Klimpl Benefits Law PLLC

Major League Baseball and Tax Code Section 409A: A Match Made in Summer Heaven Now that the MLB is past the All-Star break and approaching its trade deadline (July 30), it's the perfect time for a refresh on two of America's favorite pastimes: (1) Baseball and (2) Deferred Compensation (not necessarily in that order). Many people know that L.A. Dodgers superstar Shohei Ohtani signed one of the largest contracts in sports history before the start of this season, an eye-popping 10-year, $700 million deal. What many don't know, however, is that the Dodgers and Ohtani structured the contract so that Ohtani will not receive a whopping $680 million of that $700 million until the 10-year period beginning in 2034 and ending in 2043. Accordingly, Ohtani will not have income or be taxed on that $680 million largess until he receives it years from now. Is that legal, or fair? While one of the more extreme examples of deferred compensation (if not the most), Ohtani's arrangement is permitted under the tax rules of Section 409A of the Internal Revenue Code, as long as the Dodgers and Ohtani stick to the script of their deal. For instance, even if Ohtani is fully vested and guaranteed the $700 million by the Dodgers, his salary may not be set aside in a trust or otherwise protected from the general creditors of the Los Angeles Dodgers. (This may seem like a safe bet for Ohtani, and it probably is, but recall certain financial issues of the New York Mets in recent years relating to unexpected investment losses a la Bernie Madoff.) Further, neither Ohtani nor the Dodgers would be permitted (for the most part) to either move up- or push back -the years in which Ohtani is paid the amounts agreed upon. One exception is if at least 1 year before his remaining $680 million begins to become due, Ohtani elects (with the Dodgers' consent) to subsequently defer all or a portion of the remaining $680 million salary payments, but Ohtani would then need to wait at least 5 years from the originally agreed upon payment date to receive any further deferred salary. In addition, the Dodgers must wait until Ohtani is paid his deferred compensation to take a tax deduction. So is Ohtani's deal fair? Depends on your view. But on the face of it, it is 409A-compliant. Even if you are encountering a deferred compensation arrangement that is less than $700 million, it is worth having a firm grasp of these tax rules and the implications on employers, employees and consultants. https://lnkd.in/gWHjpckE

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Nonprofits: If you are looking for a short update or refresher on legal and ethics considerations governing the use of artificial intelligence by your organization, look no further than next week with the Pro Bono Partnership! Please consider joining the PBP and me next Wednesday, June 12th during a lunchtime webinar for a snapshot discussion. https://lnkd.in/eb7-iPGT

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