Law Firm Raises Concerns Regarding Nonqualified Deferred Compensation Plan Guidance

Dear Sirs and Mesdames;

Pursuant to the request for comments in Notice 2009-8, 2009-4 I.R.B. 347, this letter contains comments on certain issues under section 457A of the Internal Revenue Code.¹ The issues addressed in this letter assume that the only relevant service recipient (and obligor of compensation) is a "nonqualified entity" within the meaning of section 457A(b). We hope to submit a separate comment letter that addresses the potential applicability of section 457A to employees of multinational corporations who provide services for the direct or indirect benefit of members of an affiliated group that are or may be nonqualified entities.

Although the issues addressed in this letter involve circumstances that we have encountered in counseling clients on the effect of section 457A, this letter reflects the views of the undersigned and Caplin & Drysdale and is not submitted on behalf of any client or clients of the firm.

If section 457A(d)(1)(A) were interpreted to mean that compensation is not subject to a substantial risk of forfeiture for purposes of section 457A if the service provider may attain the right to such compensation other than through the future performance of substantial services, then compensation from a nonqualified entity that would become payable or vested upon such an event would be currently taxable under section 457A. For example, an employee of a nonqualified entity who would become entitled to severance pay equal to one year's salary only in the event of involuntary discharge would be currently taxable on the value of the severance pay. Similarly, under this interpretation, an employee of a nonqualified entity who was entitled to deferred compensation conditioned on the completion of ten years of service, or upon earlier death, disability, or change in control, would be currently taxable on the value of the deferred compensation. This interpretation would give absurdly harsh, and we believe clearly unintended, effect to section 457A, for it would cause employees and other service providers to be taxable on compensation that they had no foreseeable likelihood of receiving or that, except for an unlikely intervening event, they would forfeit if they did not perform substantial future services.

Accordingly, we have interpreted the statute to mean that compensation is conditioned on the future performance of substantial services -- and thus subject to a substantial risk of forfeiture under section 457A(d)(1)(A) -- if it will be forfeited if the service provider voluntarily ceases to perform future services. Thus, an employee's potential right to severance payments would be subject to a substantial risk of forfeiture if the employee's resignation would eliminate the potential right to severance payments. Similarly, if deferred compensation subject to a future service condition would be forfeited upon resignation, the fact that the deferred compensation would become vested upon death, disability, or a change in control prior to separation from service would not prevent recognition of the service-contingent substantial risk of forfeiture, Although we believe this is the only reasonable interpretation of section 457A(d)(1)(A), it would be helpful if this interpretation were confirmed in published guidance.

We, and we assume others, have advised our clients that section 457A(c) should be inapplicable to such a fee arrangement because, to the extent the future compensation is undeterminable in amount, the service provider's right to such fees is contingent on the future performance of services; conversely, the only portion of the compensation that is not contingent on the future performance of services is the determinable amount payable on termination of the management agreement. Although we do not believe there is any other reasonable interpretation of the statute, it would be helpful to have this interpretation confirmed by regulations or other published guidance under section 457A.

It is a fundamental principle of our income tax system, and essential to its administrability, that gross income be determined and determinable no later than the end of the annual accounting period. See Burnet v. Sanford & Brooks Co., 282 U.S. 359 (1931). See also Hillsboro Nat'l Bk V. Comm'r, 460 U.S. 370 (1983); United States v. Lewis, 340 U.S. 590 (1951). Despite the literal language of section 457A(d)(3)(B), we think it is inconceivable that Congress could have intended section 457A(d)(3)(B) to override this fundamental principle and require taxpayers to guess whether vested compensation will become payable in the year following vesting and, if they guess wrong, be required to file an amended tax return and pay deficiency interest or make a claim for refund for an earlier taxable year.

Moreover, under a literal reading of section 457A(d)(3)(B), the interplay between sections 409A and 457A would have uncertain and nonsensical implications. Q/A-26 of Notice 2009-8 states that the right to a deferred amount to which section 457A applies generally will not constitute a deferred amount under section 409A because the amount will be considered "paid" for purposes of the section 409A short-term deferral rule no later than the time at which the right to the amount is no longer subject to a substantial risk of forfeiture. Q/A-26 further provides that payment of a deferred amount "during the service provider's taxable year in which such amount becomes includible in income under section 457A will not constitute an impermissible acceleration of a payment under § 409A(a)(3)."⁴ Thus, if it is known that an amount is includible in gross income under section 457A in the year of vesting, an employer may pay the amount necessary to cover the employee's tax liability without violating section 409A.

