[Federal Register Volume 81, Number 120 (Wednesday, June 22, 2016)]
[Proposed Rules]
[Pages 40548-40569]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14329]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 81, No. 120 / Wednesday, June 22, 2016 /
Proposed Rules
[[Page 40548]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-147196-07]
RIN 1545-BH72
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Entities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations prescribing rules
under section 457 of the Internal Revenue Code for the taxation of
compensation deferred under plans established and maintained by State
or local governments or other tax exempt organizations. These proposed
regulations include rules for determining when amounts deferred under
these plans are includible in income, the amounts that are includible
in income, and the types of plans that are not subject to these rules.
The proposed regulations would affect participants, beneficiaries,
sponsors, and administrators of certain plans sponsored by State or
local governments or tax-exempt organizations that provide for a
deferral of compensation. This document also provides a notice of a
public hearing on the proposed regulations.
DATES: Written or electronic comments on these proposed regulations
must be received by September 20, 2016. Outline of topics to be
discussed at the public hearing scheduled for October 18, 2016 at 10
a.m. must be received by September 20, 2016.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-147196-07), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday, between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
147196-07), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC 20224 or sent electronically, via the
Federal eRulemaking Portal at www.regulations.gov (IRS REG-147196-07).
The public hearing will be held in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue NW., Washington, DC 20224.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations
under section 457, Keith Kost at (202) 317-6799 or Cheryl Press at
(202) 317-4148, concerning submission of comments, the hearing, and/or
to be placed on the building access list to attend the hearing, Regina
Johnson at (202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 457(a), (b), and (f) of the
Internal Revenue Code (Code), as well as proposed regulations under
section 457(e)(11), (e)(12), and (g)(4). Generally, if a deferred
compensation plan of a State or local government or tax-exempt entity
does not satisfy the requirements of section 457(b), (c), (d), and, in
the case of a plan that is maintained by a State or local government,
(g), compensation deferred under the plan will be included in income in
accordance with section 457(f) unless the plan is not subject to
section 457 or is treated as not providing for a deferral of
compensation for purposes of section 457. Section 457(e) includes
certain definitions and special rules for purposes of section 457 and
describes certain plans that either are not subject to section 457 or
are treated as not providing for a deferral of compensation under
section 457.\1\
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\1\ Plans described in certain statutes that are not
incorporated into the Code are not subject to section 457. See
sections 1107(c)(3)(B), 1107(c)(4), and 1107(c)(5) of the Tax Reform
Act of 1986, Public Law 99-514 (100 Stat. 2494 (1986)), as amended,
and sections 1101(e)(6), 6064(d)(2), and 6064(d)(3) of the Technical
and Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat.
3342 (1988)).
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Section 457(a)(1) provides that any amount of compensation deferred
under an eligible deferred compensation plan as defined in section
457(b) (an eligible plan), and any income attributable to the amounts
so deferred, is includible in gross income only for the taxable year in
which the compensation or other income is paid to the participant or
beneficiary in the case of an eligible employer described in section
457(e)(1)(A) or is paid or otherwise made available to the participant
or beneficiary in the case of an eligible employer described in section
457(e)(1)(B). An eligible employer described in section 457(e)(1)(A)
means a State, a political subdivision of a State, or any agency or
instrumentality of a State or political subdivision of a State (a
governmental entity). An eligible employer described in section
457(e)(1)(B) means any organization other than a governmental entity
that is exempt from tax under subtitle A (a tax-exempt entity).
Section 457(f)(1)(A) provides that, in the case of a plan of an
eligible employer providing for a deferral of compensation, if the plan
is not an eligible plan, the compensation is included in gross income
when the rights to payment of the compensation are not subject to a
substantial risk of forfeiture, as defined in section 457(f)(3)(B).\2\
Section 457(f)(1)(B) provides that the tax treatment of any amount made
available under the plan will be determined under section 72. Section
457(f)(2) provides that section 457(f)(1) does not apply to a plan that
is described in section 401(a) or an annuity plan or contract described
in section 403, the portion of any plan that consists of a transfer of
property described in section 83, the portion of a plan that consists
of a trust described in section 402(b), a qualified governmental excess
benefit arrangement described in section 415(m), or the portion of any
applicable employment retention plan described in section 457(f)(4).
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\2\ In Notice 2007-62 (2007-2 CB 331 (August 6, 2007)), the
Treasury Department and the IRS announced the intent to issue
guidance under section 457, including providing definitions of a
bona fide severance pay plan under section 457(e)(11) and
substantial risk of forfeiture under section 457(f)(3)(B). In
response to comments received in response to a request in Notice
2007-62 (on subjects including but not limited to severance pay,
covenants not to compete, and the definition of substantial risk of
forfeiture), the rules in these proposed regulations have been
modified from the proposals announced in that notice.
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Section 457(e)(11) provides that certain plans are treated as not
providing for a deferral of
[[Page 40549]]
compensation. These plans include any bona fide vacation leave, sick
leave, compensatory time, severance pay, disability pay, or death
benefit plan, as well as any plan paying solely length of service
awards to certain bona fide volunteers (or their beneficiaries) and
certain voluntary early retirement incentive plans.\3\ Section
457(e)(12) provides that section 457 does not apply to certain
nonelective deferred compensation of nonemployees.
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\3\ Announcement 2000-1 (2000-1 CB 294 (January 1, 2000)),
provides transitional guidance on the reporting requirements for
certain broad-based, nonelective deferred compensation plans
maintained by State or local governments. The announcement states
that, pending the issuance of further guidance, a State or local
government should not report amounts for any year before the year in
which a participant or beneficiary is in actual or constructive
receipt of those amounts if the amounts are provided under a plan
that the State or local government has been treating as a bona fide
severance pay plan under section 457(e)(11) for years before
calendar year 1999. To be eligible for this transitional relief, the
plan must satisfy certain requirements described in the
announcement.
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On July 11, 2003, the Treasury Department and the IRS issued final
regulations under section 457 (TD 9075) (68 FR 41230) (2003 final
regulations). The 2003 final regulations provide guidance on deferred
compensation plans of eligible employers, including eligible plans
under section 457(b). The 2003 final regulations also reflect the
changes made to section 457 by the Tax Reform Act of 1986, Public Law
99-514 (100 Stat. 2494), the Small Business Job Protection Act of 1996,
Public Law 104-188 (110 Stat. 1755), the Taxpayer Relief Act of 1997,
Public Law 105-34 (111 Stat. 788), the Economic Growth and Tax Relief
Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 38), and the
Job Creation and Worker Assistance Act of 2002, Public Law 107-147 (116
Stat. 21). The proposed amendments to the 2003 final regulations under
section 457(a), (b), and (g) contained in this document include
amendments to reflect subsequent statutory changes made to section 457.
The following sections of this preamble provide a chronological
description of the relevant changes made after the 2003 final
regulations were issued. (For a summary of the proposed changes to the
2003 final regulations, see the Explanation of Provisions section of
this preamble.)
I. American Jobs Creation Act of 2004
Section 885 of the American Jobs Creation Act of 2004, Public Law
108-357 (118 Stat. 1418), added section 409A to the Code. Section 409A
generally provides that, if at any time during a taxable year a
nonqualified deferred compensation plan fails to meet the requirements
of section 409A or is not operated in accordance with those
requirements, all amounts deferred under the plan for the taxable year
and all preceding taxable years are includible in gross income to the
extent the amounts are not subject to a substantial risk of forfeiture
and were not previously included in gross income.
On April 17, 2007, the Treasury Department and the IRS issued final
regulations under section 409A (TD 9312) at 72 FR 19234 (final section
409A regulations). The final section 409A regulations provide guidance
on the definition of certain terms and the types of plans covered under
section 409A, permissible deferral elections under section 409A, and
permissible payments under section 409A. The final section 409A
regulations provide that a deferred compensation plan of a governmental
entity or a tax-exempt entity that is subject to section 457(f) may
constitute a nonqualified deferred compensation plan for purposes of
section 409A and that the rules of section 409A apply separately and in
addition to any requirements applicable to these plans under section
457(f).
On December 8, 2008, proposed regulations under section 409A were
published in the Federal Register (73 FR 74380) (proposed section 409A
regulations) that provide guidance on the calculation of amounts
includible in income under section 409A(a) and the additional taxes
imposed by that section with respect to arrangements that do not comply
with the requirements of section 409A(a).
In Notice 2008-62 (2008-29 IRB 130 (July 21, 2008)), the Treasury
Department and the IRS provided guidance under sections 409A and 457(f)
regarding recurring part-year compensation. For this purpose, recurring
part-year compensation is compensation paid for services rendered in a
position that the employer and employee reasonably anticipate will
continue under similar terms and conditions in subsequent years, and
under which the employee will be required to provide services during
successive service periods each of which comprises less than 12 months
(for example, a teacher providing services during a school year
comprised of 10 consecutive months) and each of which begins in one
taxable year of the employee and ends in the next taxable year. Notice
2008-62 provides that an arrangement under which an employee or
independent contractor receives recurring part-year compensation does
not provide for the deferral of compensation for purposes of section
409A or for purposes of section 457(f) if (A) the arrangement does not
defer payment of any of the recurring part-year compensation beyond the
last day of the 13th month following the beginning of the service
period, and (B) the arrangement does not defer from one taxable year to
the next taxable year the payment of more than the applicable dollar
amount under section 402(g)(1)(B) ($18,000 for 2016). The notice
provides that taxpayers may rely on this rule beginning in the first
taxable year that includes July 1, 2008.
II. Pension Protection Act of 2006
The Pension Protection Act of 2006, Public Law 109-280 (120 Stat.
780) (PPA '06), permits a participant's designated beneficiary who is
not a surviving spouse to roll over, in a direct trustee-to-trustee
transfer, distributions from an eligible plan maintained by a
governmental entity (an eligible governmental plan) to an individual
retirement account or annuity (IRA). Section 829 of PPA '06 added
section 402(c)(11) to the Code, which provides that this type of
transfer is treated as an eligible rollover distribution for purposes
of section 402(c).
Section 845(b)(3) of PPA '06 added section 457(a)(3) to the Code,
which provides an exclusion from gross income for amounts that are
distributed from an eligible governmental plan to the extent provided
in section 402(l). Section 402(l) provides that distributions from
certain governmental retirement plans are excluded from the gross
income of an eligible retired public safety officer to the extent the
distributions do not exceed the amount paid by the retired officer for
qualified health insurance premiums for the year, up to a maximum of
$3,000. See Notice 2007-7, part IV (2007-1 CB 395 (January 29, 2007)),
as well as Notice 2007-99 (2007-2 CB 1243 (December 26, 2007)), for
guidance on the application of section 402(l).
Section 1104(a)(1) of PPA '06 added section 457(e)(11)(D) to the
Code, which treats applicable voluntary early retirement incentive
plans as bona fide severance pay plans that do not provide for a
deferral of compensation under section 457 with respect to payments or
supplements that are an early retirement benefit, a retirement-type
subsidy, or a social security supplement in coordination with a defined
benefit pension plan. This treatment applies only to the extent the
payments otherwise could have been provided under the defined benefit
plan (determined as if section 411 applied to the defined benefit
plan). Under section 457(e)(11)(D)(ii), an applicable
[[Page 40550]]
voluntary early retirement incentive plan may be maintained only by a
local educational agency or a tax-exempt education association.\4\
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\4\ A local education agency is defined in section 9101 of the
Elementary and Secondary Education Act of 1965, Public Law 89-10 (79
Stat. 27), as a public board of education or other public authority
legally constituted within a State for either administrative control
or direction of, or to perform a service function for, public
elementary schools or secondary schools in a city, county, township,
school district, or other political subdivision of a State, or of or
for a combination of school districts or counties that is recognized
in a State as an administrative agency for its public elementary
schools or secondary schools. A tax-exempt education association is
an association that principally represents employees of one or more
local education agencies and is an entity described in section
501(c)(5) or (6) that is exempt from tax under section 501(a).
