As part of the recently enacted Emergency Economic Stabilization Act of 2008 (H.R. 1424), the U.S. Congress established new Internal Revenue Code section 457A, which introduces new limits on the nonqualified deferred compensation plans of certain foreign and other “nonqualif ied” entities. This legislation will impose significant and uncertain burdens on many foreign-based multinationals and their plan participants. Particularly affected will be multinationals based in jurisdictions with which the United States does not have a standard income tax treaty in force (a group that includes many important non-EU, non-NAFTA U.S. trading partners). In addition, depending on how the new rules are interpreted, the rules may create problems for plans of U.S.-based multinationals and their plan participants.

Need for Technical Guidance

The legislation raises a host of unanswered technical issues. Given that plan sponsors need to amend their plans almost immediately in response to this legislation, there is an acute need for guidance.

Important issues left open by the legislation include the following:

  • How the new rules interact with preexisting regimes such as section 409A
  • Which foreign entities in non-treaty jurisdictions are “nonqualified,” a matter that will require the U.S. Treasury and the Internal Revenue Service (IRS) to determine both whether a foreign country’s income tax is “comprehensive” within the meaning of the new statute and whether “substantially all” of an entity’s income is “subject to” such a tax in various scenarios
  • How the rules may (or may not) apply to U.S. persons employed by a U.S. affiliate and participating in a plan maintained by such affiliate, where a “nonqualified” affiliate bears the costs of the deferred compensation (e.g., under an intercompany services agreement or under a secondment arrangement)
  • Whether factors such as the location of the performance of services, or which entity bears the costs of the services, may otherwise affect the potential application of the rules where another entity maintains the plan

Companies potentially affected by the new legislation should move quickly to determine what guidance they need in order to apply the new rules with confidence. In many cases, it will be worth discussing key issues with the Treasury and the IRS as they work to produce the necessary guidance. Possibility of Further Legislative Action

In addition to various technical and interpretative issues that may be addressed via administrative guidance, section 457A also raises a number of issues that may require further legislative action. The legislation as enacted applies to a number of common industry structures and scenarios that are far removed from the rhetoric and policy surrounding the legislation, which focused on certain techniques employed by hedge fund managers. With respect to some of these structures and scenarios, a case can be made that legislative relief from the application of section 457A is appropriate, based on the absence of the supposed tax abuses targeted by the legislation, potential undue burdens of the legislation on particular industries and workforces, or other countervailing policy considerations.


Whether a company faces issues that might be amenable to solution through guidance or issues requiring a legislative solution, the time to act is now. Administrative guidance is expected to be released in early 2009 and the new Congress may move quickly on tax legislation in early 2009 as well.