Deferred compensation for executives under sec. 409A.

EXECUTIVE SUMMARY

* Virtually all stock option arrangements are potentially regulated by Sec. 409A.

* Sec. 409A provides an exclusive list of permitted distributions; everything else is prohibited.

* The Service has blanket authority to determine permitted accelerated distributions.

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This two-part article discusses how Sec. 409A and the current proposed regulations apply to deferred compensation arrangements. Part II covers the applicability of Sec. 409A to equity-based compensation arrangements, permitted distributions and the election to defer compensation.

Sec. 409A and the current proposed regulations impose a new set of roles for taxation of deferred compensation. Part I of this two-part article, in the July 2006 issue, discussed the introduction of Sec. 409A and the plans and types of deferred compensation subject to it. Part II, below, covers the applicability of Sec. 409A to equity-based compensation arrangements, permitted distributions and the election to defer compensation.

Stock

Options

One of the more difficult areas of Sec. 409A coverage is stock options. First, as might be expected, incentive stock options (ISOs) are generally not treated as deferral of compensation for Sec. 409A purposes, although the proposed regulations provide a warning for plans that permit such options to be extended or otherwise modified in a manner that produces a nonqualified stock option (NQSO) as the successor. Under Prop. Regs. Sec. 1.409A-1(b)(5), such a modification would generally be treated as the grant of a new option and would be governed under the rules applicable to NQSOs.

NQSOs may escape characterization as deferral of compensation under Sec. 409A if, under the plan:

* No options may ever be granted or modified with an exercise price less than the fair market value (FMV) as of the grant date (32);

* The number of shares that may be purchased by exercise of the options is fixed as of the grant date;

* Both the exercise and the transfer of such options are taxable; and

* There are no additional deferral features in the option agreement or plan providing any benefit other than the deferral of income recognition until exercise. (33)

SARs

The proposed regulations provide the same exemption rules for stock appreciation rights (SARs) as for NQSOs, generally not treating SARs as deferred compensation if:

* The value of the baseline stock used for measuring appreciation may never be less than the FMV on the grant date;

* Only such traded stock may be delivered in settlement of the right on exercise; and

* There are no additional deferral features other than the basic SARs.

Because private companies are covered by these rules, the proposed regulations contain detailed rules on how to determine the underlying stock's FMV and a definition of what constitutes such stock. (34) There are also special rules in Prop. Regs. Sec. 1.409A-1(b)(5)(iii) (D) designed to limit the potential abuse of granting options and SARs to employees in affiliated entities. (35)

Stock Valuation

The proposed regulations address the valuation of stock underlying options and SARs for Sec. 409A purposes. For stock that is "readily tradable on an established securities market" the value may, in general, be:

* The sale price of the last trade before the grant;

* The sale price of the first trade after the grant;

* The closing price on the day before the grant;

* The closing price on the day of the grant; or

* "Any other reasonable basis using actual transactions," as long as it is consistently applied. (36)

If certain other criteria are met, taxpayers may also use an average daily wading price over a fixed period during the 30 days before or after the grant date; this rule was apparently included to accommodate certain corporations subject to foreign laws. (37)

For stock that is not readily tradable, the corporation merely has to use a "reasonable application of a reasonable valuation method" (38) Whether or not a method is "reasonable" depends on the usual factors, i.e.:

* The value of the corporation's assets;

* The value of the corporation's discounted cashflow;

* The market value of stock or other equity of comparable corporations or other entities in businesses similar to those of the taxpayer; and

* Other factors, such as premiums for control and discounts for lack of marketability. (39)

In general, a valuation is not reasonable if it is more than 12 months old or, regardless of its age, it does not take into account material recent developments. The proposed regulations provide limited safe harbors for corporations that are not confident that their internal valuation skills are intrinsically reasonable, including the use of an independent appraiser (in much the same manner as an employee stock ownership trust making its annual valuation of employer securities). (40)

Determining Which Entity Issued the Underlying Stock

Treasury continues to be wary of arrangements under which a service provider could take advantage of the general exclusion for certain stock rights, by receiving stock of an entity related to the service recipient and then using that entity as an investment vehicle. Subject to that prohibition, a service provider can receive stock in any corporation that is a member of the group as the service recipient. For this purpose, a group is defined in the same manner as a "controlled group" under the qualified plan rules, except that a corporation can elect to use a 50% standard instead of 80%. (41)