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Section 1104(b)(1) of PPA '06 added section 457(f)(2)(F) to the
Code, which provides that section 457(f)(1) does not apply to an
applicable employment retention plan. Under section 457(f)(4), an
applicable employment retention plan is a plan maintained by a local
educational agency or a tax-exempt education association to pay
additional compensation upon severance from employment for purposes of
employee retention or rewarding employees to the extent that the
benefits payable under the plan do not exceed twice the applicable
annual dollar limit on deferrals in section 457(e)(15).\5\
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\5\ See also section 1104(c) of PPA '06, which amended section
3(2) of the Employee Retirement Income Security Act of 1974, Public
Law 93-406 (88 Stat. 829) (ERISA), to provide that applicable
voluntary early retirement incentive plans and applicable employment
retention plans are treated as welfare plans (and not pension plans)
for purposes of ERISA.
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III. Heroes Earnings Assistance and Relief Tax Act of 2008
Section 104(c) of the Heroes Earnings Assistance and Relief Tax Act
of 2008, Public Law 110-245 (122 Stat. 1624) (HEART Act), amended
section 457 to add section 457(g)(4) regarding benefits payable upon
death during qualified active military service under the Uniformed
Services Employment and Reemployment Rights Act of 1994, Public Law
103-353 (108 Stat. 3149). Section 457(g)(4) provides that an eligible
governmental plan must meet the requirements of section 401(a)(37).
Under section 401(a)(37), a plan is not treated as a qualified
retirement plan unless the plan provides that, in the case of a
participant who dies while performing qualified military service, the
survivors of the participant are generally entitled to any additional
benefits that would have been provided under the plan if the
participant had resumed and then terminated employment on account of
death. Section 105(b) of the HEART Act added section 414(u)(12) to the
Code, which provides rules regarding (A) the treatment of differential
wage payments as compensation and (B) the treatment of service in the
uniformed services (as described in section 3401(h)(2)(A)) as a
severance from employment for purposes of plan distribution
requirements, including the distribution requirements of section
457(d)(1)(A)(ii).
IV. Small Business Jobs Act of 2010 and American Taxpayer Relief Act of
2012
Section 2111 of the Small Business Jobs Act of 2010, Public Law
111-240 (124 Stat. 2504) (SBJA), amended section 402A of the Code to
allow an eligible governmental plan to include a qualified Roth
contribution program, effective for taxable years beginning after
December 31, 2010. SBJA also amended section 402A to permit taxable in-
plan rollovers to qualified Roth accounts under eligible governmental
plans. Section 902 of the American Taxpayer Relief Act of 2012, Public
Law 112-240 (126 Stat. 2313), expanded the types of amounts eligible
for an in-plan Roth rollover. For guidance relating to in-plan
rollovers to qualified Roth accounts, see Notice 2013-74 (2013-52 IRB
819 (December 23, 2013)) and Notice 2010-84 (2010-51 IRB 872 (July 19,
2010)).
Explanation of Provisions
I. Overview
These proposed regulations make certain changes to the 2003 final
regulations under sections 457(a), 457(b), and 457(g) to reflect
statutory changes to section 457 since the publication of those
regulations. In addition, these proposed regulations provide guidance
on certain issues under sections 457(e)(11) and 457(e)(12) that are not
addressed in the 2003 final regulations and provide additional guidance
under section 457(f). Consistent with the 2003 final regulations,
although the rules under section 457 apply to plan participants and
beneficiaries without regard to whether the related services are
provided by an employee or independent contractor, these proposed
regulations often use the terms employee and employer to describe a
service provider and a service recipient, respectively, without regard
to whether the service provider is an independent contractor.\6\
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\6\ Section 457(e)(2) provides that the performance of services
for purposes of section 457 includes the performance of services as
an independent contractor and that the person (or governmental
entity) for whom these services are performed is treated as an
employer.
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II. Regulatory Amendments To Reflect Statutory Changes to Section 457
A. Qualified Roth Contribution Program
Section 1.457-4 of the 2003 final regulations provides that annual
deferrals to an eligible plan that satisfy certain requirements are
excluded from the gross income of the participant in the year deferred
or contributed and are not includable in gross income until paid to the
participant, in the case of an eligible governmental plan, or until
paid or otherwise made available to the participant, in the case of an
eligible plan of a tax-exempt entity. These proposed regulations amend
Sec. 1.457-4(a) and (b) to reflect the change made by SBJA to allow an
eligible governmental plan to include a qualified Roth contribution
program, as defined in section 402A(c)(1), under which designated Roth
contributions are included in income in the year of deferral.
Consistent with section 402A(b)(2), these proposed regulations provide
that contributions and withdrawals of a participant's designated Roth
contributions must be credited and debited to a designated Roth account
maintained for the participant, and that the plan must maintain a
record of each participant's investment in the contract with respect to
the account. In addition, the proposed regulations provide that no
forfeitures may be allocated to a designated Roth account and that no
contributions other than designated Roth contributions and rollover
contributions described in section 402A(c)(3)(A) may be made to the
account.
These proposed regulations also amend Sec. 1.457-7(b)(1), which
provides guidance regarding the circumstances under which amounts are
included in income under an eligible governmental plan, to specify that
qualified distributions from a designated Roth account are excluded
from gross income.
B. Certain Distributions for Qualified Accident and Health Insurance
Premiums
The proposed regulations amend the rules for the taxation of
eligible governmental plan distributions under Sec. 1.457-7(b) to
reflect the change made by PPA '06 with respect to certain amounts
distributed to an eligible public safety officer. The proposed
regulations provide that distributions from an eligible governmental
plan meeting the requirements of section
[[Page 40551]]
402(l) are excluded from gross income and are not subject to the
general rule providing that amounts deferred under an eligible
governmental plan are includable in the gross income of a participant
or beneficiary for the taxable year in which they are paid. For this
purpose, see section 402(l) for rules regarding the extent to which
this income exclusion applies to a distribution (including the dollar
limitation on the exclusion) and section 402(l)(4)(C) for the meaning
of the term public safety officer.
C. Rules Related to Qualified Military Service
The proposed regulations amend Sec. 1.457-2(f) to implement the
requirements of section 457(g)(4), which was added by the HEART Act and
which provides that an eligible governmental plan must meet the
requirements of section 401(a)(37) (providing that, in the case of a
participant who dies while performing qualified military service, the
survivors of the participant generally are entitled to any additional
benefits that would have been provided under the plan if the
participant had resumed and then terminated employment on account of
death). In addition the proposed regulations amend Sec. 1.457-6(b)(1)
to provide a cross reference to the rules under section 414(u)(12)(B)
(providing that leave for certain military service is treated as a
severance from employment for purposes of the plan distribution
restrictions that apply to eligible plans).
III. Certain Plans That Are Not Subject to Section 457 or Are Not
Treated as Providing for a Deferral of Compensation Under Section 457
A. In General
Section 1.457-2(k) of the 2003 final regulations defines the term
plan for purposes of section 457 to include any plan, agreement,
method, program, or other arrangement, including an individual
employment agreement, of an eligible employer under which the payment
of compensation is deferred. Section 1.457-2(k) of the 2003 regulations
also identifies certain plans that are not subject to section 457
(pursuant to section 457(e)(12) and (f)(2) and statutes not
incorporated into the Code) and certain plans that are treated as not
providing for a deferral of compensation for purposes of section 457
(pursuant to section 457(e)(11)). These proposed regulations amend the
definition of plan for purposes of section 457 to remove from Sec.
1.457-2(k) the provisions identifying plans that are not subject to
section 457 and plans that are treated as not providing for a deferral
of compensation for purposes of section 457, and move the provisions
regarding most of these plans to Sec. 1.457-11 of the proposed
regulations. In addition, Sec. 1.457-11 provides additional guidance
on:
Bona fide vacation leave, sick leave, compensatory time,
severance pay, disability pay, and death benefit plans, as described in
section 457(e)(11)(A)(i), which are treated as not providing for a
deferral of compensation for purposes of section 457; and
plans paying solely length of service awards to bona fide
volunteers (or their beneficiaries), as described in section
457(e)(11)(A)(ii), that also are treated as not providing for a
deferral of compensation for purposes of section 457.\7\
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\7\ See section 457(e)(11)(B) for special rules relating to
length of service award plans.
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The proposed regulations also provide guidance in a new Sec.
1.457-12 on plans described in section 457(f)(2), to which section
457(f)(1) does not apply.
B. Bona Fide Severance Pay Plans
1. General Requirements
The proposed regulations provide that a plan must meet certain
requirements to be a bona fide severance pay plan that is treated under
section 457(e)(11)(A)(i) as not providing for the deferral of
compensation (and therefore not subject to section 457). First, the
benefits provided under the plan must be payable only upon a
participant's involuntary severance from employment or pursuant to a
window program or voluntary early retirement incentive plan. Second,
the amount payable under the plan with respect to a participant must
not exceed two times the participant's annualized compensation based
upon the annual rate of pay for services provided to the eligible
employer for the calendar year preceding the calendar year in which the
participant has a severance from employment (or the current calendar
year if the participant had no compensation from the eligible employer
in the preceding calendar year), adjusted for any increase in
compensation during the year used to measure the rate of pay that was
expected to continue indefinitely if the participant had not had a
severance from employment. Third, pursuant to the written terms of the
plan, the severance benefits must be paid no later than the last day of
the second calendar year following the calendar year in which the
severance from employment occurs. The rules in these proposed
regulations for severance pay plans are similar to the rules for
separation pay plans in Sec. 1.409A-1(b)(9) of the final section 409A
regulations.
2. Involuntary Severance From Employment
a. In General
The proposed regulations require that benefits under a bona fide
severance pay plan be payable only upon an involuntary severance from
employment or pursuant to a window or voluntary early retirement
incentive program. For this purpose, an involuntary severance from
employment is a severance from employment due to the eligible
employer's independent exercise of its authority to terminate the
participant's services, other than due to the participant's implicit or
explicit request, if the participant is willing and able to continue to
perform services. The determination of whether a severance from
employment is involuntary is based on the relevant facts and
circumstances. If a severance from employment is designated as an
involuntary severance from employment, but the facts and circumstances
indicate otherwise, the severance from employment will not be treated
as involuntary for purposes of section 457.
b. Severance From Employment for Good Reason
The proposed regulations provide that an employee's voluntary
severance from employment may be treated as an involuntary severance
from employment for purposes of section 457 if the severance from
employment is for good reason. A severance from employment is for good
reason if it occurs under certain bona fide conditions that are pre-
specified in writing under circumstances in which the avoidance of
section 457 is not the primary purpose of the inclusion of these
conditions in the plan or of the actions by the employer in connection
with the satisfaction of those conditions. Notwithstanding the previous
sentence, once the bona fide conditions have been established, the
elimination of one or more of the conditions may result in the
extension of a substantial risk of forfeiture, the recognition of which
would be subject to the rules discussed in section III.E of this
preamble.
To be treated as an involuntary severance from employment, a
severance from employment for good reason must result from unilateral
action taken by the eligible employer resulting in a material adverse
change to the working relationship (such as a material reduction in the
employee's
[[Page 40552]]
duties, working conditions, or pay). Other factors that may be taken
into account in determining whether a termination for good reason
effectively constitutes an involuntary severance from employment
include the following:
Whether the payments upon severance from employment for
good reason are in the same amount and paid at the same time as
payments conditioned upon an employer-initiated severance from
employment without cause; and
whether the employee is required to give notice to the
employer of the material adverse change in conditions and provide the
employer with an opportunity to remedy the adverse change.
