The National Football Post notes that what’s on the minds of NFL players this week isn’t what foolishness is going to come out of the mouth of TO, but taxes. Agents for NFL players were reportedly sent a memo this week by the the National Football League Players Association, calling their attention to IRS code section 409A, Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans.
Deferred compensation plans? The NFL? That’s for executives, right? And club owners?
Nope. The section is applicable to all deferred compensation arrangements which are not otherwise exempt – and that would include that signing bonuses. The Code says, in part,
all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.
What that means is that bonuses and future payments which are negotiated in advance are taxed in the year that the contract is signed and not when the money is actually received. This applies to signing bonuses which are guaranteed and not those that are dependent upon a specific event that may not happen, such as making it to the Super Bowl (Um, Romo, are you reading?).
There are exceptions to section 409A which can prevent immediate taxation of future income but those are not applicable to these contracts. Most corporations include language and restrictions in their contracts to avoid this very result. Apparently, the NFL bobbled this one. According to the NFLPA “… NFL clubs did not draft or amend many NFL player contracts in order to bring them into compliance with Section 409A of the Internal Revenue Code.” Oops.
The NFL is now scurrying to ensure that contracts are up to speed by the end of the year. Significant deals signed this year include the Philadelphia Eagles’ acquisition of Asante Samuel from the New England Patriots and Brett Favre’s move from the Green Bay Packers to the New York Jets. Samuel’s deal is worth a reported $57 million with approximately half to be paid later. Favre’s three year deal is something of a secret, but allegedly includes almost $30 million in future compensation, with bonuses guaranteed even if he takes an early retirement. I’m not sure how either contract is structured but one can likely assume that they would be affected by the NFL’s actions.
Football in December has just been made even more interesting… Playoffs and taxes. I’m in heaven.
Go Eagles!
Isn’t it the agent’s job to make sure a deal is in the best interest of his client. Maybe pro athletes need to retain a tax lawyer in addition to a family law attorney and criminal defense attorney. : )
Perhaps the NFL players can help contribute to the bailout of the financial and automotive industries, two of the biggest advertisers and supporters of the NFL! The IRS never fails to get you, coming or going!
I agree this is a big problem. In fact, there may be additional nuances that are even more troubling. Here was my take on this, posted on July 31, 2008 under the heading, “Making Sport of 409A”:
Well, here’s a quickie for you, spanning both entertainment and 409A. Key to any number of re-upping of contracts, trades, etc., in the sports world is the common and critical practice of the “restructuring” of what are extremely large payments and payment streams – “restructuring the contract,” if you will. Sometimes, for example, the restructuring is needed to accommodate a team’s financial needs generally, to make the contract appealing to another team or to fit within a salary cap. What happens on and after January 1, 2009, after the expiration of transition relief under our ol’ friend cap-A? (I still think that maybe the biggest emerging issue under cap-A will prove to be the unchangeability thereunder of any number of compensation arrangements, particularly in the context of a wide range of transactional settings.) For those payments that were deferred comp., and for those payments that are to be newly or additionally deferred, how the heck are these restructuring arrangements going to continue to occur (without acceleration of taxation and an additional 20% tax)? Where they cannot be so restructured, what will be the effect on the sports industry and the teams and athletes involved? There may need to be real attention paid in the industry to ensuring that existing arrangements are “short-term deferrals” so as to permit flexibility, although even that may not be enough to facilitate deals where deferral (if not in compliance with the one-year/five-year requirements), rather than acceleration, is sought. Hmm – will someone ask Congress to get involved? (Don’t forget the golfers’ exception (couched as a medical/doctors’/hospital exception in the legislative history) under Rostenkowski’s 457(e)(12).) Just wondering . . .
It’s amazing with all that money flowing someone didn’t hire a tax guy to figure this out earlier.
Interesting footnote: today, Feb 11, Brett Favre announced his “retirement” from the NFL. And as noted above, he gets to keep most of the compensation from his contract. How crazy is the money in the NFL when teams sign players for millions and millions knowing that they might not even play…