26 U.S.C. § 409A — Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans

(a) Constructive receipt rules. (1) If a nonqualified deferred compensation plan fails, at any point in a tax year, to follow the rules in paragraphs (2), (3), and (4) below — either in how it's written or how it's actually run — then all pay deferred under that plan for that year and every earlier year must be counted as income right away, unless it was already taxed or is still genuinely at risk of being forfeited. This only hits the specific workers affected by the failure. On top of the extra income tax, the worker owes interest (calculated as if the money had been taxed back when it was first deferred or first stopped being at risk of forfeiture, at the underpayment rate plus 1 point) and an extra tax equal to 20% of the amount now includible. (2) Distributions. The plan can only pay out deferred pay when one of these happens: the worker separates from service; the worker becomes disabled (defined below); the worker dies; a fixed date or schedule set back when the pay was deferred; a change in ownership or control of the company (as defined by the IRS); or an unforeseeable emergency. For "specified employees" (key employees of a company whose stock is publicly traded), payouts triggered by separation from service must wait at least 6 months after separation (or until death, if sooner). An "unforeseeable emergency" means severe financial hardship from illness or accident to the worker, their spouse, or a dependent; loss of property in a casualty; or similar unforeseeable events outside the worker's control — and the payout can't exceed what's needed to cover the emergency plus related taxes, after counting insurance or other relief available to the worker. A worker counts as disabled if they can't do substantial work because of a medical condition expected to last at least 12 months or result in death, or if they're receiving disability income-replacement benefits for at least 3 months for such a condition. (3) Acceleration of benefits. The plan can't let payments be sped up ahead of schedule, except as IRS regulations allow. (4) Elections. The choice to defer pay for services in a coming year must be made by the end of the prior year (or another IRS-set deadline). In a worker's first year of eligibility, they get 30 days after becoming eligible to elect deferral for future services. For performance-based pay earned over at least 12 months, the election can be made up to 6 months before the period ends. If a plan lets a worker later delay a payment or change its form, that new election can't take effect for at least 12 months after it's made; for most payment types, the payment itself must be pushed back at least 5 years from when it would otherwise have been paid; and an election changing a fixed-date payment can't be made less than 12 months before that scheduled date. (b) Funding rules. (1) If money is set aside offshore (outside the U.S.) in a trust or similar arrangement to pay deferred compensation, that money counts as transferred to the worker for tax purposes right when it's set aside — even if creditors could still reach it — unless nearly all the related work was performed in that foreign country. If the money is later moved offshore, it counts as transferred then instead. (2) If a plan sets money aside and restricts it to paying benefits specifically because the employer's finances are getting worse, that money counts as transferred to the worker as of whichever is earlier: when the plan first says this restriction will happen, or when the assets are actually restricted — again, whether or not creditors could reach it. (3) For a company's traditional pension plan (defined benefit plan) during a "restricted period," if money is set aside in a trust to pay a covered executive's deferred pay under a separate nonqualified plan, or the nonqualified plan says money will become restricted because of that restricted period, that money counts as transferred to the executive right then. (This doesn't apply to money set aside before the restricted period began.) A "restricted period" is: any time the pension plan is officially "at-risk"; any time the company sponsoring the plan is in bankruptcy; or the 12 months before the pension plan terminates, if the plan doesn't have enough money to cover promised benefits at termination. If the employer pays the executive's income taxes on this included amount, that payment itself is treated as more deferred pay for interest and penalty purposes, and the employer can't deduct it. "Applicable covered employee" means a covered employee (as defined by executive-pay tax rules) of the plan sponsor or a company in its corporate group, including a former employee who held that role at termination. (4) For every year that offshore or financial-health-restricted assets stay set aside, any increase in their value or earnings on them counts as an additional taxable transfer, to the extent not already taxed. (5) If amounts are taxed under paragraphs (1), (2), or (3), the worker also owes interest (calculated the same underpayment-rate-plus-1-point way as in subsection (a)) plus an extra tax equal to 20% of the amount included. (c) This section doesn't stop some other tax rule from requiring the income to be counted earlier, and it doesn't require the same amount to be taxed again later under a different rule once it's been taxed under this section. (d) Definitions. A "nonqualified deferred compensation plan" is any plan that defers pay, except a "qualified employer plan" (certain IRA-type accounts, eligible section 457(b) government/nonprofit deferred comp plans, and section 415(m) excess-benefit plans) and bona fide vacation, sick leave, comp time, disability, or death benefit plans. "Plan" includes any agreement, even one involving just one person. Pay is "subject to a substantial risk of forfeiture" only if the worker's right to it depends on doing more substantial work in the future. References to deferred pay include the earnings on it. Rules similar to the multi-employer aggregation rules of section 414(b) and (c) apply here too, unless the IRS says otherwise. An arrangement letting a worker receive "qualified stock" (as defined in section 83(i)(2)) isn't treated as a deferred comp plan just because the worker can elect to delay recognizing that stock's income under section 83(i). (e) The IRS may issue regulations needed to carry out this section, including rules for: figuring deferred amounts under defined-benefit-style nonqualified plans; what counts as a change in company ownership or control for subsection (a)(2)(A)(v); exempting arrangements from the funding rules in subsection (b) if they won't improperly defer U.S. tax or put assets out of creditors' reach; defining "financial health" for subsection (b)(2); and disregarding a forfeiture risk when needed to carry out this section's purpose.