The proposed regulations also provide a safe harbor under which a
plan providing for the payment of amounts upon a voluntary severance
from employment under certain conditions, that are specified in writing
by the time the legally binding right to the payment arises, will be
treated as providing for a payment upon a severance from employment for
good reason.
c. Window Programs
The proposed regulations provide that the involuntary severance
from employment requirement does not apply to window programs. The
proposed regulations define the term window program to mean a program
established by an employer to provide separation pay in connection with
an impending severance from employment. To be a window program, the
program must be offered for a limited period of time (typically no
longer than 12 months), and the eligible employer must make the program
available to employees who have a severance from employment during that
period or who have a severance from employment during that period under
specified circumstances. A program is not offered for a limited period
of time (and, therefore, is not a window program) if there is a pattern
of repeatedly providing similar programs. Whether the recurrence of
programs constitutes a pattern of repeatedly providing similar programs
is based on all of the relevant facts and circumstances, including
whether the benefits are on account of a specific reduction in
workforce (or other operational conditions), whether there is a
relationship between the separation pay and an event or condition, and
whether the event or condition is temporary and discrete or is a
permanent aspect of the employer's operations.
d. Voluntary Early Retirement Incentive Plans
The proposed regulations also provide that the involuntary
severance from employment requirement does not apply to an applicable
voluntary early retirement incentive plan described in section
457(e)(11)(D)(ii). That section describes an applicable voluntary early
retirement incentive plan as a bona fide severance pay plan for
purposes of section 457 with respect to payments or supplements that
are made as an early retirement benefit, a retirement-type subsidy, or
an early retirement benefit that is greater than a normal retirement
benefit, as described in section 411(a)(9), and that are paid in
coordination with a defined benefit pension plan that is qualified
under section 401(a) and maintained by an eligible employer that is a
governmental entity or a tax-exempt education association as described
in section 457(e)(11)(D)(ii)(II). Section 457(e)(11)(D) provides that
these payments or supplements are treated as provided under a bona fide
severance pay plan only to the extent that they otherwise could have
been provided under the defined benefit plan with which the applicable
voluntary early retirement incentive plan is coordinated (determined as
if the rules in section 411 applied to the defined benefit plan).
e. Transitional Relief in Announcement 2000-1
Announcement 2000-1 provides transitional guidance on certain
broad-based nonelective plans of State or local governments that were
in existence before December 22, 1999, and were treated as bona fide
severance pay plans for years before 1999. Under the announcement, an
eligible employer that is a governmental entity is not required to
report, including on Form W-2, ``Wage and Tax Statement,'' or Form
1099-R ``Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc.,'' amounts payable under
plans that meet certain requirements until the amounts are actually or
constructively received. The rules described in these proposed
regulations regarding bona fide severance pay plans, as modified when
these proposed regulations are finalized and become applicable, will
supersede the transitional guidance in Announcement 2000-1. See section
V.B of this preamble for special applicability dates for governmental
plans.
C. Bona Fide Death Benefit Plan
The proposed regulations provide that a bona fide death benefit
plan, which is treated as not providing for the deferral of
compensation pursuant to section 457(e)(11)(A)(i), is a plan providing
for death benefits as defined in Sec. 31.3121(v)(2)-1(b)(4)(iv)(C)
(relating to the application of the Federal Insurance Contributions Act
to nonqualified deferred compensation). The proposed regulations
further provide that benefits under a bona fide death benefit plan may
be provided through insurance and that any lifetime benefits payable
under the plan that may be includible in gross income will not be
treated as including the value of any term life insurance coverage
provided under the plan.
D. Bona Fide Disability Pay Plan
The proposed regulations provide that a bona fide disability pay
plan, which is treated as not providing for the deferral of
compensation pursuant to section 457(e)(11)(A)(i), is a plan that pays
benefits only in the event of a participant's disability. For this
purpose, the value of any taxable disability insurance coverage under
the plan that is included in gross income is disregarded. These
proposed regulations provide that a participant is disabled for this
purpose if the participant meets any of the following three conditions:
The participant is unable to engage in substantial gainful
activity by reason of a medically determinable physical or mental
impairment that can be expected to result in death or last for a
continuous period of not less than 12 months;
the participant is, by reason of any medically
determinable physical or mental impairment that can be expected to
result in death or last for a continuous period of not less than 12
months, receiving income replacement benefits for a continuous period
of not less than three months under an accident or health plan covering
employees of the eligible employer; or
the participant is determined to be totally disabled by
the Social Security Administration or the Railroad Retirement Board.
E. Bona Fide Sick Leave and Vacation Leave Plans
1. General Requirements
Under the proposed regulations, whether a sick or vacation leave
plan is a bona fide sick or vacation leave plan, and therefore treated
as not providing for the deferral of compensation under section
457(e)(11)(A)(i), is determined based on the facts and circumstances. A
sick or vacation leave plan is generally
[[Page 40553]]
treated as bona fide, and not as a plan providing for the deferral of
compensation, if the facts and circumstances demonstrate that the
primary purpose of the plan is to provide employees with paid time off
from work because of sickness, vacation, or other personal reasons.
Factors used in determining whether a plan is a bona fide sick or
vacation leave plan include the following:
Whether the amount of leave provided could reasonably be
expected to be used by the employee in the normal course (and before
the cessation of services);
limits, if any, on the ability to exchange unused
accumulated leave for cash or other benefits and any applicable accrual
restrictions (for example, where permissible under applicable law, the
use of forfeiture provisions often referred to as use-or-lose rules);
the amount and frequency of any in-service distributions
of cash or other benefits offered in exchange for accumulated and
unused leave;
whether the payment of unused sick or vacation leave is
made promptly upon severance from employment (or, instead, is paid over
a period of time after severance from employment); and
whether the sick leave, vacation leave, or combined sick
and vacation leave offered under the plan is broadly applicable or is
available only to certain employees.
2. Delegation of Authority to Commissioner
The Treasury Department and the IRS recognize that eligible
employers sponsor a wide variety of sick and vacation leave plans and
that additional rules on more specific arrangements or features of
these plans may be beneficial. Accordingly, the proposed regulations
provide that the Commissioner may issue additional rules regarding bona
fide sick or vacation leave plans in revenue rulings, notices, or other
guidance published in the Internal Revenue Bulletin, as the
Commissioner determines to be necessary or appropriate.
F. Constructive Receipt
Bona fide sick or vacation leave plans (and certain other plans)
are treated as not providing for the deferral of compensation for
purposes of section 457, and the general federal tax principles for
determining the timing and amount of income inclusion, including the
constructive receipt rules of section 451, apply to these plans. See
Sec. Sec. 1.451-1 and 1.451-2 for rules regarding constructive receipt
of income.
IV. Ineligible Plans Under Section 457(f)
A. Tax Treatment of Amounts Deferred Under Section 457(f)
Consistent with section 457(f)(1)(A), the proposed regulations
provide that if a plan of an eligible employer provides for a deferral
of compensation for the benefit of a participant or beneficiary and the
plan is not an eligible plan (an ineligible plan), the compensation
deferred under the plan is includible in the gross income of the
participant or beneficiary under section 457(f)(1)(A) on the date
(referred to in this preamble and the proposed regulations as the
applicable date) that is the later of the date the participant or
beneficiary obtains a legally binding right to the compensation or, if
the compensation is subject to a substantial risk of forfeiture at that
time, the date the substantial risk of forfeiture lapses. Generally,
the amount of the compensation deferred under the plan that is
includible in gross income on the applicable date is the present value,
as of that date, of the amount of compensation deferred. For this
purpose, the amount of compensation deferred under a plan as of an
applicable date includes any earnings as of that date on amounts
deferred under the plan.
Consistent with section 457(f)(1)(B), the proposed regulations
provide that any earnings credited thereafter on compensation that was
included in gross income under section 457(f)(1)(A) are includible in
the gross income of a participant or beneficiary when paid or made
available to the participant or beneficiary and are taxable under
section 72. For purposes of section 72, the participant (or
beneficiary) is treated as having an investment in the contract equal
to the amount actually included in gross income on the applicable date.
Consistent with section 457(f)(2), the proposed regulations provide
that section 457(f)(1) does not apply to a qualified plan described in
section 401(a), an annuity plan or contract described in section 403,
the portion of a plan that consists of a trust to which section 402(b)
applies, a qualified governmental excess benefit arrangement described
in section 415(m), the portion of a plan that consists of a transfer of
property to which section 83 applies, or the portion of an applicable
employment retention plan described in section 457(f)(4) with respect
to any participant.
B. Calculation of the Present Value of Compensation Deferred Under an
Ineligible Plan
1. Overview
The proposed regulations provide general rules for determining the
present value of compensation deferred under an ineligible plan. The
proposed regulations also include specific rules for determining the
present value of compensation deferred under ineligible plans that are
account balance plans. The rules for determining present value in the
proposed regulations are similar to the rules for determining present
value in the proposed section 409A regulations.\8\
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\8\ One difference between these proposed regulations and the
proposed section 409A regulations is that income inclusion under
section 457(f) and Sec. 1.457-12(a)(2), and the present value
calculation under these proposed regulations, is determined as of
the applicable date, whereas income inclusion under section 409A,
and the present value calculation under the proposed Sec. 1.409A-4,
is determined as of the end of the service provider's taxable year.
---------------------------------------------------------------------------
The Treasury Department and the IRS expect that these regulations
will be finalized after the proposed section 409A regulations are
finalized and that these proposed regulations, when finalized, will
adopt many provisions of Sec. 1.409A-4 for ease of administration.
Accordingly, these proposed regulations include cross references to
certain provisions of Sec. 1.409A-4 as currently proposed, including
rules for determining present value under certain specific types of
plans, such as reimbursement and in-kind benefit arrangements \9\ and
split-dollar life insurance arrangements,\10\ and rules regarding the
treatment of payment restrictions and alternative times and forms of a
future payment. The Treasury Department and the IRS request comments on
whether it is appropriate to provide any additional exceptions from the
application of the rules currently described in the proposed section
409A regulations to amounts includible in income under section 457(f),
to account for the different manners in which the two provisions apply
to an amount deferred.
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\9\ A reimbursement or in-kind benefit arrangement is an
arrangement in which benefits for a participant are provided under a
nonqualified deferred compensation arrangement described in Sec.
1.409A-1(c)(2)(i)(E).
\10\ A split-dollar insurance arrangement is an arrangement in
which benefits for a participant are provided under a nonqualified
deferred compensation plan described in Sec. 1.409A-1(c)(2)(i)(F).
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[[Page 40554]]
2. Present Value of Compensation Deferred Under an Account Balance Plan
The proposed regulations provide specific rules for calculating the
present value of compensation deferred under an ineligible plan that is
an account balance plan (as defined in Sec. 31.3121(v)(2)-1(c)(1)(ii)
and (iii)).\11\ Provided that the account balance is determined using a
predetermined actual investment or a reasonable rate of interest, the
present value of an amount payable under an account balance plan as of
an applicable date is generally the amount credited to the account,
which includes both the principal and any earnings or losses through
the applicable date. If the account balance is not determined using a
predetermined actual investment or a reasonable rate of interest, the
present value of compensation deferred under the plan as of an
applicable date is equal to the amount credited to the participant's
account as of that date, plus the present value of the excess (if any)
of the earnings to be credited under the plan after the applicable date
and through the projected payment date over the earnings that would be
credited during that period using a reasonable rate of interest. If the
present value of compensation deferred under the plan is not determined
and is not taken into account by the taxpayer in this manner, the
present value of the compensation deferred under the plan as of the
applicable date will be treated as equal to the amount credited to the
participant's account as of that date, plus the present value of the
excess (if any) of the earnings to be credited under the plan through
the projected payment date over the earnings that would be credited
using the applicable Federal rate. The proposed regulations also
provide that if the amount of earnings or losses credited under an
account balance plan is based on the greater of the earnings on two or
more investments or interest rates, then the amount included in income
on the applicable date is the sum of the amount credited to the
participant's account as of the applicable date and the present value
(determined as described in section IV.B.3 of this preamble) of the
right to future earnings.
---------------------------------------------------------------------------
\11\ The rules in these regulations, however, do not apply with
respect to Federal Insurance Contributions Act and Federal
Unemployment Tax Act taxation liability under sections 3121(v)(2)
and 3306(r)(2), respectively, and the regulations thereunder.
