Treasury Issues Final Regulations on 409A NQDC Rules

The U.S. Department of Treasury and the IRS recently released final regulations addressing nonqualified deferred compensation (NQDC) plans under section 409A. The regulations provide voluminous guidance — 397 pages worth — on a variety of qualification and other issues pertaining to NQDC plans.¹

Section 409A generally provides that unless certain requirements are met, deferrals under an NQDC plan are includible in gross income to the extent they are not subject to a substantial risk of forfeiture and were not already included in gross income. Section 409A also addresses certain NQDC-related trusts and arrangements that are located outside the United States or that link benefits to a decline in the sponsor’s financial health.

Overall, the Treasury and the IRS were extremely responsive to comments, which accounts for the vast number of exceptions and special rules.

Effective Dates and Transition Rules
The final regulations generally take effect January 1, 2008. Notice 2006-79, which extended existing transition relief for NQDC arrangements under section 409A, continues to apply to periods before then and essentially requires good-faith compliance with either the proposed or the final regulations.

The final regulations provide extensive transition relief that should enable most companies to comply with section 409A from the beginning of 2005 to the end of 2007.

Deferral of Compensation Defined
Deferred compensation is compensation to which an employee has a legally binding right during a year that will be payable to — or on behalf of — the employee in a later year.

A legally binding right obtained in one year to a payment in a later year under a noncompete agreement generally constitutes deferred compensation. However, a noncompete agreement that links payment to services — either performed or not — does not create a substantial risk of forfeiture. This rule prevents taxpayers from layering a noncompete agreement over an NQDC plan, a popular tax planning technique in tax-exempt entities. Any failure to meet section 409A triggers regular taxes, a 20 percent penalty tax and interest.

The final regulations generally adopt the short-term deferral rule, which exempts NQDC arrangements from section 409A if payment is made by the 15th day of the third month following the later of the employer’s taxable year-end, or the end of the calendar year in which a legally binding right arises or a substantial risk of forfeiture lapses.

Timing of Initial Deferral Elections
Section 409A provides strict rules regarding the timing of deferral elections under an NQDC plan. These timing rules are the same as those for electing the time and form of distributions. Neither the employer nor the employee may have ongoing discretion as to the time and form of payment, but rather must make an irrevocable election by the date the employee obtains a legally binding right to the compensation.

If the employee does not elect the time and form of payment, the employer must do so within the time frame that would have applied to the employee. For example, for performance-based compensation, the plan could permit the employer to establish the time and form of payment up to six months before the relevant performance period ended.

Initial Elections May Be Made Within 30 Days of Eligibility
The 30-day rule applies only to compensation earned after the date of the election and to employees who did not actively participate in the NQDC plan for at least 24 months. However, even after becoming newly eligible for a plan, an employee who participated in another plan in the same category during the same calendar year may not make a new deferral election.

In nonaccount balance plans without participant deferrals, employee elections may be made up to 30 days from the first day of the taxable year immediately following the first year of accruing a benefit under the plan. This rule significantly eases plan administration for defined benefit excess plans in which eligibility would otherwise occur at different times for different participants as their compensation exceeded section 401(a)(17) limits during the year.

Performance-Based Compensation Subject to Six-Month Rule
Deferrals of performance-based compensation may be made up until six months before the performance period ends. To be considered performance-based, the compensation:

• Must be contingent on satisfying organizational or individual performance criteria over a period of at least 12 months, established in writing within 90 days after the service period began
• May be paid only due to performance
• May not be based on criteria that are readily ascertainable when they are established
• May be based on subjective criteria, as long as the criteria are bona fide and relate to employee performance

If a portion of the deferred compensation fails to meet these requirements, only that portion will fail to be performance-based compensation.

Initial Election for Fiscal-Year Compensation
Participants may make an initial election to defer fiscal-year compensation on or before the start of the fiscal year in which the compensation is earned. However, the plan must revert to a calendar-year approach in subsequent years.

While this rule does not help director fee plans on a recurring basis, such plans may take advantage of the 30-day rule for new directors who join after the beginning of a calendar year for fees earned after the election date.

