Vesting of Deferred Compensation: When Words are More Taxing than Deeds

Abstract

In this article the authors explore the sweeping consequences of the narrow vesting concept under the deferred compensation rules of Internal Revenue Code section 409A. Their goal is both theoretical and practical. They compare vesting under section 409A with that under section 83 and conclude that, paradoxically, the naked promise is often taxed before the funded one. The new vesting concept thus unsettles longstanding principles of income receipt and even of tax accounting. The practical result, according to the authors, is that employers might prefer to run their promises through section 83 instead of section 409A for its more favorable tax treatment.