---------------------------------------------------------------------------
3. Present Value of Compensation Deferred Under a Plan That Is Not an
Account Balance Plan
a. Reasonable Actuarial Assumptions
The proposed regulations also set forth rules for calculating the
present value of compensation deferred under an ineligible plan that is
not an account balance plan. Under the proposed regulations, the
present value of an amount deferred under such a plan as of an
applicable date is the value, as of that date, of the right to receive
payment of the compensation in the future, taking into account the time
value of money and the probability that the payment will be made. Any
actuarial assumptions used to calculate the present value of the
compensation deferred must be reasonable as of the applicable date,
determined based on all of the relevant facts and circumstances. For
this purpose, taking into account the probability that a participant
might die before receiving certain benefits is a reasonable actuarial
assumption only if the plan provides that the benefits will be
forfeited upon death. Discounts based on the probability that payments
will not be made due to the unfunded status of the plan, the risk that
the eligible employer or another party may be unwilling or unable to
pay, the possibility of future plan amendments or changes in law, and
other similar contingencies are not permitted for purposes of
determining present value under the proposed regulations.
b. Treatment of Severance From Employment
If the present value of an amount depends on the time when a
severance from employment occurs and the severance from employment has
not occurred by the applicable date, then, for purposes of determining
the present value of the amount, the severance from employment
generally may be treated as occurring on any date on or before the
fifth anniversary of the applicable date, unless, as of the applicable
date, it would be unreasonable to use such an assumption. For example,
if the applicable date occurs in 2017 and the employer knows on the
applicable date that the severance from employment will occur in 2018,
it would be unreasonable to use a date after the expected severance
from employment date to determine the present value of the
compensation.
c. Treatment of Payments Based on Formula Amounts
Some ineligible plans may provide that all or part of the amount
payable under the plan is determined by reference to one or more
factors that are indeterminable on the applicable date. For example, an
amount payable may be dependent on a participant's final average
compensation and total years of service. These proposed regulations
refer to such an amount as a formula amount. The proposed regulations
provide that the determination of the present value of a formula amount
under an ineligible plan must be based on reasonable, good faith
assumptions with respect to any contingencies as to the amount of the
payment, with the assumptions based on all the facts and circumstances
existing on the applicable date. The proposed regulations also provide
that, if only a portion of the compensation deferred under the plan
consists of a formula amount, the amount payable with respect to that
portion is determined under the rules applicable to formula amounts,
and the remaining balance is determined under the rules applicable to
amounts that are not formula amounts.
d. Unreasonable Actuarial Assumptions
If the Commissioner determines that the actuarial assumptions used
by an employer in determining present value are not reasonable, the
proposed regulations provide that the Commissioner will determine the
present value of the compensation deferred using actuarial assumptions
and methods that the Commissioner determines to be reasonable based on
all of the facts and circumstances.
4. Loss Deduction Rules
The proposed regulations contain rules similar to the loss
deduction rules in the proposed section 409A regulations. Under the
rules in these proposed regulations, if a participant includes an
amount of deferred compensation in income under section 457(f)(1)(A),
but the compensation that is subsequently paid or made available is
less than the amount included in income because the participant has
forfeited or lost some or all of the compensation due to death or some
other reason (for example, due to investment performance), the
participant is entitled to a deduction for the taxable year in which
any remaining right to the amount is permanently forfeited under the
plan's terms or otherwise permanently lost. The deduction allowed for
the taxable year in which the permanent forfeiture or loss occurs is
equal to the amount previously included in income under section
457(f)(1)(A), less the total amount of compensation that is actually
paid or made available under the plan that constitutes a return of
investment
[[Page 40555]]
in the contract. In the case of an employee, the available deduction
generally would be treated as a miscellaneous itemized deduction,
subject to the deduction limitations applicable to such expenses under
sections 67 and 68.\12\
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\12\ Section 1341 would not be applicable to this type of loss
because inclusion of an amount in income as a result of section
457(f) would not constitute receipt of an amount to which it
appeared that the taxpayer had an unrestricted right in the taxable
year of inclusion.
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5. Examples Illustrating the Present Value Rules
The proposed regulations include several examples illustrating the
application of the present value rules to the more common types of
plans providing for the deferral of compensation under section 457(f).
The regulations do not illustrate the application of these valuation
rules to plans that are more unusual for employees of governmental and
tax-exempt entities, such as compensatory options to acquire stock or
other property. The amount includible in income on the applicable date
under these less common types of plans would be determined under the
general rules for plans that are not account balance plans.
C. Definition of Deferral of Compensation
1. In General
The proposed regulations define the term deferral of compensation
for purposes of determining whether section 457(f) applies to an
arrangement because it provides for a deferral of compensation. In
general, a plan provides for a deferral of compensation if a
participant has a legally binding right during a taxable year to
compensation that, pursuant to the terms of the plan, is or may be
payable in a later taxable year. However, the proposed regulations
generally provide that a participant does not have a legally binding
right to compensation to the extent that it may be unilaterally reduced
or eliminated by the employer after the services creating the right
have been performed.
Whether a plan provides for a deferral of compensation is generally
based on the terms of the plan and the relevant facts and circumstances
at the time that the participant obtains a legally binding right to the
compensation, or, if later, when a plan is amended to convert a right
that does not provide for a deferral of compensation into a right that
does provide for a deferral of compensation. For example, if a plan
providing retiree health care does not initially provide for a deferral
of compensation but is later amended to provide the ability to receive
future cash payments instead of health benefits, it may become a plan
that provides for the deferral of compensation at the time of the
amendment.
Under the proposed regulations, an amount of compensation deferred
under a plan that provides for the deferral of compensation does not
cease to be an amount subject to section 457(f) by reason of any change
to the plan that would recharacterize the right to the amount as a
right that does not provide for the deferral of compensation. In
addition, any change under the plan that results in an exchange of an
amount deferred under the plan for some other right or benefit that
would otherwise be excluded from the participants' gross income does
not affect the characterization of the plan as one that provides for a
deferral of compensation. Thus, for example, if a plan that provides
for a deferral of compensation is amended to provide health benefits
instead of cash, it will retain its character as a plan that provides
for a deferral of compensation.
2. Short-Term Deferrals
The proposed regulations provide that a deferral of compensation
does not occur with respect to any amount that would be a short-term
deferral under Sec. 1.409A-1(b)(4), substituting the definition of a
substantial risk of forfeiture provided under these proposed
regulations for the definition under Sec. 1.409A-1(d). Accordingly, a
deferral of compensation does not occur with respect to any payment
that is not a deferred payment, provided that the participant actually
or constructively receives the payment on or before the last day of the
applicable 2\1/2\ month period. For this purpose, the applicable 2\1/2\
month period is the period ending on the later of the 15th day of the
third month following the end of the first calendar year in which the
right to the payment is no longer subject to a substantial risk of
forfeiture or the 15th day of the third month following the end of the
eligible employer's first taxable year in which the right to the
payment is no longer subject to a substantial risk of forfeiture.
Because there is considerable overlap between the definition of
substantial risk of forfeiture for purposes of section 457(f) and the
definition of substantial risk of forfeiture for purposes of section
409A, in many cases amounts that, under this rule, are not deferred
compensation subject to section 457(f) are also not deferred
compensation subject to section 409A. For example, if an arrangement
provides for the payment of a bonus on or before March 15 of the year
following the calendar year in which the right to the bonus is no
longer subject to a substantial risk of forfeiture (within the meaning
of both these proposed regulations and Sec. 1.409A-1(d)) and the bonus
is paid on or before that March 15, the arrangement would not be a plan
providing for a deferral of compensation to which section 457(f) (or
section 409A) applies. For circumstances in which a payment under a
plan made after that March 15 may still qualify as a short-term
deferral for purposes of sections 409A and 457(f) (due to incorporation
of the section 409A regulatory provisions into these proposed
regulations under section 457(f)), see Sec. 1.409A-1(b)(4)(ii).
3. Recurring Part-Year Compensation
After issuance of the final section 409A regulations, commenters
expressed concerns about the application of section 409A to situations
involving certain recurring part-year compensation. For this purpose,
recurring part-year compensation is compensation paid for services
rendered in a position that the employer and employee reasonably
anticipate will continue under similar terms and conditions in
subsequent years, and under which the employee will be required to
provide services during successive service periods each of which
comprises less than 12 months (for example, a teacher providing
services during a school year comprised of 10 consecutive months) and
each of which begins in one taxable year of the employee and ends in
the next taxable year. In general, commenters asserted that section
409A should not apply to situations involving recurring part-year
compensation because the amount being deferred from one taxable year to
the next taxable year is typically small and because most taxpayers
view that type of arrangement as a method of managing cash flow, rather
than a tax-deferral opportunity.
In response to these comments, Notice 2008-62 provided that an
arrangement under which an employee or independent contractor receives
recurring part-year compensation does not provide for the deferral of
compensation for purposes of section 409A or for purposes of section
457(f) if (i) the arrangement does not defer payment of any of the
recurring part-year compensation beyond the last day of the 13th month
following the beginning of the service period, and (ii) the arrangement
does not defer from one taxable year to the next taxable year the
[[Page 40556]]
payment of more than the applicable dollar amount under section
402(g)(1)(B) ($18,000 for 2016).
Some commenters, however, subsequently expressed concerns that
Notice 2008-62 does not adequately address some teaching positions,
such as those of college and university faculty members. They asserted
that, depending on several variables (such as the month in which the
service period begins), the dollar limitation in the notice could
result in adverse tax consequences to teachers with academic year
compensation as low as $80,000. Commenters further observed that some
of these arrangements are nonelective and, therefore, some employees
cannot opt out of a recurring part-year compensation arrangement. Some
commenters also contended that the rules set forth in the notice were
difficult to apply.
To simplify the rule set forth in Notice 2008-62, and recognizing
that educational employers frequently structure their pay plans to
include recurring part-year compensation and that the main purpose of
this design is to achieve an even cash flow for employees who do not
work for a portion of the year, these proposed regulations modify the
recurring part-year compensation rule for purposes of section 457(f).
The proposed regulations provide that a plan or arrangement under which
an employee receives recurring part-year compensation that is earned
over a period of service does not provide for the deferral of
compensation if the plan or arrangement does not defer payment of any
of the recurring part-year compensation to a date beyond the last day
of the 13th month following the first day of the service period for
which the recurring part-year compensation is paid, and the amount of
the recurring part-year compensation (not merely the amount deferred)
does not exceed the annual compensation limit under section 401(a)(17)
($265,000 for 2016) for the calendar year in which the service period
commences. A conforming change is included in proposed regulations
under section 409A that are also published in the Proposed Rules
section of this issue of the Federal Register.
D. Interaction of Section 457 With Section 409A
The proposed regulations also address the interaction of the rules
under section 457(f) and section 409A. Section 409A(c) provides that
nothing in section 409A is to be construed to prevent the inclusion of
amounts in gross income under any other provision of chapter 1 of
subtitle A of the Code (Normal taxes and surtaxes) or any other rule of
law earlier than the time provided in section 409A. In addition, it
provides that any amount included in gross income under section 409A is
not required to be included in gross income under any other provision
of chapter 1 of subtitle A or any other rule of law later than the time
provided in section 409A. The proposed regulations provide that the
rules under section 457(f) apply to plans separately and in addition to
the requirements under section 409A.\13\ Thus, a deferred compensation
plan of an eligible employer that is subject to section 457(f) may also
be a nonqualified deferred compensation plan that is subject to section
409A. Section 1.457-12(d)(5)(iii) of the proposed regulations provides
an example of the interaction of sections 409A and 457(f), and it is
intended that this example will also be included in Sec. 1.409A-4 when
those currently proposed regulations are finalized.
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\13\ See also Sec. 1.409A-1(a)(4).