Restricted Stock

Actual grants of restricted stock are generally not treated as a deferral of compensation, because such grants-due to the restriction--are not currently includible in income under Sec. 83. On the other hand, an award that is essentially a promise to make such a transfer at some point in the future (commonly known as a restricted stock unit), may constitute deferred compensation under Sec. 409A. (42) If the grant is a promise to deliver stock that itself is subject to a restriction that constitutes a "substantial risk of forfeiture" then such award will not be deferred compensation for Sec. 409A purposes, until and unless the restriction has been removed. (43)

Modification of Stock Options, SARs and Certain Other Rights

In general, any material modification of an equity-based right will be treated as the grant of a new right, to be assessed on its own terms, including the requirement that the grant be based on stock exercisable at a price no less than the FMV at the time of such modification. For this purpose, modifications include reduction of the exercise price, addition of other deferral elements and extension of the exercise period (with certain limited exceptions). A modification that actually restricts or reduces the benefits granted to the service provider will not ordinarily be treated as a material modification constituting treatment as a new grant. A modification that shortens the vesting period for exercise is not generally a material modification, although companies and service providers should be cautioned that if the grant is already treated as a deferral of compensation under Sec. 409A, such a change in the vesting schedule, if tied to a distribution event, could constitute an impermissible acceleration. (44)

The proposed regulations dealing with modifications raise an interesting issue of interpretation. On the one hand, an actual reduction in exercise price is treated as a "modification" under Prop. Regs. Sec. 1.409A-1(b)(5)(v). On the other hand, the language dealing with stock options in Notice 2005-1 (45) and the proposed regulations is very different, suggesting that unless there is no possibility during the life of the stock right for a reduction in the exercise price, such right will be treated as deferred compensation for Sec. 409A purposes. For example, Notice 2005-1 states that "the amount required to purchase stock under the option (the exercise price) may never be less than the fair market value of the underlying stock on the date the option is granted."

The preamble to the proposed regulations suggests that whenever the terms of the stock agreement or those of the plan under which the right is granted provide the plan administrator with a general power to modify the terms of outstanding grants of stock rights, none of the grants will be excluded from treatment as deferred compensation under Sec. 409A. (46) Pending clarification of this language, drafters should ensure that plan committees have no discretion to reduce the exercise price of any outstanding options or SARs. (47)

Non-U.S. Plans and NRAs

Because Sec. 409A's coverage is so broad, Treasury has spent a fair amount of time and effort carving out exceptions for circumstances that were clearly not intended to be regulated by the statute. The best example is the treatment of persons and transactions involving non-U.S, jurisdictions. First, Sec. 409A generally does not include a deferral arrangement for an individual when the contributions are excludible from Federal income tax pursuant to any bilateral income tax convention. (48) Second, Sec. 409A does not apply to any broad-based foreign retirement plan maintained by a non-U.S. person. (49) For this purpose, under Prop. Regs. Sec. 1.409A-1(a)(3)(v), such a plan is one that is written, is nondiscriminatory, covers nonresident aliens (NRAs) and does not provide additional benefits beyond those related to retirement and separation. Third, under Prop. Regs. Sec. 1.409A-1(a) (3) (iii), Sec. 409A does not include any non-U.S. plans in which U.S. persons, who are not eligible to participate in a U.S.-based plan, participate to the extent of nonelective deferrals of foreign earned income (but only up to the usual Sec. 415 ceilings). Finally, under Prop. Regs. Sec. 1.409A-1(a)(3)(iv), Sec. 409A does not include any arrangements that are part of a so-called totalization agreement for payroll taxes or a similar arrangement required under foreign law.

Separation Pay

Sec. 409A regulates certain payments made on the condition of termination of employment or consultancy, on the premise that, at least for key employees, it would be an easy matter to characterize as "severance" or "separation" plans many arrangements that are, in substance, deferred compensation plans. For this purpose, separation pay includes certain medical coverage under Prop. Regs. Sec. 1.409A-1(b)(9)(iv). Although the risk of abuse of a severance provision is obviously much more significant in the case of a voluntary termination, Treasury's view is that Congress intended to cover both voluntary and involuntary terminations, because either type could reasonably be part of a predetermined arrangement for deferral of compensation. (50)

Sec. 409A does not cover any severance arrangement contained in a collectively bargained agreement (determined by the Department of Labor to have been arrived at in good-faith, arm's-length negotiations between management and labor) either for an involuntary separation or as part of a so-called window program. (51) In either circumstance, the amount payable under the severance provision is equal to the lesser of (1) two years' annual compensation or (2) two years of the annual cap for qualified plans (52); the severance provision requires payment in full no later than December 31 of the second calendar year after the calendar year in which the separation has occurred. There is also a limited exception for continuation of certain benefits, including health insurance and moving expenses, under Prop. Regs. Sec. 1.409A-1 (b) (9) (iv).