Initial Elections for Grants With Vesting Schedules
This rule governs grants with time-based vesting, such as time-vested restricted stock units (RSUs) with a 12-month or longer vesting schedule. Time-vested RSUs are not performance-based compensation, because payments are based on the entire value of the underlying stock grant rather than on the appreciation in value alone. For these grants, an initial deferral election is required within 30 days after the grant date, provided the election is made at least 12 months before the service period ends. Practically speaking, for RSUs with a 12-month vesting date, the deferral election must be in place before the grant date.

Deferral Elections for Separation Pay
If separation pay results from bona fide, arm’s-length negotiations, the initial deferral election (and election of time and form of payment) may be made any time before the employee acquires a legally binding right to the payment. In cases of preexisting legally binding rights to deferred compensation, including legally binding rights to severance that are subject to a substantial risk of forfeiture, the participant must elect the distribution time and form when the right is granted.

Acceleration of Payments
Although the statute generally prohibits the acceleration of payments, the final regulations allow acceleration in the event of the participant’s death, disability or an unforeseeable emergency. In addition, a domestic relations order generally may provide for a new time and form of payment to the participant’s spouse or former spouse.

Substitution of Payment Events Generally Prohibited
Generally, after initial elections are made, sponsors may not amend a plan to allow an earlier distribution date. Changes to the distribution rules for certain events may be substituted only under a very narrow exception.

Limited Exceptions to Prohibition on Termination/Distributions
Although the statute precludes a termination followed by an immediate liquidation of plan balances, the final regulations provide limited exceptions:

1. Sponsors may terminate all plans of the same type for all participants, as long as all payments are made between 12 months and 24 months from the date of termination. The employer may not adopt a successor plan of the same type within three years of the termination.
2. Sponsors may terminate a plan and pay participants during the 12-month period after a change in control.
3. A company in bankruptcy may terminate a plan if deferrals are included in the participants’ gross incomes by the latest of (a) the calendar year in which the termination occurs, (b) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture or (c) the first calendar year in which the payment is administratively practicable.

A new anti-abuse rule treats any amount paid in lieu of a terminated promise to pay NQDC as a payment of the deferred compensation. An employer may cash out a participant any time, as long as the NQDC amount meets the applicable dollar limit under section 402(g) ($15,500 for 2007). Cash-outs are also allowed if the plan owes the employee future annuity payments that are within the 402(g) limit.

Subsequent Elections
The statute prevents so-called subsequent elections to change the distribution time and form. An exception permits a participant to delay a distribution for five years from the initial payment date by electing to do so more than one year before that date. Installment payments may be treated individually or as a single payment stream. Additionally, a participant may convert a right to receive a future life annuity to a lump sum, and vice versa.

Another exception permits elections to change from a life annuity to another actuarially equivalent life annuity at any time. Determining the availability of this annuity election requires a two-step analysis:

1. Determine whether the annuity is a life annuity (ignoring term-certain features, pop-up provisions, cash refund features, Social Security or Railroad Retirement leveling features and features applying a permissible cost-of-living index).
2. Determine whether the alternative life annuity is actuarially equivalent.

For example, a subsidized joint-and-survivor annuity is considered actuarially equivalent to a single-life annuity if neither the annual lifetime benefit nor the annual survivor benefit available under the joint-and-survivor annuity exceeds the annual lifetime benefit available under the single-life annuity.

Sponsors must use the same actuarial assumptions and methods to value each annuity during the entire term of the employee’s plan participation. However, they may change the actuarial assumptions and methods used to determine future annuity payments, and use different assumptions and methods from those in the qualified plan.

Distribution Events
Distributions may not be made before the earliest of:

• Separation from service (after a six-month delay for key employees of public companies)
• Disability or death
• Change in control/ownership
• Specified time or fixed schedule
• Unforeseeable emergency

Payments may be made as soon as administratively feasible within the calendar year after the triggering event or, if later, on the 15th day of the third month after the event. Further, distributions elected within a designated calendar year may be made any time during that year.

Double triggers are allowed. For example, a distribution might occur three years from the date of a separation from service. A plan also may provide for a different time and form of payment, depending on whether the permissible payment event occurs before or after a specified date.

Separation From Service
An employee’s death, retirement or termination of employment constitutes a separation from service. Termination is considered to have occurred if the employer and employee reasonably anticipate that either:

1. No further services will be performed after a certain date.
2. The level of bona fide services the employee will perform after such date (whether as an employee or as an independent contractor) will not exceed 20 percent of the average level performed over the preceding 36-month period (or the full period, if less than 36 months).