But, if the employer guesses wrong, and deferred compensation that becomes vested in a given year becomes payable and is paid in the following year by reason of an unexpected separation from service, does Q/A-26 mean that the payment for taxes in that circumstance would constitute a prohibited acceleration under section 409A(a)(3) because no amount would then have been includible in gross income under section 457A? Even if the employer guesses right, such a payment for taxes would itself be a short-term deferral under a literal application of section 457A(d)(3)(B) and thus not includible in gross income under section 457A in the year of vesting. Does Q/A-26 mean that section 409A would nonetheless be inapplicable because the payment was made with respect to an amount that would have been includible in gross income under section 457A had the payment not been made? And by providing relief from section 409A(a)(3) only for payments made in the year of vesting, does Q/A-26 mean to imply that payments made in the following year when the service provider must file a tax return would violate section 409A(a)(3)? There is clearly no justification for imputing a section 409A violation by reason of the timing of such a payment,⁵ but if such a payment is made in the following year, it would be a short-term deferral under the literal terms of section 457A(d)(3)(B) which would be includible in gross income in the year of payment and thereby reduce the amount includible in gross income under section 457A in the preceding year.

Needless to say, even if the tax consequences of all of the various factual permutations could be spelled out with greater clarity, none of this makes a particle of sense. In the following section of this letter, we urge the Treasury and Service to issue guidance which provides that section 409A does not apply to the compensation obligations of nonqualified entities. In our view, any rationale for preserving the potential applicability of section 409A to the compensation obligations of nonqualified entities is far outweighed by the anomalies and inequities that would pose. If the Treasury and the Service adopt that recommendation, that will eliminate the bizarre and perilous section 409A implications of section 457A(d)(3)(B), However, even if the section 409A risks are completely eliminated, taxpayers still will not know whether deferred compensation payable by a nonqualified entity is includible in gross income under section 457A in the year of vesting (as defined for purposes of section 457A), if there is a chance that it may be actually paid before the end of the service recipient's taxable year following the service recipient's taxable year in which vesting occurs. Conversely, compensation that is expected or scheduled to be paid in the year following the year of vesting, and hence not taxable under section 457A, could become subject to section 457A if payment were delayed beyond that year.

Assuming that the Treasury and the Service are not free to re-write section 457A(d)(3)(B) and there is no foreseeable prospect of Congress doing so, regulations or other guidance cannot repair this flawed statutory provision in a way that makes complete sense. However, as a matter of principle, practicality, and fairness, a taxpayer should not be required to file an amended return for a taxable year by reason of events that occur following the close of that taxable year. Accordingly, we recommend that guidance under section 457A allow a service provider to apply section 457A(d)(3)(B) based on the terms of the service provider's contractual payment rights as of the close of the taxable year which includes the taxable year of the service recipient in which vesting occurs, without regard to events occurring after the close of that taxable year of the service provider.

Thus, if as of the last day of the service provider's taxable year in which vesting occurs, the service provider is not contractually entitled to receive payment before the close of the service recipient's taxable year following the service recipient's taxable year in which vesting occurred, the service provider should be permitted to treat the amount of the vested compensation as gross income under section 457A and not be required to include such amount (other than increments) in gross income in any later year, even if such compensation or a portion thereof later becomes a short-term deferral under the literal terms of section 457A(d)(3)(B), This would not prevent a taxpayer from relying on the terms of the statute and reporting such compensation in the year of payment if it became a short-term deferral under section 457A(d)(3)(B) and filing a claim for refund if the compensation had been reported as section 457A income in the year of vesting, but it would not require the taxpayer to do so.

Conversely, if a service provider is contractually entitled to receive payment before the end of the service recipient's taxable year following the service recipient's taxable year in which vesting occurs, the service provider should be entitled to treat such compensation as a short-term deferral under section 457(d)(3)(B) that is not included in gross income under section 457A, even if payment is ultimately delayed beyond the section 457A(d)(3)(B) short-term deferral period. Thus, in that circumstance, the service provider would not be required to file an amended return and report section 457A income in the year of vesting. If the taxpayer agreed or consented to payment beyond the section 457A(d)(3)(B) short-term deferral period, it would be reasonable to treat the compensation as includible in gross income under section 457A in the year of such agreement or consent. If the taxpayer did not agree or consent to such later payment, the compensation would be includible in the service provider's gross income in accordance with the service provider's regular method of accounting.