Election to Defer Compensation

Performance-Based Compensation

Generally under Sec. 409A(a) (4)(B)(i), any election by a service provider to defer compensation for any tax year must be made before the beginning of such tax year. A 30-day grace period is available after the date on which participants first become eligible to participate in the plan. For "performance-based compensation" when the performance period is at least 12 months in duration, a service provider may make the decision to defer on or before the date that is six months before the end of the performance period. (53) In effect, the statute gives the person earning the compensation additional time in which to figure out how much compensation he or she might expect to earn during the year and then to do some personal financial planning.

The proposed regulations provide that performance-based compensation must relate to the performance of services over at least 12 consecutive months. During the first 90 days of the performance period, the performance standards must be set forth in writing and, at the time the performance standards are set, it must be uncertain whether or not those standards can be met. (54)

The proposed regulations provide that the performance standards may include certain subjective criteria if they are related to the service recipient's performance and the judgment of performance is not made by a person related to, or under the control of, the service provider. Finally, payments may qualify as performance-based compensation even if they have not been approved by the compensation committee (or the entire board of directors) of the service recipient or by the company's stockholders. (55)

Subsequent Elections to Defer Payments

Sec. 409A provides that, after the first election to defer distribution, a service provider can make an additional election for a further deferral, if the plan requires that:

* Any such subsequent election takes effect only after the 12-month period after the election date;

* Except in the case of the death or disability of the service provider or the occurrence of an unforeseeable emergency, the first payment to be made as a result of the subsequent election will be at least five years after the election date; and

* Any such subsequent election may be made no less than 12 months before the first payment scheduled under the existing plan of distributions. (56)

A plan can also provide for special dispensations for subsequent deferrals in circumstances when timely distribution would create hardship for the service recipient or the service provider, such as payments that would:

* Run afoul of the Sec. 162(m) deduction limits for payments of compensation greater than $1 million in one year;

* Violate loan covenants or similar obligations to which the service recipient is subject, if such violation would cause material harm; or

* Violate Federal securities laws or "other applicable law" (including, presumably, state securities laws).

In all cases, the plan must provide that the deferred payment be made as soon as reasonably possible without violating the specific law in question. Treasury may provide, in future regulations, other permissible exceptions. (57)

Permitted Distributions

In General

One of the difficulties in coping with administrative guidance for a statute that breaks new ground is that the necessary coverage of the myriad details of implementation can deflect focus from the main issue. The genesis of Sec. 409A was the perceived abuse of nonqualified deferred compensation arrangements by highly paid employees and consultants. Essentially, the statute provides that many of the extra rights to distributions which service providers had previously attached to their deferral arrangements will now have the effect of making all of deferred amounts immediately taxable. Sec. 409A provides an exclusive list of the types of permitted distributions of deferred compensation amounts; anything else is prohibited. (58)

There are six major circumstances under which a plan may provide for distributions of deferred compensation without being subject to the penalty provisions:

1. Separation from service;

2. Disability;

3. Death;

4. A specific time or times scheduled in advance;

5. An unforeseeable emergency; and

6. A change in ownership or effective control of a corporate service recipient, under Sec. 409A(a)(2)(A).

Separation from Service

In the case of employees, separation by termination of employment is a fairly straightforward concept, including (1) actual termination and (2) constructive termination, when a leave of absence exceeds six months and there is no legal right to re-employment. (59) In the case of independent contractors, "separation" means expiration of all contracts for the performance of services, if such expiration constitutes termination of the contractual relationship between the service provider and the service recipient. (60) If the employee in question is a "specified employee" a distribution cannot be made until after the end of the six-month period following termination. For this purpose, a "specified employee" means a person who earns more than $130,000 from a publicly traded corporation, owns at least 5% of the equity of such corporation, or owns at least 1% of the equity and earns more than $150,000. (61)

Disability or Death

For Sec. 409A purposes, a disabled person means one who is unable to engage in any "substantial gainful activity" from a medically determinable physical or mental impairment that can be expected to result in death or to last for a continuous period of at least 12 months. (62) The proposed regulations also allow the use of a determination by the Social Security Administration of total disability for this purpose. (63)

Specific Time or Times Scheduled in Advance

To comply with Sec. 409A, the specific time or schedule of times must be fixed and objectively determinable at the time of the original deferral of compensation, under Prop. Kegs. Sec. 1.409A-3(g)(1).This schedule may be triggered by the occurrence of an event that has the effect of eliminating a substantial risk of forfeiture.

