Title 26 — Internal Revenue CodeRelease 119-73not60
§457A Nonqualified Deferred Compensation From Certain Tax Indifferent Parties
Title 26 › Subtitle Subtitle A— Income Taxes › Chapter 1— NORMAL TAXES AND SURTAXES › Subchapter E— Accounting Periods and Methods of Accounting › Part II— METHODS OF ACCOUNTING › Subpart B— Taxable Year for Which Items of Gross Income Included › § 457A
Summary
If you get pay that was put off under a deferred-pay plan from certain foreign or tax‑indifferent employers, you must count that pay as income when you no longer could lose it. If the amount is not known then, you must count it when it becomes known and also pay interest plus a penalty equal to 20 percent of the amount. The interest is the normal underpayment rate from section 6621 plus 1 percentage point, measured from the year the pay was first deferred or when the risk of losing it ended, whichever is later. If you are actually paid within 12 months after the employer’s tax year in which the risk ended, it is not treated as deferred. A special rule says pay tied only to gain on a single investment asset stays at risk until that asset is sold. The tax official can write rules to carry out and, when needed, deny the “at‑risk” treatment. Key terms: “nonqualified entity” — certain foreign corporations or partnerships with the tax situations described above; “nonqualified deferred compensation plan” — the kind defined in section 409A, plus plans that pay based on equity appreciation.
Full Legal Text
Title 26, §457A
Internal Revenue Code — Source: USLM XML via OLRC
(a)Any compensation which is deferred under a nonqualified deferred compensation plan of a nonqualified entity shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation.
(b)For purposes of this section, the term “nonqualified entity” means—
(1)any foreign corporation unless substantially all of its income is—
(A)effectively connected with the conduct of a trade or business in the United States, or
(B)subject to a comprehensive foreign income tax, and
(2)any partnership unless substantially all of its income is allocated to persons other than—
(A)foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax, and
(B)organizations which are exempt from tax under this title.
(c)(1)If the amount of any compensation is not determinable at the time that such compensation is otherwise includible in gross income under subsection (a)—
(A)such amount shall be so includible in gross income when determinable, and
(B)the tax imposed under this chapter for the taxable year in which such compensation is includible in gross income shall be increased by the sum of—
(i)the amount of interest determined under paragraph (2), and
(ii)an amount equal to 20 percent of the amount of such compensation.
(2)For purposes of paragraph (1)(B)(i), the interest determined under this paragraph for any taxable year is the amount of interest at the underpayment rate under section 6621 plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture.
(d)For purposes of this section—
(1)(A)The rights of a person to compensation shall be treated as subject to a substantial risk of forfeiture only if such person’s rights to such compensation are conditioned upon the future performance of substantial services by any individual.
(B)(i)To the extent provided in regulations prescribed by the Secretary, if compensation is determined solely by reference to the amount of gain recognized on the disposition of an investment asset, such compensation shall be treated as subject to a substantial risk of forfeiture until the date of such disposition.
(ii)For purposes of clause (i), the term “investment asset” means any single asset (other than an investment fund or similar entity)—
(I)acquired directly by an investment fund or similar entity,
(II)with respect to which such entity does not (nor does any person related to such entity) participate in the active management of such asset (or if such asset is an interest in an entity, in the active management of the activities of such entity), and
(III)substantially all of any gain on the disposition of which (other than such deferred compensation) is allocated to investors in such entity.
(iii)Paragraph (3)(B) shall not apply to any compensation to which clause (i) applies.
(2)The term “comprehensive foreign income tax” means, with respect to any foreign person, the income tax of a foreign country if—
(A)such person is eligible for the benefits of a comprehensive income tax treaty between such foreign country and the United States, or
(B)such person demonstrates to the satisfaction of the Secretary that such foreign country has a comprehensive income tax.
(3)(A)The term “nonqualified deferred compensation plan” has the meaning given such term under section 409A(d), except that such term shall include any plan that provides a right to compensation based on the appreciation in value of a specified number of equity units of the service recipient.
(B)Compensation shall not be treated as deferred for purposes of this section if the service provider receives payment of such compensation not later than 12 months after the end of the taxable year of the service recipient during which the right to the payment of such compensation is no longer subject to a substantial risk of forfeiture.
(4)In the case of a foreign corporation with income which is taxable under section 882, this section shall not apply to compensation which, had such compensation been paid in cash on the date that such compensation ceased to be subject to a substantial risk of forfeiture, would have been deductible by such foreign corporation against such income.
(5)Rules similar to the rules of paragraphs (5) and (6) of section 409A(d) shall apply.
(e)The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations disregarding a substantial risk of forfeiture in cases where necessary to carry out the purposes of this section.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2018—Subsec. (d)(4). Pub. L. 115–141 substituted “case of a foreign” for “case a foreign” and “been paid” for “had been paid”.
Statutory Notes and Related Subsidiaries
Effective Date
Pub. L. 110–343, div. C, title VIII, § 801(d), Oct. 3, 2008, 122 Stat. 3931, provided that: “(1) In general.—Except as otherwise provided in this subsection, the
Amendments
made by this section [enacting this section and amending section 26 of this title] shall apply to amounts deferred which are attributable to services performed after December 31, 2008. “(2) Application to existing deferrals.—In the case of any amount deferred to which the
Amendments
made by this section do not apply solely by reason of the fact that the amount is attributable to services performed before
January 1, 2009, to the extent such amount is not includible in gross income in a taxable year beginning before 2018, such amounts shall be includible in gross income in the later of—“(A) the last taxable year beginning before 2018, or “(B) the taxable year in which there is no substantial risk of forfeiture of the rights to such compensation (determined in the same manner as determined for purposes of section 457A of the Internal Revenue Code of 1986, as added by this section). “(3) Accelerated payments.—No later than 120 days after the date of the enactment of this Act [Oct. 3, 2008], the Secretary shall issue guidance providing a limited period of time during which a nonqualified deferred compensation arrangement attributable to services performed on or before
December 31, 2008, may, without violating the requirements of section 409A(a) of the Internal Revenue Code of 1986, be amended to conform the date of distribution to the date the amounts are required to be included in income. “(4) Certain back-to-back arrangements.—If the taxpayer is also a service recipient and maintains one or more nonqualified deferred compensation arrangements for its service providers under which any amount is attributable to services performed on or before
December 31, 2008, the guidance issued under paragraph (4) shall permit such arrangements to be amended to conform the dates of distribution under such arrangement to the date amounts are required to be included in the income of such taxpayer under this subsection. “(5) Accelerated payment not treated as material modification.—Any amendment to a nonqualified deferred compensation arrangement made pursuant to paragraph (4) or (5) shall not be treated as a material modification of the arrangement for purposes of section 409A of the Internal Revenue Code of 1986.”
Reference
Citations & Metadata
Citation
26 U.S.C. § 457A
Title 26 — Internal Revenue Code
Last Updated
Apr 5, 2026
Release point: 119-73not60