Notice 2009-8 further indicates that section 409A may somehow apply to annual earnings credited to (including annual growth in the present value of) vested deferred compensation payable by a nonqualified entity. Q/A-24 states that pending further guidance, such amounts are to be treated as payments in accordance with a fixed schedule for purposes of section 409A. Q/A-26 goes on to provide that "payment timing issues may arise" under section 409A to the extent such amounts would otherwise have been accumulated and paid at a later date. However, since such earnings increments amounts are fully includible in gross income under section 457A as of the time they are recognized as "amounts deferred" under section 409A,⁷ we do not understand how any part of such earnings can separately (or later) be includible in gross income under section 409A.⁸ If there is no incremental amount that can at anytime be included in gross income under section 409A, then section 409A cannot apply. In short, we believe that section 457A effectively supersedes section 409A with respect to the taxation of earnings on vested deferred compensation payable by a nonqualified entity and urge that future guidance confirm this point.⁹

Beyond clarifying the inapplicability of section 409A to such earnings, we strongly urge the Treasury and the Service to reconsider whether there is any justification for making section 409A applicable or potentially applicable to any compensation payable by a nonqualified entity. Section 457A has effectively eliminated the opportunity for U.S. service providers to have tax-deferred compensation from nonqualified entities, except for the limited period of deferral permitted under section 457A(d)(3)(B) and the deferral permitted until 2017 for deferred compensation attributable to pre-2009 services.¹⁰ Thus, in the case of compensation payable by a nonqualified entity, there is virtually no opportunity for taxpayers to exercise the kind of control over the timing of tax-deferred compensation that section 409A was intended to police. It would be one thing if the overlap or potential overlap of these Code provisions was a harmless quirk, but it is not. The potential applicability of section 409A to compensation payable by a nonqualified entity poses risks of section 409A violations that defy common sense and that will inevitably be the source of legitimate misunderstanding by taxpayers. The greatest, and most nonsensical, source of those risks is the uncertain applicability of the section 457A short-term deferral exception under section 457A(d)(3)(B), as discussed in the preceding section of this letter.

But even where it is clear that section 457A will not apply by reason of section 457A(d)(3)(B), there is a needless risk of technical section 409A violations under customary billing arrangements that currently fail to qualify as short-term deferrals for section 409A purposes. We struggled to achieve a sensible and workable solution to such a problem even before section 457A was enacted. The problem involves investment managers who are calendar-year taxpayers that provide investment management services for unrelated nonqualified entities over which they have no legal or de facto control. Certain of our investment management clients have dozens of such service relationships with unrelated nonqualified entities. In almost all cases, our clients had ceased deferring any portion of their compensation from such entities before the enactment of section 457A. They invoice the entities for their fees on a quarterly, semi-annual or annual basis and have every incentive to be paid for their services as soon as possible and seek to do so. However, because the amount of their fees is typically dependent on the amount of assets under management, investment performance, or a combination thereof, it usually requires a number of weeks after each billing period before fee amounts can be determined and invoices sent. Under their agreements with the entities, the managers are typically entitled to payment within a period such as 60 days or less after their invoices are sent to the service recipient.

As a result, the investment managers' fees for periods ending December 31 (whether that is the end of a quarterly, semi-annual, or annual billing period) are commonly payable and paid after March 15 of the following year because invoices are sent after January 14. In the absence of disputes, such fees are paid long before the end of the following year. Nonetheless, these fees do not presently constitute short-term deferrals for purposes of section 409A and thus are technically classified as amounts deferred under a nonqualified deferred compensation plan subject to section 409A.¹¹ Assuming that the reporting requirement of section 6041(g)(1) will not apply to (or be enforced against) foreign nonqualified entities, the fact that such year-end fees are technically classified as deferred compensation subject to section 409A is not itself a significant concern.