Change of Control

The continued ability to use a change of control of a corporate service recipient as a distribution trigger is one of the few bright spots for planners of deferred compensation arrangements. For Sec. 409A purposes, a change of control is a change of more than 50% of the equity of a corporation. Also, there may be a change in "effective" control when a person or group acquires at least 35% of the corporation's equity or effects a replacement of a majority of the board of directors. Moreover, there is an ownership change of a "substantial portion" of a corporation's assets when at least 40% of the corporation's gross market value is acquired by a person or group. (64) Finally, the proposed regulations address the specific issue of deferred payments to certain key executives of a target company as part of an acquisition of the target's stock, when those payments are conditioned on future performance of the target or its assets. Basically, such arrangements are deemed to fall within the permitted arrangements of Sec. 409A, as long as the terms and conditions of the deferred payment are the same as those for the target's nonemployee-stockholders. (65) However, it is not clear how the employee-stockholders could take advantage of this rule if there are no nonemployee-stockholders.

Unforeseeable Emergencies

This saving provision seems reasonable on its face; one merely has to determine which emergencies are foreseeable and which are unforeseeable and whether such expenses can be reasonably covered by other assets. Under Prop. Kegs. Sec. 1.409A-3(g)(3), unanticipated medical and drug costs not covered by insurance are unforeseeable. Funeral expenses of a dependent are treated as unforeseeable. College expenses for a child are, however, foreseeable. All of these examples are, of necessity, unclear; the result will depend on the specific facts and circumstances.

Example: J enrolls, as he had always planned, at the state university, so that he can live at home and pay tuition of less than $6,000 per year. J learns at the beginning of his freshman year that he has an opportunity to transfer to any ivy league school. Because there is no stipend involved, J's mother will have to pay about $57,000 a year (after tax). Assuming that J's mother cannot reasonably cover this cost with other funds, this might well constitute an unforeseeable emergency within the meaning of the proposed regulations.

Acceleration of Distributions

Under Sec. 409A, Treasury has blanket authority to determine which types of accelerated distributions are permitted and which are not. Generally under Prop. Regs. Sec. 1.409A-3(h), the inclusion in any plan of an acceleration provision is prohibited, except for the following.

* Waiver by the service recipient of a milestone condition that constitutes a substantial risk of forfeiture, as long as the actual distribution otherwise meets the Sec. 409A requirements;

* Payments to comply with a domestic relations payment order;

* Distributions to comply with certain certificates of divestiture from conflicts of interest under Sec. 1043(b)(3);

* Distributions to pay taxes on income taxable under a Sec. 457(f) plan;

* Mandatory lump-sum distribution of de minimis amounts made in connection with the termination of a service provider, as long as such amounts are no greater than $10,000 and are made within 2 1/2 months of the year following the termination year;

* Distributions to pay payroll taxes;

* Distributions to pay income taxes (and, presumably, interest and penalties) resulting from income inclusion under Sec. 409A;

* Distributions on cancellation of deferrals following a hardship distribution from a qualified retirement plan (Regs. Sec. 1.401(k)-1(d)(3)); and

* Distributions resulting from termination arrangements due to liquidation, bankruptcy or a change-of-control event of the service recipient.

Areas Not Yet Addressed

Currently, Treasury is working on further guidance for compliance with Sec. 409A and has asked for comments on regulation of a few specific areas, including:

* The use of foreign bank accounts and similar arrangements for rabbi trusts;

* The inclusion of "financial health" triggers in deferred compensation arrangements;

* Computation methods for determining the amounts of income actually includible on the occurrence of different Sec. 409A events;

* The effect of Sec. 409A on split-dollar life insurance arrangements;

* The appropriate treatment under Sec. 409A of partnerships and other noncorporate entities as service recipients (66);

* Guidance on the effect of See. 409A on "earn-out" provisions in acquisitions;

* Defining "separation from service" of an independent contractor; and

* Defining an "affiliate" for purposes of regulation by Sec. 409A (especially in the case of SARs).

