The IRS has the uncanny ability to complicate just about anything beyond comprehension. Recently, Congress instituted a new section of the code, Section 409A. This new provision is going to be my bread and butter. In a nutshell, the code says that deferred compensation can only be paid on certain events without very, very bad tax penalties (see, I can make it simple). One of those events when compensation can be paid is death. Last year, the IRS released Regulations for the purpose of explaining and offering guidance on these regs. The following is the IRS explanation of what constitutes "death."
Part III – Administrative, Procedural, and Miscellaneous
2008 Application Death Under § 409A to Nonqualified Deferred Compensation Plans
Notice 2007-90
I. PURPOSE
This notice provides additional guidance on the application of a service
recipient’s death under § 409A of the Internal Revenue Code to nonqualified deferred
compensation plans. This guidance includes:
• A more precise definition of death (also known as “separation from life”).
• Presumptions the Service will apply in determining if a service recipient has
experienced a separation from life under § 409A.
• Examples detailing situations that the help illustrate the Treasury’s position on
separation from life.
II. BACKGROUND
Section 409A provides certain requirements applicable to nonqualified deferred
compensation plans. If a plan does not meet those requirements, participants in the
plan are required to immediately include amounts deferred under the plan in income
and pay additional taxes on such income.
The Treasury Department and the IRS issued final regulations under § 409A in
April 2007 (72 Fed. Reg. 19234 (
years beginning on or after
that payment may be made under a nonqualified deferred compensation plan upon a
service provider’s death. Commentators stated that taxpayers anticipate difficulties in
formally determining if a service provider is dead. In addition, a number of
commentators have raised questions regarding the application of the final regulations to
certain types of deaths. This notice is issued in response to these comments and
questions.
III. DEATH
A. In General
For purposes of determining if a service provider (or a service provider’s
beneficiary or estate) is entitled to a payment under a nonqualified deferred
compensation plan on account of the service provider’s death, the Treasury will
consider a service provider to be dead if the service provider’s death meets the criteria
necessary for a separation from life.
B. Separation from Life
1. In General
A service provider separates from life with the service recipient if the service
provider has a termination of all mental and bodily functions. However, the service
provider’s life is treated as continuing intact while the individual is temporarily
unconscious, having an out of body experience, cryogenically frozen or experiencing
another bona fide leave of absence from the individual’s conscious state, if the period of
such leave does not exceed ten minutes, or if longer, so long as the individual retains a
right to regain life and/or reanimation under an applicable contract (with the devil or
otherwise) or other arrangement.
If the period of leave exceeds ten minutes and the individual does not retain a
right to regain life and/or reanimation under an applicable contract or other
arrangement, the death is deemed to occur on the first minute immediately following
such ten-minute period. Notwithstanding the foregoing, where a leave is due to any
medically determinable physical or mental impairment that can be expected to result in
death, where such impairment causes the service provider to be unable to perform the
essential functions of life without mechanical support, a 525,600 minute period of
absence may be substituted for such ten minute period.
2. Termination of Life
A service provider will be deemed to have experienced a separation from life if
he or she experiences a termination of life. Whether a termination of life has occurred is
determined based on whether the facts and circumstances indicate that the service
provider reasonably anticipated (or would have reasonably anticipated) that no further
mental and bodily functions would be performed after a certain date or that the level of
bona fide mental and bodily functions the service provider would perform after such
date (whether with or without mechanical assistance) would permanently decrease to
no more than 20 percent of the average level of bona fide mental and bodily functions
performed (whether with or without mechanical assistance) over the immediately
preceding 36-month period (or the full period of life if the service provider has been
living less than 36 months). Facts and circumstances to be considered in making this
determination include, but are not limited to, whether the service provider continues to
be treated as living for other purposes (such as whether or not he or she continues to
receive a paycheck from the service recipient), whether similarly situated service
providers have been treated consistently by the service recipient, and whether the
service provider is permitted, and realistically available, to perform services for other
service recipients. A service provider is presumed to have separated from life where the
level of bona fide mental and bodily functions performed decreases to a level equal to
20 percent or less of the average level of mental and bodily functions performed by the
service provider during the immediately preceding 36-month period. A service provider
will be presumed not to have separated from service where the level of bona fide mental
