v1 Overview of Specific Exceptions Available for International Service Jonathan F. Lewis Debevoise & Plimpton LLP

v12 Introduction 1.Categories of participants 2.Exceptions available to both expats and nonresident aliens working in the U.S. 3.Exceptions only available to expats 4.Exceptions only available to nonresident aliens working in the U.S. 5.Common situations to watch out for

v13 1.Categories of participants Section 409A only applies to individuals subject to U.S. taxation –Category 1: Expatriates – U.S. citizens and green card holders on assignment outside of the U.S. –Category 2: Resident aliens (other than green card holders) and nonresident aliens on assignment inside the U.S. Particularly problematic where individuals are subject to U.S. taxation on benefits earned under their home country benefit plans. The focus is on these individuals accruing benefits under non- U.S. plans that are deemed to be nonqualified deferred compensation plan under Section 409A *

v14 2.Exceptions available to both Category 1 and Category 2 Tax Treaty Exceptions Contributions and accruals under a plan are excluded from Section 409A if they are excluded from U.S. federal income tax pursuant to a tax treaty – typically applies to broad- based tax-qualified plans and similar non-U.S. plans Compensation credited under a plan is excluded from Section 409A if the compensation would have been excluded from U.S. federal income tax pursuant to a tax treaty if paid to the employee It appears that these items must be excludable from income (as opposed to taxable in a future year)

v15 2.Exceptions available to both Category 1 and Category 2 (cont’d) Exception for Broad-Based Non-U.S. Retirement Plans Contributions and accruals under a non-discriminatory, broad-based retirement plan may be excluded from Section 409A; applies to: –nonresident aliens working in the U.S.; and –resident aliens classified as such only under the substantial presence text of Section 7701 of the Code; The exception is also available to U.S. residents and green card holders, but additional limitations apply, including that: –The individual cannot be eligible to participate in a U.S. plan –The exception only applies to nonelective deferrals of specified foreign income

v16 2.Exceptions available to both Category 1 and Category 2 (cont’d) What is a broad-based non-U.S. retirement plan? –Must have written rules –Must cover a wide range of employees, substantially all of whom are nonresident aliens, resident aliens who satisfy the substantial presence test (and are not green card holders) or residents of U.S. possessions –Must provide significant benefits for a substantial majority of participants (alone or in combination with other plans) –Must be nondiscriminatory –Legal or tax restrictions must discourage pre-retirement distributions There is very little published guidance on how to interpret these requirements (in particular the nondiscrimination requirement and the pre-retirement distribution requirement)

v17 2.Exceptions available to both Category 1 and Category 2 (cont’d) Tax Equalization Agreements Payments under tax equalization agreements are excluded from Section 409A if the payments are made by the later of: (1)the second year beginning after the year in which the employee’s U.S. tax return relating to the compensation subject to equalization is filed (including extensions); and (2)the second taxable year beginning after the latest taxable year in which the employee’s non-U.S. tax return or payment is required to be filed or made relating to the compensation subject to equalization In the event of an audit or litigation over the amount of taxable income, equalization payments may be delayed until the completion of the audit or litigation

v18 2.Exceptions available to both Category 1 and Category 2 (cont’d) Plans Subject to Totalization Agreements and Non-U.S. Social Security Plans are excluded from Section 409A if (1) they are mandated by a foreign government and (2) contributions or benefits are subject to a totalization agreement –The U.S. has totalization agreements with 21 countries, including most European nations Non-U.S. social security benefits are also excluded from Section 409A

v19 2.Exceptions available to both Category 1 and Category 2 (cont’d) Foreign Separation Pay Plans Separation pay required to be paid under non-U.S law is not subject to Section 409A (but only to the extent relating to non-U.S. income) May be payable on a voluntary or involuntary termination Earnings To the extent that compensation is not subject to Section 409A, then earnings on that amount generally will also not be subject to Section 409A

v110 3.Exceptions only available to Category 1 Compensation Excludable under Sections 911, 931 or 933 If an amount accrued under a deferred compensation plan would have been excluded from income if actually paid to an expat under these sections of the Internal Revenue Code, then the accrual will be excluded from Section 409A –Section 911 is a limited exclusion for foreign-earned income by U.S. persons for services outside of the U.S. –Sections 931 and 933 exclude certain income earned in U.S. territories and possessions

v111 4.Exceptions only available to Category 2 Compensation Excludable under Section 872 Amounts accrued under non-U.S. plans which would not have been U.S. source income or related to conducting a trade or business in the U.S. if paid to the employee are excluded from Section 409A

v112 4.Exceptions only available to Category 2 (cont’d) Limited Deferrals Amounts accrued under non-U.S. plans by nonresident aliens working in the U.S. are excluded from Section 409A if they do not exceed a specified dollar amount ($15,500 in 2008) –Substantially all participants must be nonresident aliens who are not green card holders As a practical matter, this exception will normally apply only to nonresident aliens working in the U.S. for a limited number of days

v113 5.Common situations to watch out for Plans funded by offshore trusts: –Section 409 generally prohibits the funding of benefits in trusts located outside of the United States –To the extent that the benefits of a U.S. taxpayer are funded in an offshore trust, there is an exception from Section 409A, but the services to which the deferred compensation relates must have been performed in that jurisdiction –The short-term deferral exception may also apply to the extent these benefits are taxable on vesting

v114 5.Common situations to watch out for (cont’d) Garden leave – an individual who is on garden leave may have a “separation from service” earlier than his or her designated termination date Guarantees – where a new employee is provided with a compensation guarantee and the employer has the right to satisfy the guarantee in currently taxable income (e.g., cash in shares) or non-taxable income (e.g., phantom units or restricted stock), Section 409A issues may arise