What is a significant concern, however, is that such post-March 15 payments would be deemed to violate 409A unless there has been a timely "deferral election" establishing the time and form of payment of the "deferred compensation." See Reg. § 1.409A-2(a). If a service provider is not obligated to bill its clients by any particular date, the clients are not obligated to pay the fees by any identifiable date, and thus there would appear to be no timely deferral election. To minimize the risk that such customary billing arrangements might be treated as technical violations of section 409A, we advised our clients to amend their investment management agreements to obligate themselves to invoice their clients within a specified number of days (such as 60) after the end of each billing period, so that the combination of that obligation and the client's payment obligation within a specified number of days following the receipt of an invoice contractually establishes a payment date during the year following each December 31, such that payment within that year will comply with section 409A.¹² Assuming that this form of billing obligation serves to avert a technical violation of section 409A, it is nonetheless an artificial solution to a compliance issue that, in our view, should not exist and that similarly situated taxpayers may understandably fail to recognize and address.

The simplest and cleanest way to eliminate the risk of all such technical section 409A violations in the case of compensation payable by a nonqualified entity would be for the Treasury and the Service to issue guidance that provides that section 409A does not apply to the compensation obligations of nonqualified entities (other than deferred compensation attributable to pre-2009 services for taxable years prior to 2017). Again, the enactment of section 457A has made the purposes of section 409A almost entirely irrelevant to compensation payable by a nonqualified entity, leaving its potential applicability as a "trap for the unwary" in very limited circumstances. Moreover, even if there is some thread of an argument that section 409A should have limited applicability to the compensation obligations of nonqualified entities, we do not think that can justify the confusion and inequities that similar to the treatment of nonresident clients and certain other service providers under the section 409A regulations, we recommend guidance that provides that section 409A does not apply if the plan sponsor was a nonqualified entity at the time the legally binding right to the compensation first arose or, if later, the time that the right to the compensation was no longer subject to a substantial risk of forfeiture.¹³

We recognize that the Joint Committee Staff explanation of section 457A states that it applies in addition to the requirements of section 409A. However, the Joint Committee explanation is not official legislative history, and we question whether the Joint Committee Staff had the opportunity to consider the "catch 22" implications of this statement. As evident from the foregoing discussion of the section 457A(d)(3)(B), the operation and implications of section 457A were not carefully considered by Congress. While the Treasury and the Service cannot modify the statute itself, there is clearly authority to define the boundary between sections 457A and 409A in a fair and coherent way, and we believe it is incumbent on the Treasury and the Service to do so if affected taxpayers are expected to understand and comply with their tax reporting obligations. The most straightforward and unambiguous way to disentangle sections 457A and 409 is for the Treasury and the Service to adopt guidance that provides that section 409A does not apply to the compensation obligations of nonqualified entities.

As a more circuitous alternative, the short-term deferral period under section 409A could be extended by nine and one-half months in the case of compensation payable by a nonqualified entity. This would make section 409A inapplicable to compensation payable and paid by the end of the twelve-month period beginning on the last day of the later of the service provider's or the nonqualified entity's taxable year in which the compensation becomes vested. The practical effect of this modification of the section 409A short-term deferral rule, coupled with the taxing effect of section 457A for compensation paid by a nonqualified entity after the section 457A short-term deferral period, would be to make section 409A inapplicable to compensation payable by a nonqualified entity in all instances.¹⁴ Because the short-term deferral exception under section 409A is nonstatutory, there is plainly authority under section 409A(e) to modify that definition with respect to compensation payable by a nonqualified entity.

At a minimum, we urge that compensation payable by a nonqualified entity be treated as an exempt short-term deferral under section 409A where the compensation is paid by the end of the service provider's taxable year following its first taxable year in which the compensation is no longer subject to a substantial risk of forfeiture (within the meaning of section 457A) and is not paid under an agreement that provides for payment at any later date. This modification would extend the short-term deferral period under section 409A by a maximum of 9 1/2 months, less where the service recipient has a different taxable year than the service provider, or the compensation is subject to a substantial risk of forfeiture that is recognized under section 409A but not under section 457A. In our comments on the proposed regulations under section 409A (comment letter dated March 29, 2006), we had urged that the proposed definition of a short-term deferral under section 409A be modified to include payments made by the close of the service provider's taxable year following the taxable year in which the service provider's right to the compensation ceased to be subject to a substantial risk of forfeiture. We did not understand, and still do not understand, why the date of payment within the same taxable year of a service provider should have any bearing on whether compensation is classified as deferred compensations for the service provider's income tax purposes.¹⁵ Assuming that the definition of short-term deferrals will not now be generally changed for purposes of section 409A, we cannot see that any legitimate purpose is served by preserving the potential applicability of section 409A to compensation that is payable and paid by a nonqualified entity during the taxable year of the service provider after the year in which the compensation becomes vested.¹⁶

The enactment of section 457A poses daunting interpretive challenges that do not need to be compounded by preserving the possibility that section 409A may technically apply and be violated by service providers who receive compensation from nonqualified entities to which section 457A does not apply. With so little opportunity for tax deferral at stake, we urge the Treasury and Service to do whatever is possible to simplify this pointlessly technical and confusing subject.