---------------------------------------------------------------------------
E. Rules Relating to Substantial Risk of Forfeiture
The proposed regulations provide rules regarding the conditions
that constitute a substantial risk of forfeiture for purposes of
section 457(f). As discussed in section IV.A of this preamble, an
amount to which an employee has a legally binding right under an
ineligible plan is generally includible in gross income on the later of
the date the employee obtains the legally binding right to the
compensation or, if the compensation is subject to a substantial risk
of forfeiture, the date the substantial risk of forfeiture lapses. The
proposed regulations provide that an amount is generally subject to a
substantial risk of forfeiture for this purpose only if entitlement to
that amount is conditioned on the future performance of substantial
services, or upon the occurrence of a condition that is related to a
purpose of the compensation if the possibility of forfeiture is
substantial. A special rule applies to determine whether initial
deferrals of current compensation may be treated as subject to a
substantial risk of forfeiture and whether a substantial risk of
forfeiture can be extended. For this purpose, current compensation
refers to compensation that is payable on a current basis such as
salary, commissions, and certain bonuses, and does not include
compensation that is deferred compensation.
Whether an amount is conditioned on the future performance of
substantial services is based on all of the relevant facts and
circumstances, such as whether the hours required to be performed
during the relevant period are substantial in relation to the amount of
compensation. A condition is related to a purpose of the compensation
only if the condition relates to the employee's performance of services
for the employer or to the employer's tax exempt or governmental
activities, as applicable, or organizational goals. A substantial risk
of forfeiture exists based on a condition related to the purpose of the
compensation only if the likelihood that the forfeiture event will
occur is substantial. Also, an amount is not subject to a substantial
risk of forfeiture if the facts and circumstances indicate that the
forfeiture condition is unlikely to be enforced. Factors considered for
purposes of determining the likelihood that the forfeiture will be
enforced include, but are not limited to, the past practices of the
employer, the level of control or influence of the employee with
respect to the organization and the individual(s) who would be
responsible for enforcing the forfeiture, and the enforceability of the
provisions under applicable law.
Under these proposed regulations, if a plan provides that
entitlement to an amount is conditioned on an involuntary severance
from employment without cause, the right is subject to a substantial
risk of forfeiture if the possibility of forfeiture is substantial. For
this purpose, a voluntary severance from employment that would be
treated as an involuntary severance from employment under a bona fide
severance pay plan for purposes of section 457(e)(11)(A)(i) (that is, a
severance from employment for good reason) is also treated as an
involuntary severance from employment without cause. See section
III.B.2 of this preamble for a discussion of circumstances under which
a severance from employment for good reason may be treated as an
involuntary severance from employment for purposes of section
457(e)(11)(A)(i).
The proposed regulations provide that compensation is not
considered to be subject to a substantial risk of forfeiture merely
because it would be forfeited if the employee accepts a position with a
competing employer unless certain conditions are satisfied. First, the
right to the compensation must be expressly conditioned on the employee
refraining from the performance of future services pursuant to a
written agreement that is enforceable under applicable law. Second, the
employer must consistently make reasonable efforts to verify compliance
with all of the noncompetition agreements to which it is a party
(including the noncompetition
[[Page 40557]]
agreement at issue). Third, at the time the noncompetition agreement
becomes binding, the facts and circumstances must show that the
employer has a substantial and bona fide interest in preventing the
employee from performing the prohibited services and that the employee
has a bona fide interest in engaging, and an ability to engage, in the
prohibited services. The proposed regulations identify several factors
that are relevant for this purpose.
Additional conditions apply with respect to the ability to treat
initial deferrals of current compensation as being subject to a
substantial risk of forfeiture. Similarly, an attempt to extend the
period covered by a risk of forfeiture, often referred to as a rolling
risk of forfeiture, is generally disregarded under the proposed
regulations unless certain conditions are met.
Specifically, the proposed regulations permit initial deferrals of
current compensation to be subject to a substantial risk of forfeiture
and also allow an existing risk of forfeiture to be extended only if
all of the following requirements are met. First, the present value of
the amount to be paid upon the lapse of the substantial risk of
forfeiture (as extended, if applicable) must be materially greater than
the amount the employee otherwise would be paid in the absence of the
substantial risk of forfeiture (or absence of the extension). The
proposed regulations provide that an amount is materially greater for
this purpose only if the present value of the amount to be paid upon
the lapse of the substantial risk of forfeiture, measured as of the
date the amount would have otherwise been paid (or in the case of an
extension of the risk of forfeiture, the date that the substantial risk
of forfeiture would have lapsed without regard to the extension), is
more than 125 percent of the amount the participant otherwise would
have received on that date in the absence of the new or extended
substantial risk of forfeiture. (No implication is intended that this
standard would also apply for purposes of Sec. 1.409A-1(d)(1).)
Second, the initial or extended substantial risk of forfeiture must
be based upon the future performance of substantial services or
adherence to an agreement not to compete. It may not be based solely on
the occurrence of a condition related to the purpose of the transfer
(for example, a performance goal for the organization), though that
type of condition may be combined with a sufficient service condition.
Third, the period for which substantial future services must be
performed may not be less than two years (absent an intervening event
such as death, disability, or involuntary severance from employment).
Fourth, the agreement subjecting the amount to a substantial risk
of forfeiture must be made in writing before the beginning of the
calendar year in which any services giving rise to the compensation are
performed in the case of initial deferrals of current compensation or
at least 90 days before the date on which an existing substantial risk
of forfeiture would have lapsed in the absence of an extension. Special
rules apply to new employees. The proposed regulations do not extend
these special rules for new employees to employees who are newly
eligible to participate in a plan. The Treasury Department and the IRS
request comments on whether special provisions for newly eligible
employees are needed in the context of arrangements subject to section
457(f), and if so whether the rules under Sec. Sec. 1.409A-1(c)(2) and
1.409A-2(a)(7) would be a useful basis for similar rules under section
457(f) and how an aggregated single plan (versus multiple plans) should
be defined for this purpose to ensure that the rules are not subject to
manipulation.
V. Proposed Applicability Dates
A. General Applicability Date
Generally, these regulations are proposed to apply to compensation
deferred under a plan for calendar years beginning after the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register, including deferred amounts to
which the legally binding right arose during prior calendar years that
were not previously included in income during one or more prior
calendar years. No implication is intended regarding application of the
law before these proposed regulations become applicable. Taxpayers may
rely on these proposed regulations until the applicability date.
B. Special Applicability Dates
These regulations are proposed to include three special
applicability dates for specific provisions. First, in the case of a
plan that is maintained pursuant to one or more collective bargaining
agreements that have been ratified and are in effect on the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register, these regulations would not apply
to compensation deferred under the plan before the earlier of (1) the
date on which the last of the collective bargaining agreements
terminates (determined without regard to any extension thereof after
the date of publication of the Treasury decision adopting these rules
as final regulations in the Federal Register, or (2) the date that is
three years after the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register.
Second, for all plans, with respect to the rules regarding
recurring part-year compensation for periods before the applicability
date of these regulations, taxpayers may rely on either the rules set
forth in these proposed regulations or the rules set forth in Notice
2008-62.
Third, to the extent that legislation is required to amend a
governmental plan, the proposed regulations would apply only to
compensation deferred under the plan in calendar years beginning on or
after the close of the second regular legislative session of the
legislative body with the authority to amend the plan that begins after
the date of publication of the Treasury decision adopting these rules
as final regulations in the Federal Register.
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory impact assessment is
not required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations, and because the regulations do not impose a
collection of information on small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of
the Code, this notice of proposed rulemaking has been submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Comments and Public Hearing
Before the proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the IRS
as prescribed in this preamble under the ADDRESSES heading. The
Treasury Department and the IRS request comments on all aspects of the
proposed rules, including whether special transition rules are needed
for plans established before the proposed applicability dates of these
regulations (including sick and vacation leave or severance pay plans
that may be treated as providing deferred compensation
[[Page 40558]]
subject to section 457, but that, under the proposed regulations, may
be treated as providing deferred compensation subject to section
457(f), whether additional exceptions are appropriate to the general
application of the rules currently described in the proposed section
409A regulations to determine the amounts includible in income under
section 457(f), and whether special provisions for newly eligible
employees are needed in the context of arrangements subject to section
457(f) (and if so whether the rules under Sec. Sec. 1.409A-1(c)(2) and
1.409A-2(a)(7) would be a useful basis for similar rules under section
457(f)). All comments submitted by the public will be available at
www.regulations.gov or upon request.
A public hearing has been scheduled for October 18, 2016, beginning
at 10 a.m. in the Auditorium, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 30 minutes before the
hearing starts. For information about having your name placed on the
building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written or
electronic comments by September 20, 2016 and an outline of the topics
to be discussed and the amount of time to be devoted to each topic (a
signed original and eight (8) copies) by September 20, 2016. A period
of 10 minutes will be allotted to each person for making comments. An
agenda showing the scheduling of the speakers will be prepared after
the deadline for receiving outlines has passed. Copies of the agenda
will be available free of charge at the hearing.
Statement of Availability of IRS Documents
For copies of recently issued revenue procedures, revenue rulings,
notices, and other guidance published in the Internal Revenue Bulletin,
please visit the IRS Web site at http://www.irs.gov or contact the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402.
Drafting Information
The principal author of the proposed regulations is Keith R. Kost,
Office of Associate Chief Counsel (Tax Exempt and Government Entities).
However, other personnel from the Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.457-1 is revised to read as follows:
Sec. 1.457-1 General overview of section 457.
Section 457 provides rules for nonqualified deferred compensation
plans established by eligible employers as defined under Sec. 1.457-
2(d). Eligible employers may establish either deferred compensation
plans that are eligible plans that meet the requirements of section
457(b) and Sec. Sec. 1.457-3 through 1.457-10, or deferred
compensation plans that do not meet the requirements of section 457(b)
and Sec. Sec. 1.457-3 through 1.457-10 (and therefore are ineligible
plans which are generally subject to federal income tax treatment under
section 457(f) and Sec. 1.457-12(a)). Plans described in Sec. 1.457-
11 are not subject to section 457 or are treated as not providing for a
deferral of compensation for purposes of section 457 (and, accordingly,
the rules under Sec. Sec. 1.457-3 through 1.457-10 and Sec. 1.457-
12(a) do not apply to these plans).
0
Par. 3. Section 1.457-2 is amended by:
0
1. Revising the introductory text.
0
2. Revising the second sentence of paragraph (f).
0
3. Revising the last sentence of paragraph (i).
0
4. Revising paragraph (k).
The revisions read as follows:
Sec. 1.457-2 Definitions.
This section sets forth the definitions that are used under
Sec. Sec. 1.457-1 through 1.457-12.
* * * * *
(f) * * * An eligible governmental plan is an eligible plan that is
established and maintained by a State as defined in paragraph (l) of
this section and that meets the requirements of section 401(a)(37). * *
*
* * * * *
(i) * * * Solely for purposes of section 457 and Sec. Sec. 1.457-2
through 1.457-12, the term nonelective employer contribution includes
employer contributions that would be described in section 401(m) if
they were contributions to a qualified plan.
* * * * *
(k) Plan. Plan includes any agreement, method, program, or other
arrangement (including an individual employment agreement) under which
the payment of compensation for services rendered to an eligible
employer is deferred (whether by salary reduction, nonelective employer
contribution, or otherwise). However, the plans described in Sec.
1.457-11 are either not subject to section 457 or are treated as not
providing for a deferral of compensation for purposes of section 457,
even if the payment of compensation is deferred under the plan.
* * * * *
0
Par. 4. Section 1.457-4 is amended by:
0
1. Revising paragraphs (a), (b), and the last sentence of (e)(1).
0
2. Removing the language ``Sec. 1.457-11'' wherever it appears in
paragraphs (e)(1), (e)(2), (e)(3), and (e)(5) Example 1 and adding the
language ``Sec. 1.457-12'' in its place.
The revisions read as follows:
Sec. 1.457-4 Annual deferrals, deferral limitations, and deferral
agreements under eligible plans.
(a) Taxation of annual deferrals. With the exception of designated
Roth contributions (which are not excludable from gross income), annual
deferrals that satisfy the requirements of paragraphs (b) and (c) of
this section are excluded from the gross income of a participant in the
year deferred or contributed and are not includible in gross income
until paid to the participant in the case of an eligible governmental
plan, or until paid or otherwise made available to the participant in
the case of an eligible plan of a tax-exempt entity. See Sec. 1.457-7.
