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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations
employee without restriction that is or will be transferred by the covered employee in exchange for the payment.
c When payment is considered to be made1 In general. A payment in the nature of compensation is considered made in the taxable year in which it is includible in the covered employees gross income or, in the case of fringe benefits and other benefits that are excludable from income, in the taxable year the benefits are received. In the case of taxable non-cash fringe benefits provided in a calendar year, payment is considered made on the date or dates the employer chooses, but no later than December 31 of the calendar year in which the benefits are provided, except that when the fringe benefit is the transfer of personal property either tangible or intangible of a kind normally held for investment or the transfer of real property, payment is considered made on the actual date of transfer. If the fringe benefit is neither a transfer of personal property nor a transfer of real property, the employer may, in its discretion, treat the value of the benefit actually provided during the last two months of the calendar year as paid during the subsequent calendar year. However, an employer that treats the value of a benefit paid during the last two months of a calendar year as paid during the subsequent calendar year under this rule must treat the value of that fringe benefit as paid during the subsequent calendar year with respect to all employees who receive it.
2 Transfers of section 83 property. A
transfer of property in connection with the performance of services that is subject to section 83 is considered a payment made in the taxable year in which the property is transferred or would be includible in the gross income of the covered employee under section 83, disregarding any election made by the employee under section 83b or i.
Thus, in general, such a payment is considered made at the later of the date the property is transferred as defined in 1.833a to the covered employee or the date the property becomes substantially vested as defined in 1.833b and j. The amount of the payment is the compensation as determined under section 83, disregarding any amount includible in income pursuant to an election made by an employee under section 83b.
3 Stock options. An option including an option to which section 421 applies is treated as property that is transferred when the option becomes vested regardless of whether the option has a readily ascertainable fair market value as defined in 1.837b. For purposes of determining the timing and
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amount of any payment related to the option, the principles of 1.280G1, Q/
A13 and any method prescribed by the Commissioner in published guidance of general applicability under 601.601d2 apply.
d Payment contingent on an employees separation from employment1 In general. A payment is contingent on an employees separation from employment if the facts and circumstances indicate that the employer would not make the payment in the absence of the employees involuntary separation from employment. A payment generally would be made in the absence of the employees involuntary separation from employment if it is substantially certain at the time of the involuntary separation from employment that the payment would be made whether or not the involuntary separation occurred. A
payment the right to which is not subject to a substantial risk of forfeiture within the meaning of section 457f3B at the time of an involuntary separation from employment generally is a payment that would have been made in the absence of an involuntary separation from employment and is therefore not contingent on a separation from employment, except that the increased value of an accelerated payment of a vested amount described in paragraph f3 of this section resulting from an involuntary separation from employment is not treated as a payment that would have been made in the absence of an involuntary separation from employment. A payment the right to which is no longer subject to a substantial risk of forfeiture within the meaning of section 457f3B as a result of an involuntary separation from employment, including a payment the vesting of which is accelerated due to the separation from employment as described in paragraph f3 of this section, is not treated as a payment that would have been made in the absence of an involuntary separation from employment and thus is contingent on a separation from employment. A
payment does not fail to be contingent on a separation from employment merely because the payment is conditioned upon the execution of a release of claims, noncompetition or nondisclosure provisions, or other similar requirements. See paragraph d3 of this section for the treatment of a payment made pursuant to a covenant not to compete. If, after an involuntary separation from employment, the former employee continues to provide certain services as a nonemployee, payments for services rendered as a nonemployee
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are not payments that are contingent on a separation from employment to the extent those payments are reasonable and are not made on account of the involuntary separation from employment. Whether services are performed as an employee or nonemployee depends upon all the facts and circumstances. See 53.49601e.
For rules on determining whether payments are reasonable compensation for services, the rules of 1.280G1, Q/
A40 through Q/A42 excluding Q/A
40b and Q/A42b, and Q/A44 are applied by analogy substituting involuntary separation from employment for change in ownership or control.
2 Employment agreementsi In general. If a covered employee involuntarily separates from employment before the end of a contract term and is paid damages for breach of contract pursuant to an employment agreement, the payment of damages is treated as a payment that is contingent on a separation from employment. An employment agreement is an agreement between an employee and employer that describes, among other things, the amount of compensation or remuneration payable to the employee for services performed during the term of the agreement.
ii Example. The following example illustrates the rules of this paragraph d2. For purposes of this example, assume any entity referred to as ATEO is an ATEO.
A Example1 Facts. Employee A, a covered employee, has a 3-year employment agreement with ATEO 1.
Under the agreement, Employee A will receive a salary of $200,000 for the first year and, for each succeeding year, an annual salary that is $100,000 more than the previous year. The agreement provides that, in the event of As involuntary separation from employment without cause, Employee A
will receive the remaining salary due under the agreement. At the beginning of the second year of the agreement, ATEO 1 involuntarily terminates Employee As employment without cause and pays Employee A $700,000
representing the remaining salary due under the employment agreement $300,000 for the second year of the agreement plus $400,000 for the third year of the agreement.
2 Conclusion. The $700,000
payment is treated as a payment that is contingent on a separation from employment.
3 Noncompetition agreements. A
payment under an agreement requiring a covered employee to refrain from performing services for example, a
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