Final Section 409A regulations and their effect on offshore hedge fund deferral arrangements

Abstract

Purpose

The purpose of this paper is to explain restrictions on nonqualified deferred compensation arrangements contained in Section 409A of the Internal Revenue Code.

Design/methodology/approach

The study explains the background to Section 409A, how Section 409A applies to hedge funds, how deferral elections may be made, permissible payment events, and back‐to‐back deferral arrangements.

Findings

The paper finds that, to avoid current taxation, the penalty tax, and interest, a deferral arrangement must comply with the technical provisions of Section 409A. These provisions generally govern the timing of initial and subsequent deferrals, the form and time of distributions, and the acceleration of distributions under certain circumstances.

Practical implications

Section 409A places specific requirements on certain deferred amounts which, if not followed, will cause the amounts to be subject to current taxation and a 20 percent penalty tax plus interest charges.

Originality/value

The paper is a practical guide written by a team of lawyers with experience in advising hedge funds on the full range of legal issues that affect their business and investments.

Citation

Shea Fries, E., Scerbak, A.A., Tse, M.A. and Webster, S.A. (2007), "Final Section 409A regulations and their effect on offshore hedge fund deferral arrangements", Journal of Investment Compliance, Vol. 8 No. 3, pp. 60-63. https://doi.org/10.1108/15285810710824099