002-44

Modified by

Ann. 2008-111, 2008-48 I.R.B. 1224

2002-64

Superseded by

Rev. Proc. 2008-55, 2008-39 I.R.B. 768

2004-44

Superseded by

Rev. Proc. 2008-67, 2008-48 I.R.B. 1211

2005-29

Superseded by

Rev. Proc. 2008-49, 2008-34 I.R.B. 423

2006-27

Modified and superseded by

Rev. Proc. 2008-50, 2008-35 I.R.B. 464

2006-29

Superseded by

Rev. Proc. 2008-34, 2008-27 I.R.B. 13

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin 2008–26, dated June 30, 2008.

2008–51 I.R.B. iv December 22, 2008

Revenue Procedures— Continued:

2006-34

Superseded by

Rev. Proc. 2008-44, 2008-30 I.R.B. 187

2006-44

Modified by

Ann. 2008-111, 2008-48 I.R.B. 1224

2007-9

Modified by

Rev. Proc. 2008-70, 2008-49 I.R.B. 1240

2007-14

Superseded by

Rev. Proc. 2008-52, 2008-36 I.R.B. 587

2007-19

Superseded by

Rev. Proc. 2008-39, 2008-29 I.R.B. 143

2007-37

Updated by

Rev. Proc. 2008-62, 2008-42 I.R.B. 935

2007-42

Superseded by

Rev. Proc. 2008-32, 2008-28 I.R.B. 82

2007-43

Superseded by

Rev. Proc. 2008-33, 2008-28 I.R.B. 93

2007-44

Modified by

Rev. Proc. 2008-56, 2008-40 I.R.B. 826

2007-49

Section 3 modified and superseded by

Rev. Proc. 2008-50, 2008-35 I.R.B. 464

2007-50

Superseded by

Rev. Proc. 2008-36, 2008-33 I.R.B. 340

2007-63

Superseded by

Rev. Proc. 2008-59, 2008-41 I.R.B. 857

2007-66

Modified and superseded by

Rev. Proc. 2008-54, 2008-38 I.R.B. 722

2007-70

Superseded by

Rev. Proc. 2008-72, 2008-50 I.R.B. 1286

Modified by

Ann. 2008-63, 2008-28 I.R.B. 114

2007-72

Amplified and superseded by

Rev. Proc. 2008-47, 2008-31 I.R.B. 272

2008-3

Modified and amplified by

Rev. Proc. 2008-61, 2008-42 I.R.B. 934

Revenue Procedures— Continued:

2008-4

Modified by

Rev. Proc. 2008-67, 2008-48 I.R.B. 1211

2008-10

Modified by

Rev. Proc. 2008-70, 2008-49 I.R.B. 1240

2008-12

Modified and superseded by

Rev. Proc. 2008-35, 2008-29 I.R.B. 132

2008-43

Modified by

Rev. Proc. 2008-52, 2008-36 I.R.B. 587

2008-44

Clarified by

Ann. 2008-119, 2008-50 I.R.B. 1295

2008-52

Modified by

Ann. 2008-84, 2008-38 I.R.B. 748

Revenue Rulings:

67-213

Amplified by

Rev. Rul. 2008-40, 2008-30 I.R.B. 166

71-234

Modified by

Rev. Proc. 2008-43, 2008-30 I.R.B. 186

76-273

Obsoleted by

T.D. 9414, 2008-35 I.R.B. 454

77-480

Modified by

Rev. Proc. 2008-43, 2008-30 I.R.B. 186

82-105

Obsoleted by

T.D. 9414, 2008-35 I.R.B. 454

91-17

Amplified by

Rev. Proc. 2008-41, 2008-29 I.R.B. 155Rev. Proc. 2008-42, 2008-29 I.R.B. 160

Superseded in part by

Rev. Proc. 2008-40, 2008-29 I.R.B. 151

2005-6

Amplified by

Rev. Proc. 2008-38, 2008-29 I.R.B. 139

2006-57

Modified by

Notice 2008-74, 2008-38 I.R.B. 718

2008-3

Supplemented and superseded by

Rev. Rul. 2008-52, 2008-49 I.R.B. 1233

2008-12

Amplified by

Rev. Rul. 2008-38, 2008-31 I.R.B. 249

Revenue Rulings— Continued:

Clarified by

Ann. 2008-65, 2008-31 I.R.B. 279

Treasury Decisions:

8073

Corrected by

Ann. 2008-99, 2008-44 I.R.B. 1089

9391

Corrected by

Ann. 2008-74, 2008-33 I.R.B. 392

9417

Corrected by

Ann. 2008-91, 2008-42 I.R.B. 963

9424

Corrected by

Ann. 2008-114, 2008-48 I.R.B. 1226

December 22, 2008 v 2008–51 I.R.B.

2008–51 I.R.B. December 22, 2008

December 22, 2008 2008–51 I.R.B.

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