We recognize that there may be a substantial period of time before comprehensive regulations are proposed under section 457A and hope that this and the other issues addressed in this letter (as well as issues raised by others) can be addressed in further interim guidance that modifies and clarifies Notice 2009-8. In particular, the Treasury and the Service may need additional time to address the difficult issues posed by the potential applicability of section 457A to U.S. employees of multinational corporations, including the development of more workable rules (including possible safe harbors) for purposes of determining when the deferred compensation rights of a U.S. employee are and are not subject to tax under section 457A(a) when the employee provides services for the direct or indirect benefit of numbers of an affiliated group that may be classified as nonqualified entities. In the meantime, we would urge the issuance of further interim guidance that clarifies the application of section 457A (and its relationship to section 409A) where it is clear that a U.S. service provider's compensation rights are attributable to services for a nonqualified entity.

² For example, assume that the fund manager "earns" $9X for the fund's performance in the first year of the arrangement ("Year 1"), with $3X of that amount payable in Year 2, $3X (reduced by one-third of the applicable percentage of Year 2 losses, if any) payable in Year 3, and $3X (reduced by one-third of the applicable percentage of Year 2 and Year 3 losses, if any). However, if the agreement terminated at the end of Year 1, the manager would be entitled to a payment of $9X in year 2.

³ Nonqualified entities that are foreign corporations may have no awareness of section 457A and have no U.S. tax reporting obligations with respect to U.S. service providers, and thus a service provider may be on its own to determine the applicability of section 457A, including the service recipient's taxable year. The "taxable year" of such a foreign corporation is presumably to be determined under the Code, not by reference to foreign tax law, especially since a foreign corporation is a nonqualified entity under section 457A only if it is not subject to a comprehensive foreign income tax. Guidance under section 457A should confirm that section 441(b) applies for this purpose, even if the nonqualified entity does not otherwise have a taxable year that is relevant for U.S. tax purposes. Under section 441(b), the taxable year of such a foreign corporation would presumably be its fiscal year. However, since there may be cases where the service provider is unable to determine the section 441(b) taxable year of the nonqualified entity, consideration should be given to a rule that would allow the service provider to treat the service recipient as having the same taxable year as the service provider for purposes of section 457A.

⁴ Q/A-26 of Notice 2009-8 proceeds to state: "However, plan provisions will still be necessary to address use of the § 457A short-term deferral rule (see Q&A-4)." We assume this enigmatic sentence was not intended to suggest that there is some documentary requirement for a payment to qualify as a short-term deferral for purposes of section 457A, albeit that is the literal implication of the sentence. On the other hand, if the sentence is intended to mean that there are documentary requirements to assure that a section 457A short-term deferral that is not a section 409A short-term deferral does not violate section 409A (see the issue discussed at pages 10 et. seq. infra.), this obscure point underscores our recommendation, as discussed hereinafter, that section 409A be made inapplicable to the compensation obligations of nonqualified entities.

⁵ For example, if a nonqualified entity believes that $100x of compensation that becomes vested on December 31 of Year 1 is includible in the employee's Year 1 gross income under section 457A, and it remits or withholds $40x in respect of the employee's Year 1 income tax liability during Year 2, there would be no justification for treating that as an accelerated payment giving rise to a section 409A violation.

⁶ Assuming a calendar year service provider, the section 457A short-term deferral period would end later than the service provider's taxable year in which the section 409A short-term deferral period ends only if the service recipient and service provider had different taxable years and vesting occurred in a taxable year of the service recipient that ended later than the taxable year of the service provider during which vesting occurred.

⁷See Notice 2009-8, Q/A-15 and Q/A-16; Prop. Reg. § 1.409A-4(b)(2)(i). If the earnings credited under the term of a plan exceeded a reasonable measure of earnings, that would simply mean that a greater amount would be includible in gross income under section 457A in the year of vesting.