(b) Agreement for deferral--(1) In general. To be an eligible plan,
the plan must provide that compensation for any calendar month may be
deferred by salary reduction only if an agreement providing for the
deferral has been entered into before the first day of the month in
which the compensation to be deferred under the agreement would
otherwise be paid or made available, and any modification or revocation
of such an agreement may not become effective before the first day of
the month following the month in which
[[Page 40559]]
the modification or revocation occurs. However, a new employee may
defer compensation in the first calendar month of employment if an
agreement providing for the deferral is entered into on or before the
first day the participant performs services for the eligible employer.
An eligible plan may provide that if a participant enters into an
agreement providing for deferral by salary reduction under the plan,
the agreement will remain in effect until the participant revokes or
alters the terms of the agreement. Nonelective employer contributions
to an eligible plan are not subject to the timing rules for salary
reduction agreements described in this paragraph (b)(1).
(2) Designated Roth contributions in plans maintained by eligible
governmental employers--(i) Elections. An election by a participant to
make a designated Roth contribution (as defined in section 402A(c)(1))
to an eligible governmental plan in lieu of all or a portion of the
amount that the participant could elect to contribute to the plan on a
pre-tax basis must be irrevocably designated as an elective deferral
that is not excludable from gross income in accordance with the timing
rules under paragraph (b)(1) of this section. Designated Roth
contributions are treated the same as pre-tax contributions for
purposes of Sec. Sec. 1.457-1 through 1.457-10, except as otherwise
specifically provided in those sections.
(ii) Separate accounting. Contributions and withdrawals of a
participant's designated Roth contributions must be credited and
debited to a designated Roth account maintained for the participant,
and the plan must maintain a record of the participant's investment in
the contract (that is, designated Roth contributions that have not been
distributed) with respect to the participant's designated Roth account.
In addition, gains, losses, and other credits or charges must be
separately allocated on a reasonable and consistent basis to the
designated Roth account and other accounts under the plan. However,
forfeitures may not be allocated to the designated Roth account, and no
contributions other than designated Roth contributions and rollover
contributions described in section 402A(c)(3)(B) may be allocated to
such account. The separate accounting requirement described in this
paragraph applies to a plan at the time a designated Roth contribution
is contributed to the plan and continues to apply until all designated
Roth contributions (and the earnings attributable thereto) are
distributed from the plan. See A-13 of Sec. 1.402A-1 for additional
requirements for separate accounting.
* * * * *
(e) * * *
(1) * * * Thus, an excess deferral is includible in gross income
when deferred or, if later, when the excess deferral first ceases to be
subject to a substantial risk of forfeiture, under the rules described
in Sec. 1.457-12(e).
* * * * *
0
Par. 5. Section 1.457-6 is amended by revising the first sentence of
paragraph (b)(1) to read as follows:
Sec. 1.457-6 Timing of distributions under eligible plans.
* * * * *
(b) * * *
(1) * * * An employee has a severance from employment with the
eligible employer if the employee dies, retires, or otherwise has a
severance from employment (including as described in section
414(u)(12)(B)) with the eligible employer.* * *
* * * * *
0
Par. 6. Section 1.457-7 is amended by revising the section heading and
paragraph (b)(1), redesignating paragraph (b)(4) as (b)(5), and adding
a new paragraph (b)(4) to read as follows:
Sec. 1.457-7 Taxation of distributions under eligible plans.
* * * * *
(b) * * *
(1) Amounts included in gross income in year paid under an eligible
governmental plan. Except as provided in paragraphs (b)(2), (3), and
(4) of this section (or in Sec. 1.457-10(c) relating to payments to a
spouse or former spouse pursuant to a qualified domestic relations
order), amounts deferred under an eligible governmental plan are
includible in the gross income of a participant or beneficiary for the
taxable year in which paid to the participant or beneficiary under the
plan. Distributions from designated Roth accounts are excludable from
gross income to the extent provided in section 402A and Sec. Sec.
1.402A-1 and 1.402A-2.
* * * * *
(4) Certain amounts from an eligible governmental plan not in
excess of the amount paid for qualified health insurance premiums.
Amounts paid to a participant who is an eligible retired public safety
officer from an eligible governmental plan are excludible from gross
income to the extent provided in section 402(l).
* * * * *
0
Par. 7. Section 1.457-9 is amended by revising the third sentence of
paragraph (a) and the last sentence of paragraph (b) to read as
follows:
Sec. 1.457-9 Effect on eligible plans when not administered in
accordance with eligibility requirements.
(a) * * * If a plan ceases to be an eligible governmental plan,
amounts subsequently deferred by participants are includible in gross
income when deferred, or, if later, when the amounts deferred first
cease to be subject to a substantial risk of forfeiture, under the
rules described in Sec. 1.457-12(e). * * *
(b) * * * See Sec. 1.457-12 for rules regarding the treatment of
an ineligible plan.
Sec. 1.457-10 [Amended]
0
Par. 8. Section 1.457-10 is amended by removing the language ``Sec.
1.457-11'' wherever it appears in paragraphs (a)(2)(i), (a)(3) Example
2 (ii), (c)(2) Example 1 (ii) and Example 2 (ii) and adding the
language ``Sec. 1.457-12'' in its place.
Sec. Sec. 1.457-11 and 1.457-12 [Redesignated as Sec. Sec. 1.457-12
and 1.457-13]
0
Par. 9. Redesignate Sec. Sec. 1.457-11 and 1.457-12 as Sec. Sec.
1.457-12 and 1.457-13, respectively.
0
Par. 10. Add a new Sec. 1.457-11 to read as follows:
Sec. 1.457-11 Exclusions and exceptions for certain plans.
(a) In general. The plans described in paragraphs (b) and (c) of
this section either are not subject to section 457 or are treated as
not providing for a deferral of compensation for purposes of section
457, and, accordingly, the provisions of Sec. Sec. 1.457-3 through
1.457-10 and 1.457-12(a) do not apply to these plans.
(b) Plans not subject to section 457. The following plans are not
subject to section 457:
(1) Any plan satisfying the conditions in section 1107(c)(4) of the
Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2494) (TRA '86)
(relating to certain plans for State judges);
(2) Any of the following plans (to which specific transitional
statutory exclusions apply):
(i) A plan of a tax-exempt entity in existence prior to January 1,
1987, if the conditions of section 1107(c)(3)(B) of the TRA '86, as
amended by section 1011(e)(6) of the Technical and Miscellaneous
Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342) (TAMRA), are
satisfied (see Sec. 1.457-2(b)(4) for a different rule that may apply
to the annual deferrals permitted under this type of plan);
(ii) A collectively bargained nonelective deferred compensation
plan in effect on December 31, 1987, if the conditions of section
6064(d)(2) of TAMRA are satisfied;
[[Page 40560]]
(iii) Amounts deferred under plans described in section 6064(d)(3)
of TAMRA (relating to amounts deferred under certain nonelective
deferred compensation plans in effect before 1989); and
(iv) Any plan satisfying the conditions in section 1107(c)(4) and
(5) of TRA '86 (relating to certain plans for certain individuals with
respect to which the IRS issued guidance before 1977); and
(3) Any plan described in section 457(e)(12) that provides only
nonelective deferred compensation attributable to services not
performed as an employee (for example, a plan providing nonelective
deferred compensation attributable to services performed by independent
contractors). For this purpose, deferred compensation is nonelective
only if all individuals, other than those who have not satisfied any
applicable initial service requirement, with the same relationship to
the payor are covered under the same plan with no individual variations
or options under the plan.
(c) Plans treated as not providing for a deferral of compensation.
The following plans are treated as not providing for a deferral of
compensation for purposes of section 457, Sec. Sec. 1.457-1 through
1.457-10, and Sec. 1.457-12:
(1) A bona fide vacation leave, sick leave, compensatory time,
severance pay, disability pay, or death benefit plan, as described in
section 457(e)(11)(A)(i) (see paragraph (d) of this section for the
definition of a bona fide severance pay plan, paragraph (e) of this
section for the definitions of a bona fide death benefit plan and a
bona fide disability pay plan, and paragraph (f) of this section for
the requirements for a bona fide sick or vacation leave plan); and
(2) A plan described in section 457(e)(11)(A)(ii) paying solely
length of service awards that are based on service accrued after
December 31,1996, to bona fide volunteers (and their beneficiaries) on
account of qualified services performed by those volunteers.
(d) Definition of bona fide severance pay plan--(1) In general. A
bona fide severance pay plan is an arrangement that meets the following
requirements:
(i) Except as provided in paragraph (d)(3) of this section,
benefits are payable only upon involuntary severance from employment,
as defined in paragraph (d)(2) of this section (see Sec. 1.457-6(b)
for the meaning of severance from employment);
(ii) The amount payable does not exceed two times the participant's
annualized compensation based upon the annual rate of pay for services
provided to the eligible employer for the calendar year preceding the
calendar year in which the participant has a severance from employment
with the eligible employer (or the current calendar year if the
participant had no compensation for services provided to the eligible
employer in the preceding calendar year), adjusted for any increase
during the year used to measure the rate of pay that was expected to
continue indefinitely if the participant had not had a severance from
employment; and
(iii) The entire severance benefit must be paid to the participant
no later than the last day of the second calendar year following the
calendar year in which the severance from employment occurs, pursuant
to a requirement contained in a written plan document.
(2) Involuntary severance from employment--(i) In general. For
purposes of paragraph (d)(1)(i) of this section, an involuntary
severance from employment means a severance from employment due to the
independent exercise of the eligible employer's unilateral authority to
terminate the participant's services, other than due to the
participant's implicit or explicit request, if the participant was
willing and able to continue performing services. An involuntary
severance from employment may include an eligible employer's failure to
renew a contract at the time the contract expires, provided that the
employee was willing and able to execute a new contract providing terms
and conditions substantially similar to those in the expiring contract
and to continue providing such services. The determination of whether a
severance from employment is involuntary is based on all the facts and
circumstances without regard to any characterization of the reason for
the payment by the employer or participant.
(ii) Severance from employment for good reason--(A) In general.
Notwithstanding paragraph (d)(2)(i) of this section, a participant's
voluntary severance from employment will be treated as an involuntary
severance from employment, for purposes of paragraph (d)(1)(i) of this
section, if the severance occurs under certain bona fide conditions
that are pre-specified in writing (referred to herein as a severance
from employment for good reason), provided that the avoidance of the
requirements of section 457 is not the primary purpose of the inclusion
of the conditions or of the actions by the employer in connection with
the satisfaction of the conditions, and a voluntary severance from
employment under such conditions effectively constitutes an involuntary
severance from employment. Notwithstanding the previous sentence, once
the bona fide conditions have been established, the elimination of one
or more of the conditions may result in the extension of a substantial
risk of forfeiture, the recognition of which would be subject to the
rules discussed in Sec. 1.457-12(e)(2).
(B) Material negative change required. A severance from employment
for good reason will be treated as an involuntary severance from
employment only if the relevant facts and circumstances demonstrate
that it was the result of unilateral employer action that caused a
material negative change to the participant's relationship with the
eligible employer. Some factors that may provide evidence of such a
material negative change include a material reduction in the duties to
be performed, a material negative change in the conditions under which
the duties are to be performed, or a material reduction in the
compensation to be received for performing such services. Other factors
to be considered in determining whether a severance from employment due
to good reason will be treated as an involuntary severance from
employment include the extent to which the payments upon a severance
from employment for good reason are in the same amount and made at the
same time and in the same form as payments that would be made upon an
actual involuntary severance from employment, and whether the employee
is required to give the employer notice of the existence of the
condition that would result in the treatment of a severance from
employment as being for good reason and a reasonable opportunity to
remedy the condition.