Conversely, employees will be presumed not to have separated from service if they continue to perform at 50 percent or more of their previous level of service, averaged over the previous 36 months. Unpaid bona fide leave does not count, but periods of paid leave do. Other relevant factors include the employer’s past practices and reasonable expectations, and whether the person is treated as an employee for other purposes.

The IRS adopted a modified phased retirement provision that allows a distribution if the employee plans to reduce the level of services to less than 50 percent of his or her previous 36-month average.

A shorter-than-six-month military leave, sick leave or other bona fide leaves of absence — or a longer leave if the employee has reemployment rights — is not considered a separation from service. The rules would not consider a separation from service to occur under a “same desk rule” analysis.

Six-Month Delay for Distributions Upon Separation From Service for Key Employees of Public Companies
A company may identify key employees based on any 12-month period. Employees who meet the requirements of section 416(i) during the 12-month period are considered key employees for 12 months, starting no later than the first day of the fourth month after the 12-month period ends. For example, key employees as of December 31, 2007, remain key employees from April 1, 2008, through March 31, 2009.

An NQDC plan may delay payments to all employees for six months after separation from service, regardless of their key-employee status. A plan may use an alternative method to determine who is subject to a six-month delay, provided that the alternative method is reasonably designed to include all key employees, is an objective standard applying equally to any employee and identifies no more than 200 employees.

The final regulations clarify that the six-month delay also applies to employees of a company whose stock is publicly traded only on a foreign exchange, or is traded on a U.S. exchange only as American depositary receipts or American depositary shares. If the employer is composed of multiple entities, this rule applies if one entity had stock that was publicly traded on a foreign exchange.

At the employer’s discretion, either an annuity commencement date may be delayed for six months, or the initial annuity payment may be delayed for seven months.

A new flexible rule allows up to 50 employees to be treated as key employees due to a corporate transaction (in addition to 1 percent and 5 percent owners being treated as key employees). For example, the merged employer could simply combine the pre-transaction separate lists of key employees. The regulations provide detailed additional guidance for determining key employees in mergers between private and public companies, spin-offs from publicly traded companies and initial public offerings.

Disability
Any disability defined in section 409A(a) or determined under the Social Security Administration may trigger a distribution.

Change in Control
The IRS liberalized the definition of a change in ownership or effective control of a corporation so that more corporate transactions could trigger a distribution of NQDC. For example, the employer need not undergo a change — a change in the ownership of a corporate parent would suffice.

The following change-in-control events may trigger an immediate distribution:

• A change in ownership occurs when any person or group acquires ownership of more than 50 percent of the total fair market value (FMV) or total voting power of the corporation’s stock.
• A change in effective control occurs when any person or group acquires ownership of more than 30 percent of the FMV or total voting power of the corporation’s stock.
• A change in the ownership of a substantial portion of the assets of the corporation occurs when any person or group acquires assets valued at 40 percent or more of the corporation’s gross FMV.

The final regulations allow double triggers, such as a change in control followed by a separation from service, whereby the second event may trigger a distribution in the same time and form as other separation payments. Under a special rule, a distribution triggered by a separation from service within two years of a change-in-control event may have a different time and form from those of other single-trigger separations.

Events that are not defined as a change in control may still trigger a distribution due to separation from service in the event of a transfer of a division or substantial assets, such as in mergers and acquisitions. These distributions are allowed only if the employee stops providing services to the seller and begins providing them to the buyer, the buyer is an unrelated third party and the transaction results from bona fide, arm’s-length negotiations.

Generally, spin-offs do not constitute a termination of employment for the subsidiary’s employees, because the employees work for the same employer before and after the transaction. However, terminating and liquidating a plan within 12 months of a change-in-control transaction could trigger distributions under the change-in-control rules. However, all spin-offs do not constitute a change in control.

The final regulations permit earn-out provisions, under which additional amounts are payable by an acquirer at a later date, subject to the satisfaction of specified conditions, without violating the rule prohibiting distributions triggered by an event.

Unforeseeable Emergency
The final regulations define an unforeseeable emergency and the associated payment amounts. Emergency distributions are not allowed if the emergency may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the employee’s assets — to the extent doing so would not impose severe financial hardship — or by stopping deferrals under the plan.