This list, of course, is not comprehensive, nor is Treasury bound by any limits on the areas in which it will provide new or amended regulations.

Housekeeping and Planning

Cleaning Up Existing Plans

Bearing in mind the range of arrangements that are considered "plans" for Sec. 409A purposes, a practitioner's first step should be to make an inventory of everything that could be regulated, including all types of compensation agreements, retirement arrangements, employment agreements, noncompetition agreements, equity-participation agreements and severance agreements. The second step is to determine when changes have to be made to get the plan into compliance prospectively. The third step is to decide whether to make the changes in the existing arrangements or to seal off those arrangements and draft new ones.

Auditing and Updating All Records and Recordkeeping

Because of the far greater risks and difficulty of complying with the new rules, practitioners should take particular care to ensure that the company knows at any given time how much is being paid or accrued for services of all kinds. Every bank account and escrow and trust arrangement must be checked regular.

Inspecting Agreements for Presence of Compensation Deferral

Every agreement entered into by a business that involves, even indirectly, compensation for services must be examined for compliance with Sec. 409A. This includes not only agreements formally designated as such, but also all agreements for the sale of goods that contain a service element and, most importantly, any formal corporate resolutions or informal writings that could constitute compensation agreements.

Revising Tax Due Diligence Checklist for Potential Acquisitions

Every adjustment and test check made for the company should be reflected in a concomitant change to the company's (or practitioner's) standard request list for due diligence information in the circumstance of a potential acquisition of another company.

Conclusion

The proposed regulations have answered a few questions, raised some new ones and require educated guesses on the treatment of different types of transactions. In addition, because Sec. 409A's scope covers virtually every type of deferred compensation, tax advisers can reasonably conclude that knowledge of the rules will be required, and uncertainty will continue, for the foreseeable future.

Author's note: The author acknowledges the kind assistance on a number of accounting questions of Melody Thornton, Tax Manager, and James Ledwith, Audit Partner, in the San Diego, CA, office of J.H. Cohn, LLP.

Stuart R. Singer

Of Counsel

Jenkens & Gilchrist LLP

Los Angeles, CA

(32) The plan must not give the administrative committee the power to reduce the exercise price under any circumstances, except for the usual pro-rata adjustments of option amounts and exercise prices in the case of recapitalizatious or mergers.

(33) See Prop. Regs. Sec. 1.409A-1(b)(5)(i).

(34) See Prop. Regs. Sec. 1.409A-1(b)(5). The valuation rules for such stock are, in general, no less clear than comparable guidance in other contexts of administrative and case law; see Prop. Regs. Sec. 1.409A-1(b)(5)(iv).

(35) Notice 2005-1, IRB 2005-2, 274 described the Service's concern about abuses of the SAIL rules by, among other things, combining a SAR. with a mandatory buyback of stock delivered on exercise. This was one of the areas for which the IRS has specifically asked for comments; see id. at Q&A-4.

(36) See Prop. Regs. Sec. 1.409A-1(b)(5)(iv)(A).

(37) See id. Interestingly, the proposed regulations permit any corporation, not merely those subject to specific foreign laws, to employ this method.

(38) "The determination of whether a valuation method is reasonable, or whether an application of a valuation method is reasonable, is made based on the facts and circumstances as of the valuation date"; see Prop. Regs. Sec. 1.409A-1(b)(5)(iv)(B)(1).

(39) See Prop. Regs. Sec. 1.409A-1(b)(5)(iv)(B)(1).

(40) See Prop. Regs. Sec. 1.409A-1(b)(5)(iv)(B)(2) and Sec. 401(a)(28).

(41) See Sec. 414(b) and Prop. Regs. Sec. 1.409A-1(b)(5)(iii).

(42) See Prop. Regs. Sec. 1.409A-1(b)(6).

(43) See Prop. Regs. Sec. 1.409A-1(b)(6)(ii).

(44) Prop. Regs. Sec. 1.409A-1(b)(5)(v)(E).

(45) See Notice 2005-1, note 35 supra, at Q&A-4(d)(ii).