(C) Safe harbor. The requirements of paragraph (d)(2)(ii)(B) of
this section are deemed to be satisfied if a severance from employment
occurs under the conditions described in paragraph (d)(2)(ii)(C)(1) of
this section, those conditions are specified in writing by the time the
legally binding right to the payment arises, and the plan also
satisfies the requirements in paragraphs (d)(2)(ii)(C)(2) and (3) of
this section.
(1) The severance from employment occurs during a limited period of
time not to exceed two years following the initial existence of one or
more of the following conditions arising without the consent of the
participant:
(i) A material diminution in the participant's base compensation;
(ii) A material diminution in the participant's authority, duties,
or responsibilities;
(iii) A material diminution in the authority, duties, or
responsibilities of the supervisor to whom the participant is required
to report, including a
[[Page 40561]]
requirement that a participant report to a corporate officer or
employee instead of reporting directly to the board of directors (or
similar governing body) of an organization;
(iv) A material diminution in the budget over which the participant
retains authority;
(v) A material change in the geographic location at which the
participant must perform services; or
(vi) Any other action or inaction that constitutes a material
breach by the eligible employer of the agreement under which the
participant provides services.
(2) The amount, time, and form of payment upon the severance from
employment is substantially the same as the amount, time, and form of
payment that would have been made upon an actual involuntary severance
from employment, to the extent such right to payment exists.
(3) The participant is required to provide notice to the eligible
employer of the existence of the applicable condition(s) described in
paragraph (d)(2)(ii)(C)(1) of this section within a period not to
exceed 90 days after the initial existence of the condition(s), upon
the notice of which, the employer must be provided a period of at least
30 days during which it may remedy the condition(s) and not be required
to pay the amount.
(3) Window programs. The requirement in paragraph (d)(1)(i) of this
section that benefits be payable only upon involuntary severance from
employment does not apply to a bona fide severance pay plan that
provides benefits upon a severance from employment pursuant to a window
program. For this purpose, a window program means a program established
by an employer to provide separation pay in connection with an
impending severance from employment, if the program is made available
by the employer for a limited period of time (typically no longer than
12 months) to participants who have a severance from employment during
that period or to participants who have a severance from employment
during that period under specified circumstances. A program is not
considered a window program for purposes of this paragraph if it is
part of a pattern of multiple similar programs that, if offered as a
single program, would not be a window program under this paragraph.
Whether multiple programs constitute a pattern of similar programs is
determined based on the relevant facts and circumstances. Although no
one factor is determinative, relevant factors include whether the
benefits are on account of a specific reduction in workforce (or some
other entity-related operational condition), the degree to which the
separation pay relates to an event or condition, and whether the event
or condition is temporary or discrete or is a permanent aspect of the
employer's practices.
(4) Voluntary early retirement incentive plans--(i) In general.
Notwithstanding paragraph (d)(1) of this section, an applicable
voluntary early retirement incentive plan (as defined in section
457(e)(11)(D)(ii)) is treated as a bona fide severance pay plan for
purposes of this section with respect to payments or supplements made
as an early retirement benefit, a retirement-type subsidy, or an early
retirement benefit described in the last sentence of section 411(a)(9),
if the payments or supplements are made in coordination with a defined
benefit pension plan that is qualified under section 401(a) maintained
by an eligible employer described in section 457(e)(1)(A) or by an
education association described in section 457(e)(11)(D)(ii)(II). See
section 1104(d)(4) of the Pension Protection Act of 2006, Public Law
109-280 (120 Stat. 780), regarding the application of the Internal
Revenue Code and certain other laws to any plan, arrangement, or
conduct to which section 457(e)(11)(D) does not apply.
(ii) Definitions. The definitions in Sec. 1.411(d)-3(g)(6)(i) and
(iv) apply for purposes of determining whether payments or supplements
are an early retirement benefit or a retirement-type subsidy, and the
definition in Sec. 1.411(a)-7(c)(4) applies for purposes of
determining whether payments or supplements are an early retirement
benefit described in the last sentence of section 411(a)(9).
(e) Bona fide death benefit or disability pay plans--(1) Bona fide
death benefit plan. For purposes of section 457(e)(11)(A)(i) and this
section, a bona fide death benefit plan is a plan providing death
benefits as defined in Sec. 31.3121(v)(2)-1(b)(4)(iv)(C) of this
chapter, provided that, for purposes of this paragraph (e)(1), the
death benefits may be provided through insurance and the lifetime
benefits payable under the plan are not treated as including the value
of any term life insurance coverage provided under the plan that is
includible in gross income.
(2) Bona fide disability pay plan. For purposes of section
457(e)(11)(A)(i) and this section, a bona fide disability pay plan is a
plan that pays benefits (whether or not insured) only in the event that
a participant is disabled, provided that, for purposes of this
paragraph (e)(2), the value of any disability insurance coverage
provided under the plan that is included in gross income is
disregarded. For this purpose, a participant is considered disabled
only if the participant meets one of the following conditions:
(i) The participant is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment that can be expected to result in death or last for a
continuous period of not less than 12 months;
(ii) The participant is, by reason of any medically determinable
physical or mental impairment that can be expected to result in death
or last for a continuous period of not less than 12 months, receiving
income replacement benefits for a period of not less than three months
under an accident and health plan covering employees of the eligible
employer; or
(iii) The participant is determined to be totally disabled by the
Social Security Administration or Railroad Retirement Board.
(f) Bona fide sick and vacation leave plans--(1) In general. For
purposes of section 457(e)(11)(A)(i) and this section, the
determination of whether a sick or vacation leave plan is a bona fide
sick or vacation leave plan is made based on the relevant facts and
circumstances. In general, a plan is treated as a bona fide sick or
vacation leave plan, and not an arrangement to defer compensation, if
the facts and circumstances demonstrate that the primary purpose of the
plan is to provide participants with paid time off from work because of
sickness, vacation, or other personal reasons. Factors used in
determining whether a plan is a bona fide sick or vacation leave plan
include whether the amount of leave provided could reasonably be
expected to be used in the normal course by an employee (before the
employee ceases to provide services to the eligible employer) absent
unusual circumstances, the ability to exchange unused accumulated leave
for cash or other benefits (including nontaxable benefits and the use
of leave to postpone the date of termination of employment), the
applicable restraints (if any) on the ability to accumulate unused
leave and carry it forward to subsequent years in circumstances in
which the accumulated leave may be exchanged for cash or other
benefits, the amount and frequency of any in-service distributions of
cash or other benefits offered in exchange for accumulated and unused
leave, whether any payment of unused leave is made promptly upon
severance from employment (or instead is paid over a period after
severance from employment), and whether the program (or a particular
feature of the
[[Page 40562]]
program) is available only to a limited number of employees.
(2) Delegation of authority to Commissioner. The Commissioner may
provide additional rules regarding the requirements of a bona fide sick
or vacation leave plan under section 457, in revenue rulings, notices,
or other guidance published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter), as the Commissioner determines
to be necessary or appropriate.
0
Par. 11. Newly-designated Sec. 1.457-12 is revised to read as follows:
Sec. 1.457-12 Tax treatment of participants if plan is not an
eligible plan.
(a) Tax treatment of an ineligible plan under section 457(f)--(1)
In general. Pursuant to section 457(f)(1), if an eligible employer
provides for a deferral of compensation under an ineligible plan,
amounts will be included in income in accordance with paragraphs (a)(2)
through (4) of this section, except as otherwise provided in this
paragraph (a) or paragraph (b) of this section. See Sec. 1.457-11 for
plans that are not subject to section 457 or are not treated as
providing for a deferral of compensation for purposes of section 457.
(2) Income inclusion. The present value of compensation deferred
under an ineligible plan is includible in the gross income of a
participant or beneficiary under section 457(f) on the applicable date.
For this purpose, the applicable date is the later of the first date on
which there is a legally binding right to the compensation or, if the
compensation is subject to a substantial risk of forfeiture, the first
date on which the substantial risk of forfeiture (within the meaning of
section 457(f)(3)(B) and paragraph (e) of this section) lapses.
Paragraph (c) of this section provides rules for determining the
present value of the compensation deferred under the plan, including a
requirement that the amount of compensation deferred under an
ineligible plan as of an applicable date includes any earnings on the
compensation as of that date.
(3) Treatment of earnings after income inclusion. Earnings credited
on compensation deferred under an ineligible plan after the date on
which the compensation is includible in gross income under section
457(f)(1) pursuant to paragraph (a)(2) of this section are includible
in the gross income of a participant or beneficiary when paid or made
available to the participant or beneficiary.
(4) Income inclusion when compensation is paid or made available.
Amounts paid or made available to a participant or beneficiary under an
ineligible plan are includible in the gross income of the participant
or beneficiary under section 72, relating to annuities. For this
purpose, an amount is paid or made available if there is actual or
constructive receipt (within the meaning of Sec. 1.451-2) of any
taxable or nontaxable benefit, including a transfer of cash, a transfer
of property includible in income under section 83, any other event that
results in the inclusion in income under the economic benefit doctrine,
a contribution to (or transfer or creation of a beneficial interest in)
a trust described in section 402(b) at a time when contributions to the
trust are includible in income under section 402(b), or inclusion of an
amount in income under section 457A. An amount is also paid or made
available for this purpose if there is a transfer, cancellation, or
reduction of an amount of deferred compensation in exchange for
benefits under a welfare benefit plan, a fringe benefit excludible
under section 119 or section 132, or any other benefit that is
excludible from gross income.
(5) Investment in the contract. For purposes of applying section 72
to amounts that are paid or made available as described in paragraph
(a)(4) of this section, a participant is treated as having an
investment in the contract to the extent that compensation has been
included in gross income by the participant in accordance with
paragraph (a)(2) of this section. An amount is treated as included in
income for a taxable year only to the extent that the amount was
properly includible in income and the participant actually included the
amount in income (including on an original or amended federal income
tax return or as a result of an IRS examination or a final decision of
a court of competent jurisdiction).
(b) Exceptions--(1) In general. Section 457(f)(1) and paragraph (a)
of this section do not apply to a plan or a portion of a plan described
in this paragraph (b). The determination of whether a plan or a portion
of a plan is described in this paragraph (b) is made as of the date on
which the legally binding right to an amount arises. However, a plan or
portion of a plan will cease to be a plan that is described in this
paragraph (b) on the first date that it no longer meets the
requirements described in this paragraph (b).
(2) Certain retirement plans. Annuity plans and contracts described
in section 403 and plans described in section 401(a) are not subject to
the provisions of section 457(f)(1) and paragraph (a) of this section.
(3) Section 402(b) trusts--(i) Section 402(b). The portion of a
plan that consists of a trust to which section 402(b) applies is not
subject to the provisions of section 457(f)(1) and paragraph (a) of
this section.
(ii) Example. The provisions of this paragraph (b)(3) are
illustrated in the following example:
Example. (i) Facts. On October 1, 2017, an eligible employer
establishes an ineligible plan covering only one participant (a
highly compensated employee under section 414(q)) under which the
participant obtains an unconditional right to be paid $150,000 (plus
interest at a specified reasonable rate) on October 1, 2021. As part
of the plan, the employer simultaneously establishes a trust
described in section 402(b) in the United States for the sole
benefit of the participant. Under the terms of the plan and trust,
the assets of the trust are also payable to the participant on
October 1, 2021, and the amount that the employer is otherwise
obligated to pay under the plan will be reduced (offset) by the
amount paid to the participant from the trust. Section 402(b)(4)
applies to the trust, and the trust has assets of $98,000 on October
1, 2017 and $100,000 on December 31, 2017.
(ii) Conclusion. Section 457(f) and this section apply only to
the portion of the plan that is not funded through the section
402(b) trust. Thus, the participant has income under section 457(f)
equal to the present value of the portion of the compensation
deferred under the plan that is not funded through the section
402(b) trust on the date on which there is a legally binding right
to the compensation (October 1, 2017). This present value is equal
to $52,000 ($150,000--$98,000), which is included in the
participant's gross income on October 1, 2017. The participant must
also include $100,000 in gross income on December 31, 2017 pursuant
to section 402(b)(4)(A).