162(m) Plans
The final regulations permit employers to defer a payment that would exceed the $1 million cap until the first year the payment would not exceed the cap or the employee separates from service. However, to meet this exception, all payments that could be delayed under this provision must be delayed, and if delayed until after separation from service, the six-month delay for key employees likely would apply.

Stock Options and Stock Appreciation Rights
All options and SARs issued at the FMV of employer stock are exempt from section 409A. The final regulations define FMV and how to value company stock. Options issued under section 423 employee stock purchase plans also are exempt, but similar plans whose options are issued by a foreign company and mostly cover nonresident aliens are not exempt.

The proposed regulations had generally prevented subsidiaries of publicly traded entities from issuing options or SARs based on the increase in value of subsidiary stock, but the final regulations eliminate that restriction. Additionally, options or SARs may be issued by any entity in a chain of organizations, all with a controlling interest in another organization, beginning with the parent organization and ending with the employee’s employer on the grant date. However, the rules do not appear to permit parent employees to be issued options or SARs in subsidiary stock except in connection with a corporate transaction. Control is defined as a 50 percent or greater interest, although this percentage may be reduced to 20 percent if legitimate business criteria are met.

This legitimate business criteria rule, which is geared primarily to grants in joint ventures, is fairly flexible. However, the final regulations added an anti-abuse rule, enabling the IRS to determine that a grant was deferred compensation rather than the result of a true increase in the company’s value.

Under the final regulations, options or SARS may be issued based on any class of common stock.

How to Determine Fair Market Value – Nonpublic Companies
Nonpublic companies generally may use any reasonable valuation methodology. A reasonable valuation must be based on an independent appraisal and a generally applicable repurchase formula (applicable for both compensatory and noncompensatory purposes) that would be treated as FMV under section 83. For illiquid stock of a start-up corporation, a qualified individual must perform the valuation at a time when neither a change-in-control event nor a public stock offering is anticipated. This presumption would apply to start-ups that do not anticipate a change in control within the next 90 days or an initial public offering within the next 180 days.

How to Determine Fair Market Value – Public Companies
For public companies, the value should be based on the current stock market price. This may be the average selling price during a specified period no more than 30 days before or 30 days after the grant date, and the commitment to grant the right based on the average selling price must be irrevocable before the specified period begins. To satisfy this requirement, the employer must designate the recipient, the number of shares he or she may purchase and the method for determining the exercise price, including the averaging period.

Other Equity-Based Compensation
The final regulations clarify that a grant of restricted property generally does not constitute deferred compensation under section 409A. So a future right to nonvested property, such as restricted stock, that is subject to a substantial risk of forfeiture is not NQDC. Similarly, the right to elect a bonus or other payment in the form of restricted stock or a FMV stock option, rather than cash, is not subject to section 409A.

This catchall provision governs grants with time-based vesting. For example, a time-vested RSU with a 12-month or longer vesting schedule, which is not considered performance-based compensation because the entire value of the underlying stock grant is paid, would fall under this rule. An initial deferral election would be required within 30 days after the grant date, provided that the election was made at least 12 months before the service period ended.

The final regulations generally treat extensions of the exercise period of a stock right as an additional deferral feature. However, extending an option exercise period is not considered an additional deferral feature or a modification as long as the exercise period is within the earlier of either the original maximum option term or 10 years from the original grant date. Similarly, extending the exercise period for an “underwater” option is allowed. Companies also may convert from options to SARs (and vice versa) after the instrument has been issued, as long as they meet the requirements for modifying the exercise period.

The rules prohibit the deferral of stock option gains unless the deferral election is made when the option is first awarded.

In converting equity in a corporate transaction, companies generally may substitute options with the same intrinsic value. The recipient of the substituted nonstatutory stock option need not be employed by the successor entity. This rule provides additional flexibility to issue appropriate equity in a corporate spin-off.

Although dividend rights on options are rare, the right to a payment of accumulated dividend equivalents at the time of the exercise generally will be treated as a reduction in the exercise price, making the option subject to section 409A. Companies may still distribute these dividends when they are otherwise paid to shareholders, or accumulate dividends and pay them at a fixed date or as the right to the underlying option vests.

Notice 2005-1 still applies to partnership interests and guaranteed payments. Essentially, taxpayers should apply the principles applicable to options or SARs to equivalent rights with respect to partnership interests. Guaranteed payments are subject to the same deferral form and timing rules as any other NQDC.