(46) The preamble to the proposed regulations (REG-158080-04 (10/4/05), Section II.C.2) states: "the legislative history states that section 409A does not cover grants of stock options where the exercise price can never be less than the fair market value of the underlying stock at the date of grant (a non-discounted option). See H.R. Conf. Rep. No. 108-755, at 735 (2004). Thus an option with an exercise price that is or may be below the fair market value of the underlying stock at the date of grant (a discounted option) is subject to the requirements of section 409A."

According to Prop. Regs. Sec. 1.409A-1(b)(5), "[s]tock options, stock appreciation rights and other equity-based compensation. (i) Stock rights. (A) Nonstatutory stock options not providing for the defewal of compensation. An option to purchase service recipient stock does not provide for a deferral of compensation if--(1) The amount required to purchase stock under the option (the exercise price) may never be less than the fair market value of the underlying stock (disregarding lapse restrictions as defined in [section] 1.83-3(i)) on the date the option is granted and the number of shares subject to the option is fixed on the original date of grant of the option." The language in Notice 2005-1, note 35 supra, is comparable; see id. at Q&A-4(d); and REG-158080-04, Section I.B.

(47) Quite apart from the Sec. 409A issue, drafters may not want to include such a provision in their plans because of the potential charge to the company's income resulting from such a repricing.

(48) See Prop. Regs. Sec. 1.409A-1(a)(3)(i).

(49) See Prop. Regs. Sec. 1.409A-1(a)(3)(ii).

(50) See REG-158080-04, note 46 supra, at Section II.G.1.

(51) In this context, "window program" is designed to cover circumstances in which the employer offers employees special incentives to elect early retirement. The theory here is that the distinction between involuntary and voluntary retirements may be a little unclear.

(52) This is $200,000, plus annual cost-of-living adjustments. For 2006, the amount is $220,000; see Notice 2005-75, IRB 2005-45, 929.

(53) Notice 2005-1, note 35 supra, did not actually define performance-based compensation, but merely gave the service provider the benefit of the six-month rule for so-called "bonus" compensation; see id. at Q&A-22. The legislative history to Sec. 409A indicates that the definition was intended to be close to that employed in the regulations under Sec. 162(m), the statute that restricts the deduction of certain compensation in excess of $1 million. One troubling aspect of the notice's definition was that, unlike its counterpart in the Sec. 162(m) regulations, the bonus could not be computed solely on the basis of performance of the service recipient's stock in the marketplace; see Notice 2005-1. Prop. Regs. Sec. 1.409A-1(e)(3) has eliminated this difference.

(54) See Prop. Regs. Sec. 1.409A-1(e)(1).

(55) Of course, this last provision may be of little help to service recipients that are public companies, because the establishment of material modifications to compensation plans for their executive officers will, quite apart from Sec. 409A, usually require approval by the compensation committee, the full board of directors or even the company's stockholders; cf. Rule 16b-3(d), promulgated under the Securities Exchange Act of 1934, as amended; National Association of Securities Dealers Automated Quotation System (NASDAQ) Marketplace Rules Section 4350(i)(1)(A); New York Stock Exchange Listed Company Manual Section 303.A.08; and Sec. 162(m).

(56) See Sec. 409A(a)(4)(C) and Prop. Regs. Sec. 1.409A-2(b).

(57) See Prop. Regs. Sec. 1.409A-2(b)(5).

(58) There is a sort of virtual exception as well. If the service recipient is either unwilling or unable to make a payment to the service provider when it is due and if the parties are acting in good faith, the delay in payment is not treated as a deferral. The parties are obligated to make the payments as soon as practicable; see Prop. Regs. Sec. 1.A09A-3(e).

(59) See Prop. Regs. Sec. 1.409A-1(h)(1).

(60) See Prop. Regs. Sec. 1.409A-1(h)(2).

(61) See Sec. 409A(a)(2)(B)(i) and Prop. Regs. Sec. 1.409A-1(i). This definition is borrowed from the definition of "key employee" in Sec. 416(i)(1)(A).

(62) See Prop. Kegs. Sec. 1.409A-3(g)(4).

(63) On March 28, 2006, the Social Security Administration issued a final rule establishing a new disability determination process; the new rule is effective as of Aug. 1, 2006.

(64) See Prop. Kegs. Sec. 1.409A-3(g)(5).

(65) See id.

(66) Pending such guidance, taxpayers are asked to analogize as best they can about how to treat corporate service recipients.