and bodily functions performed continues at a level that is 50 percent or more of the
average level of mental and bodily functions performed by the service provider during
the immediately preceding 36-month period. No presumption applies to a decrease in
the level of bona fide mental and bodily functions performed to a level that is more than
20 percent and less than 50 percent of the average level of bona fide mental and bodily
functions performed during the immediately preceding 36-month period. The
presumption is rebuttable by demonstrating that the service provider reasonably
anticipated that as of a certain date the level of bona fide mental and bodily functions
would be reduced permanently to a level less than or equal to 20 percent of the average
level of bona fide mental and bodily functions provided during the immediately
preceding 36-month period or full period of life if the service provider has been alive for
a period of less than 36 months (or that the level of bona fide mental and bodily
functions would not be so reduced). For example, an service provider may demonstrate
that the service provider reasonably anticipated that the service provider would cease
mental and bodily functions, but that, after the original cessation of mental and bodily
functions, a deal made with God (such as in the movie “Heaven Can Wait”) caused the
service provider to return to life. Although the service provider’s return to life may cause
the service provider to be presumed to have continued to live because the service
provider is performing mental and bodily functions at a rate equal to the rate at which
the service provider was performing mental and bodily functions before the termination
of life, the facts and circumstances in this case would demonstrate that at the time the
service provider originally ceased to perform mental and bodily functions, the service
provider reasonably anticipated that the service provider would not perform mental and
bodily functions in the future.
Notwithstanding the foregoing paragraph, a plan may treat another level of
reasonably anticipated permanent reduction in the level of bona fide mental and bodily
functions as a separation from life, provided that the level of reduction required must be
designated in writing as a specific percentage, and the reasonably anticipated reduced
level of bona fide mental and bodily functions must be greater than 20 percent but less
than 50 percent of the average level of bona fide mental and bodily functions provided
in the immediately preceding 36 months. The plan must specify the definition of
separation from life on or before the date on which a separation from life is designated
as a time of payment of the applicable amount deferred, and once designated, any
change to the definition of separation from life with respect to such amount deferred will
be subject to the rules regarding subsequent deferrals and the acceleration of
payments. For purposes of this paragraph, for periods during which a service provider is
experiencing a bona fide absence (as described in section III(B)(2)) and has not
otherwise terminated life pursuant to this paragraph, the service provider is treated as
performing bona fide mental and bodily functions at a level equal to the level of mental
and bodily functions that the service provider would have been required to perform to
receive the compensation. In this regard, the Service recognizes that not all jobs
require the same level of mental and/or bodily functions.
3. Examples
Example 1 – Joanna uses 10% of her brain and 90% of her body on a daily
basis. Joanna gets hit by a truck such that she can only use 2% of her brain and 18%
of her body. If Joanna’s nonqualified deferred compensation plan provides for
payments on separation from life, Joanna is entitled to payment under her nonqualified
deferred compensation plan because she is only providing mental and bodily functions
equal to 20% of the bona fide mental and bodily functions she was performing before
she was hit by a truck.
Example 2 – Pete uses 5% of his brain and 50% of his body on a daily basis.
Pete has struck a deal with the devil such that, in exchange for his soul, Pete retains the
right to regain life after the first two times that he would otherwise separate from life.
Pete gets mauled by a cougar and is not performing any mental and bodily functions for
more than 10 minutes. However, because Pete retains the right to regain life, he has
not experienced a separation from life.
Example 3 – The same facts as Example 2 except that the devil realizes he got a
raw deal because Pete does not have a soul. Because the contract providing Pete the
right to regain life is not valid, even under the laws of hell, Pete no longer has the right
to regain life pursuant to a contract or other arrangement, and therefore experiences a
separation from life at the expiration of the 10-minute period.
VII. DRAFTING INFORMATION
The principal author of this notice is B. L. Zebub of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However,
other personnel from the Treasury Department and the IRS participated in its
development. For further information regarding this notice, contact B.L. Zebub at
(666) 911-4355 (not a toll-free call).
If you made it all the way through that, congratulations. And, yes, it is a joke.
1 comment:
So technically, I was deemed dead within the first minute that the ninth quarter started, since I "experienc[ed]another bona fide leave of absence from the individual’s conscious state" that lasted at least 10 1/2 weeks longer than 10 minutes.
I wonder if I can get out of paying my student loans...
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