Plans Linked to Qualified Plans
The final regulations permit qualified supplemental executive retirement plans (QSERPs) to shift NQDC accruals to a qualified defined benefit plan or a broad-based foreign retirement plan. A SERP integrated with either type of pension plan will continue to meet section 409A, regardless of amendments to the qualified plan that increase or decrease benefits under the SERP, as long as:

• No change is made to the time or form of a payment under the NQDC plan.
• The NQDC deferrals do not exceed the change in the amounts deferred under the qualified plan.

Certain actions or inactions under a qualified plan (or broad-based foreign retirement plan) that interacts with an NQDC plan will not violate section 409A to the extent that the change in the NQDC plan does not exceed the change in the deferrals under the qualified plan for:

• An employee’s election whether to receive a subsidized benefit or an ancillary benefit under the qualified plan
• The amendment of a qualified plan to add or remove a subsidized benefit or an ancillary benefit, or to freeze or limit future accruals of benefits under the qualified plan

The final regulations continue to endorse some NQDC plans that interact with a 401(k) plan to the extent employee changes in 401(k) plan elective deferrals do not either:

• Increase deferrals under all NQDC plans to more than the 402(g) limit for that year
• Cause the matching amounts to the NQDC to exceed 100 percent of the matching amounts that would be provided under the qualified plan, absent any plan-based restrictions to reflect limits on qualified plan contributions under the Code

Severance Plans
Separation pay plans are not subject to section 409A, so distributions may be immediate. In an important change, the right to a gross-up payment for taxes payable under section 280G constitutes separation pay that may be paid immediately.

Several plan designs are considered separation pay plans:

• Collectively bargained separation pay plans that are:
  • Part of an agreement that the Secretary of Labor determines to be a collective bargaining agreement
  • The subject of arm’s-length negotiations between employee representatives and one or more employers
• Separation pay for an involuntary termination or under a window program for amounts less than twice annual compensation (or, if less, twice the limit on annual compensation for qualified plans under section 401(a)(17)), as long as the compensation is paid by the end of the second calendar year after the termination year

A good-reason termination is subject to the general restrictions on involuntary terminations or window programs described above. Good-reason terminations are considered involuntary separations only if employer actions create a material negative change in the employment relationship. Under a safe harbor, payments are considered to be for good-reason terminations if:

1. The employee separates from service within one year after the good-reason condition occurs.
2. The amount, time and form of payment for the separation are identical to the amount, time and form of payment upon an involuntary separation from service.
3. The employer is notified of the good-reason condition within 90 days and has at least 30 days to remedy the condition.

Plan Defined
All same-category plans covering a single participant must be aggregated as a single plan. The nine plan categories are: elective account balance plans, nonelective account balance plans, nonaccount balance plans, split-dollar life insurance arrangements, reimbursement plans, stock rights that constitute NQDC, separation pay plans, foreign plans and amounts deferred under any other plan.

A violation of section 409A in one plan would cause all plans in the same category to be in violation. This also prevents participants from taking advantage of the 30-day grace rule to make a new deferral election when they move from one plan to another in the same category.

Under the final regulations, a 409A-compliant plan must be documented. The plan document must specify, at the time an amount is deferred, the amount the employee has a right to be paid (or for amounts determined under an objective, nondiscretionary formula, the terms of such formula), and the payment schedule or payment triggers.

The plan must also require a six-month delay for payments at separation of service to key employees and, if applicable, specify the time by which an irrevocable deferral election is required. The final regulations also provide that a plan provision that purports to nullify noncompliant plan terms is disregarded, thus rendering a popular drafting technique unworkable.

Rules for Tax-Exempts and Governmental Plans
Under the final regulations, 457(f) plans must meet the provisions of both section 457(f) and section 409A. As noted above, noncompete agreements are ignored in determining when a substantial risk of forfeiture lapses under section 409A. For purposes of the short-term deferral rule, an amount is considered paid upon being included in income under section 457(f). The right to earnings on amounts that have previously been included under 457(f) is deferred compensation under section 409A. The IRS will likely provide additional clarification on the definition of substantial risk of forfeiture under section 457(f).

Miscellaneous Plan Designs
The final rules exempt indemnification for expenses arising from a legal claim for damages related to the employee’s service from section 409A. Similarly, a right to liability insurance coverage providing for such payments is not considered NQDC.