⁸ In contrast with the income tax treatment of ineligible deferred compensation plans under section 457(f), there is no opportunity for a service provider to derive tax-deferred earnings on deferred compensation payable by a nonqualified entity. For this reason, it is unclear why Q/A-24 of Notice 2009-8 states that section 409A rules similar to those applicable to arrangements under section 457(f) apply to arrangements covered by section 457A.

⁹ If Notice 2009-8 is intended to suggest that section 409A may be used as a sanction if a service provider fails to report earnings that are properly includible in gross income under section 457A, the same rationale would suggest that section 409A should apply if a service provider fails to report the amount of any deferred compensation that is includible in gross income under section 457A or 457(f) in the year of vesting. However, not only is that contrary to section 1.409A-1(b)(4)(B) of the regulations (which exempts as a short-term deferral the amount includible in gross income under section 457(f)), but more fundamentally, we do not believe that section 409A was enacted or can legitimately be used as a sanction for a failure to report compensation properly includible in gross income under another section of the Code.

¹⁰ While we recommend that section 409A generally be made inapplicable to the compensation obligations of nonqualified entities, the concerns underlying this recommendation do not apply to compensation attributable to pre-2009 services to which section 457A will not apply until taxable years beginning in 2017.

¹¹ Section 409A would have no applicability to such compensation rights if these service relationships were covered by the rule of section 1.409A-1(f)(2)(i), which generally exempts from section 409A compensation payable to independent contractors. However, the exception for investment management services in section 1.409A-1(f)(2)(i) appears to make this exemption inapplicable, regardless of the nature of the relationship between the service provider and the service recipient

¹² This also assures a contractual payment date within the section 409A short-term deferral period for fees earned during the first, second, and third calendar quarters.

¹³See Reg. § 1.409A-1(b)(8)(i) and (ii), which follow this formulation in defining the inapplicability of section 409A to compensation that would be exempt from tax under a treaty compensation earned by a nonresident alien which is not effectively connected with a trade or business in the United States, and in certain other circumstances. This form of exception from section 409A would eliminate the section 409A risks suggested by Q/A-26 of Notice 2009-8, which states that payment timing issues under section 409A may arise if a plan sponsor becomes a nonqualified entity or ceases to be a nonqualified entity before the substantial risk of forfeiture lapses. In the former case, once section 457A becomes applicable to compensation, we can see no reason why section 409A should have continuing applicability. In the latter case, the compensation obligation would not be subject to either section 457A or section 409A if the service recipient ceased to be a nonqualified entity after the legally binding right to the compensation was established. We do not believe such a rule would invite abuse, inasmuch as it is difficult to imagine the circumstance in which taxpayers would have an incentive for a service recipient change its status from being a nonqualified entity to a qualified entity for the purpose of avoiding section 409A. Moreover, absent such a rule, there would be a need to define a window in which compensation agreements that were subject to section 457A could be amended to comply with section 409A, and there would be a significant risk that affected service providers would be unable to get service recipients' agreement to modify their compensation agreements to comply with section 409A or not learn of the change in the service recipient's classification in a sufficiently timely way to modify their agreements.

¹⁴ This assumes that the Service and Treasury concur in our view that section 409A cannot apply to earnings on vested deferred compensation payable by a nonqualified entity because all such earnings are taxable under section 457A as they accrue.

¹⁵ As noted in our March 29, 2006 comment letter, the only antecedents of the 2 1/2 month rule set forth in the section 409A regulations are the rule under section 404 (which relates solely to whether compensation payments by an accrual method service recipient are deductible in the year of accrual or the year of payment), and the optional 2 1/2 month rule of convenience under section 3121(v)(2). On the other hand, the sole statutory precedent for distinguishing nonqualified deferred compensation from current compensation for purposes of service provider taxation was former section 1348(b)(1), which provided that "deferred compensation does not include any amount received before the end of the first taxable year of the recipient in which the right to receive such amount is not subject to a substantial risk of forfeiture (within the meaning of section 83(c)(1))."

¹⁶ Under this modification of the section 409A short-term deferral rule, section 457A might still apply to make such compensation taxable in the year it is earned, if it were paid after the end of the twelve-month period after the end of the service recipient's taxable year in which it was earned. In that case, section 409A would be inapplicable for the additional reason that the inclusion in gross income under section 457A would be treated as a payment in the year of vesting.