The right to a tax-exempt benefit, such as health coverage exempt under section 105, is not subject to section 409A. Taxable reimbursements of expenses generally are subject to section 409A; however, the final regulations added several exceptions:

• Reimbursement of medical expenses during the COBRA availability period
• Reimbursement of reasonable outplacement and moving expenses made by the end of the third year (or the second year for in-kind benefits) after the separation-from-service year
• Other reimbursements or in-kind benefits as long as the plan provides for reimbursements during an objectively prescribed period, the reimbursement does not affect the amount available for later years and the reimbursement is paid by the end of the year following the expense. For example, a plan may reimburse three years of annual club dues but may not make one $30,000 payment for three years worth of dues.
• Settlements or awards (and attorneys’ fees) arising from bona fide legal claims, even if they are treated as compensation
• Promised benefits consisting solely of educational assistance provided solely for the employee’s education

A right to reimbursement for a tax gross-up is NQDC, but to meet the requirements for a fixed time and form of payment, it must be reimbursed by the end of the employee’s taxable year after the year the taxes were paid. The same timing rule applies to reimbursements for settlements of employee tax audits.

Expatriates and Nonresident Aliens
U.S. citizens or resident aliens working abroad are not subject to section 409A if the NQDC constitutes foreign-earned income paid to a qualified individual under section 911. This exemption applies only to employees who are ineligible for a qualified employer plan. In addition, section 409A does not apply to U.S. citizens who work overseas and whose nonelective deferrals of foreign income to broad-based foreign retirement plans meet the section 415 limits. Finally, section 409A does not apply to tax-equalization payments (even for U.S. taxes that exceed foreign taxes) made before the end of the second calendar year after the participant’s U.S. tax return is due or after the deadline for filing foreign tax returns.

For green-card holders, section 409A does not apply to deferrals within the section 402(g) limit made by a nonresident alien under a broad-based foreign retirement plan. For non-green-card holders, section 409A does not apply to deferrals under a foreign plan. A bona fide resident of a U.S. possession who participates in a broad-based foreign retirement plan is not subject to 409A. If substantially all the active participants are bona fide residents of a possession, the plan is treated as a broad-based foreign retirement plan, so that U.S. citizens and resident aliens may be eligible for the more limited exclusion for participation in a foreign retirement plan.

Grandfather Rules
Grandfathered deferrals are amounts deferred in taxable years beginning before January 1, 2005, to the extent the plan was not materially modified after October 3, 2004. An amount is considered deferred before January 1, 2005, if the employee had a legally binding right to the amount, and it was earned and vested as of December 31, 2004. A right to an amount is earned and vested once the amount is not subject to either a substantial risk of forfeiture or a requirement to perform further services.

In account balance plans, grandfathered amounts include all account balances earned and vested, as well as the present value of any earned and vested right to future account credits, even if such amounts were not credited to the account as of December 31, 2004. For vested equity-based compensation, grandfathered amounts generally equal the payment that would be available if the right had been exercised as of December 31, 2004, and any earnings on that amount.

In nonaccount balance plans, grandfathered amounts equal the present value as of December 31, 2004, of the amount to which employees would have been entitled had they voluntarily terminated services without cause on that date and received the maximum benefits available from the plan on the earliest possible date. In later calendar years, the grandfathered amount may increase to the present value of the benefit the employee becomes entitled to, determined under the plan as of October 3, 2004, disregarding any services rendered after December 31, 2004, or any other events affecting benefit entitlement or amounts (other than the participant’s survival or an election of the time or form of benefit). Any actuarial assumptions and methods that were reasonable on December 31, 2004, may be used in later years to determine the grandfathered amount.

A material modification to a grandfathered plan may make the plan subject to section 409A. Changing a notional investment measure or adding an investment measure that qualifies as a predetermined actual investment with a reasonable rate of interest is not a material modification. In addition, a plan amendment to honor payments under a domestic relations order is not a material modification.

If a non-grandfathered portion of the plan complies with section 409A, and a material modification subjects the grandfathered portion to section 409A, the material modification itself generally does not trigger a violation.

¹Nomenclature: Although the final regulations use the terms service provider and service recipient because 409A applies to both employees and non-employees working for an organization or individual, this article uses the terms employee and employer throughout.

June 2007