(4) Qualified governmental excess benefit arrangements under
section 415(m). A qualified governmental excess benefit arrangement
described in section 415(m) is not subject to the provisions of section
457(f)(1) and paragraph (a) of this section.
(5) Nonqualified annuities under section 403(c)--(i) Section 403(c)
annuities. The portion of a plan in which premiums are paid by an
employer for an annuity contract to which section 403(c) applies is not
subject to the provisions of section 457(f)(1) and paragraph (a) of
this section.
(ii) Examples. The provisions of this paragraph (b)(5) are
illustrated by the following examples:
Example 1. (i) Facts. A tax-exempt entity pays a premium for an
annuity contract (described in section 403(c)) for the benefit of a
participant. The annuity contract has a value of $135,000, and the
participant is substantially vested (as defined in Sec. 1.83-3(b))
at the time the premium is paid. The
[[Page 40563]]
participant includes the full value ($135,000) in income under
section 403(c) in the year the employer pays the premium.
(ii) Conclusion. Although the participant has a legally binding
right to payments under the annuity contract that will be made in a
subsequent taxable year, the participant's interest in the annuity
contract is not subject to section 457(f)(1) and paragraph (a) of
this section.
Example 2. (i) Facts. The facts are the same as in Example 1 of
this paragraph (b)(5), except the participant's rights in the
annuity contract are not substantially vested (as defined in Sec.
1.83-3(b)) at the time the premium is paid and do not become
substantially vested until a future taxable year. The participant
does not include the full value of the contract in income under
section 403(c) in the year the employer pays the premium.
(ii) Conclusion. Neither the payment of the premium nor the
participant's interest in the annuity contract is subject to section
457(f)(1) or paragraph (a) of this section.
(6) Transfer of property under section 83--(i) Section 83. The
portion of a plan that consists of a transfer of property to which
section 83 applies is not subject to the provisions of section
457(f)(1) and paragraph (a) of this section. Specifically, section
457(f)(1) and paragraph (a) of this section do not apply if, on or
before the first date on which compensation deferred under a plan is
not subject to a substantial risk of forfeiture (within the meaning of
section 457(f)(3)(B) and paragraph (e) of this section), the amount is
paid through a transfer of property described in section 83. However,
section 457(f)(1) and paragraph (a) of this section do apply if the
first date on which compensation deferred under a plan is not subject
to a substantial risk of forfeiture (as defined in section 457(f)(3)(B)
and paragraph (e) of this section) precedes the date on which the
amount is paid through a transfer of property described in section 83.
If deferred compensation payable in property is includible in gross
income under section 457(f)(1)(A), then, as provided in section 72, the
amount includible in gross income when that property is later
transferred or made available to the participant or beneficiary is the
excess of the value of the property at that time over the amount
previously included in gross income under section 457(f)(1)(A).
(ii) Examples. The provisions of this paragraph (b)(6) are
illustrated by the following examples:
Example 1. (i) Facts. On December 1, 2017, an eligible employer
agrees to transfer property that is substantially vested (within the
meaning of Sec. 1.83-3(b)) and has a fair market value equal to a
specified dollar amount, to a participant on January 15, 2020. The
participant's rights under the agreement are not subject to a
substantial risk of forfeiture (within the meaning of section
457(f)(3)(B) and paragraph (e) of this section).
(ii) Conclusion. Because there is no substantial risk of
forfeiture (within the meaning of section 457(f)(3)(B) and paragraph
(e) of this section) with respect to the agreement to transfer
property in 2020, the present value of the amount on the applicable
date (December 1, 2017) is includible in the participant's gross
income under section 457(f)(1)(A). Under paragraph (a)(4) of this
section, when the substantially vested property is transferred to
the participant on January 15, 2020, the amount includible in the
participant's gross income is equal to the excess of the fair market
value of the property on that date over the amount that was included
in gross income for 2017.
Example 2. (i) Facts. Under a bonus plan, an eligible employer
agrees in 2021 to transfer property that is substantially nonvested
(within the meaning of Sec. 1.83-3(b)) to Participants A and B in
2023 if they are continuously employed by the eligible employer
through the date of the transfer (which condition constitutes a
substantial risk of forfeiture within the meaning of section
457(f)(3)(B) and paragraph (e) of this section). In 2023, the
eligible employer transfers the property to Participants A and B,
subject to a substantial risk of forfeiture (within the meaning of
Sec. 1.83-3(c)), that lapses in 2025. Participant A makes a timely
election to include the fair market value of the property in gross
income under section 83(b). Participant B does not make this
election.
(ii) Conclusion. The compensation deferred for both Participants
A and B is not subject to section 457(f)(1) or paragraph (a) of this
section because section 83 applies to the transfer of property on or
before the date on which the property is not subject to a
substantial risk of forfeiture (within the meaning of section
457(f)(3)(B) and paragraph (e) of this section). Because of the
section 83(b) election, Participant A includes the fair market value
of the property (disregarding lapse restrictions) in gross income
for 2023 under section 83(b)(1). Participant B includes the value of
the property in gross income when the substantial risk of forfeiture
lapses in 2025 under section 83(a).
(7) Applicable employment retention plan. The portion of a plan
that is an applicable employment retention plan as described in section
457(f)(4) with respect to any participant is not subject to the
provisions of section 457(f)(1) and paragraph (a) of this section. See
also section 1104(d)(4) of the Pension Protection Act of 2006, Public
Law 109-280 (120 Stat. 780), regarding the application of the Internal
Revenue Code and certain other laws to any plan, arrangement, or
conduct to which section 457(f)(2)(F) does not apply.
(c) Amount included in income--(1) Calculation of present value--
(i) In general. Except as otherwise provided in this paragraph (c), the
present value of compensation deferred under an ineligible plan as of
an applicable date equals the present value of the future payments to
which the participant has a legally binding right (as described in
paragraph (d) of this section). For this purpose, present value is
determined in accordance with the provisions of this paragraph
(c)(1)(i) by multiplying the amount of a payment (or the amount of each
payment in a series of payments) by the probability that any condition
or conditions on which the payment is contingent will be satisfied and
discounting the amount using an assumed rate of interest to reflect the
time value of money.
(ii) Actuarial assumptions--(A) In general--(1) Reasonable
actuarial assumptions. For purposes of paragraph (c)(1)(i) of this
section, present value is determined using actuarial assumptions and
methods that, based on all of the facts and circumstances, are
reasonable as of the applicable date, including an interest rate that
is reasonable as of that date and other assumptions necessary to
determine the present value (without regard to whether the present
value of the compensation deferred under the plan is reasonably
ascertainable as described in Sec. 31.3121(v)(2)-1(e)(4)(i)(B) of this
chapter).
(2) Probability of death before the payment of benefits. For
purposes of paragraph (c)(1)(i) of this section, the probability that a
participant will die before a payment is made is permitted to be taken
into account only to the extent that the payment is forfeitable upon
death.
(3) Probability that the payment will not be made. For purposes of
paragraph (c)(1)(i) of this section, the probability that payments will
not be made (or will be reduced) because of the unfunded status of a
plan, the risk associated with any deemed or actual investment of
compensation deferred under the plan, the risk that the eligible
employer or another party will be unwilling or unable to pay, the
possibility of future plan amendments, the possibility of a future
change in the law, or similar risks or contingencies are not taken into
account.
(B) Payments made in foreign currency. The rules in Sec. 1.409A-
4(b)(2)(i) apply for purposes of determining the treatment of payments
in foreign currency.
(C) Treatment of payment triggers based upon events--(1) In
general. Except as provided in paragraph (c)(1)(ii)(C)(2) of this
section, the rules in Sec. 1.409A-4(b)(2)(vii) apply for purposes of
determining the treatment of payment triggers based upon events.
[[Page 40564]]
(2) Treatment of severance from employment. If the date on which a
payment will be made depends on the date the participant has a
severance from employment (as described in Sec. 1.457-6(b)) and the
participant has not had a severance from employment by the applicable
date, then for purposes of paragraph (c)(1)(ii)(A)(1) of this section,
the severance from employment may be treated as occurring on any date
that is not later than the fifth anniversary of the applicable date,
unless this assumption would be unreasonable under the facts and
circumstances.
(iii) Unreasonable assumptions. If any actuarial assumption or
method used to determine the present value of compensation deferred
under the plan is not reasonable, as determined by the Commissioner,
then the Commissioner will determine the present value using actuarial
assumptions and methods that the Commissioner determines to be
reasonable, including the AFR and the applicable mortality table under
section 417(e)(3)(B) as of the applicable date. For purposes of this
section, AFR means the mid-term applicable federal rate (as defined
pursuant to section 1274(d)) for January 1 of the relevant calendar
year, compounded annually.
(iv) Account balance plans--(A) In general. To the extent benefits
are provided under an account balance plan, as defined in Sec.
31.3121(v)(2)-1(c)(1)(ii) and (iii) of this chapter, to which earnings
(or losses, if applicable) are credited at least annually, the present
value of compensation deferred under the plan as of an applicable date
is the amount credited to the participant's account, including both the
principal amount credited to the account and any earnings or losses
attributable to the principal amount that have been credited to the
account, as of that date.
(B) Unreasonable rates of return. This paragraph (c)(1)(iv)(B)
applies to an account balance plan under which the income credited is
based on neither a predetermined actual investment, within the meaning
of Sec. 31.3121(v)(2)-1(d)(2)(i)(B) of this chapter, nor a rate of
interest that is reasonable, within the meaning of Sec. 31.3121(v)(2)-
1(d)(2)(i)(C) of this chapter, as determined by the Commissioner. The
present value of compensation deferred under that type of plan as of an
applicable date is equal to the amount credited to the participant's
account as of that date, plus the present value of the excess (if any)
of the earnings to be credited under the plan over the earnings that
would be credited through the projected payment date using a reasonable
rate of interest. If the present value of compensation deferred under
the plan is not determined and is not taken into account by the
taxpayer in this manner, the present value of the compensation deferred
under the plan will be treated as equal to the amount credited to the
participant's account as of the applicable date, plus the present value
of the excess (if any) of the earnings to be credited under the plan
through the projected payment date over the earnings that would be
credited using the AFR.
(C) Combinations of predetermined actual investments or interest
rates. If the amount of earnings or losses credited under an account
balance plan is based on the greater of two or more rates of return
(each of which would be a predetermined actual investment or a
reasonable interest rate if the earnings or losses credited were based
on only one of those rates of return), then the amount included in
income on the applicable date is the sum of the amount credited to the
participant's account as of the applicable date and the present value
(determined under paragraph (c)(1)(i) of this section) of the right to
future earnings.
(D) Examples. The following examples illustrate the provisions of
paragraphs (c)(1)(i) through (iv) of this section. For purposes of
these examples, assume that the arrangements are either not subject to
section 409A or 457A or otherwise comply with the requirements of those
provisions, and that the parties are not under examination for any of
the tax years in question.
Example 1. (i) Facts. On October 1, 2017, an eligible employer
agrees to pay $100,000 to a participant on January 1, 2024, if the
participant is alive on that date. The employer determines that the
October 1, 2017 present value of that payment is $75,000 based on
the second segment rate used for purposes of section 417(e)(3)(C) on
October 1, 2017, and using the mortality table applicable under
section 417(e)(3)(B) on October 1, 2017.
(ii) Conclusion. The present value has been determined in
accordance with paragraph (c)(1)(i) of this section.
Example 2. (i) Facts. On October 1, 2018, an eligible employer
agrees to pay $100,000 to a participant at severance from
employment. The assumptions that the employer uses to determine the
present value are that the participant will have a severance from
employment on October 1, 2023 (the fifth anniversary of the date the
participant obtains the right to the payment in accordance with
paragraph (c)(1)(ii)(C)(2) of this section) and that the present
value will be determined using a rate of 4.5% compounded monthly.
(ii) Conclusion. Assuming, solely for purposes of this example,
that the employer's severance from employment date and interest rate
assumptions are reasonable, the value included in income on the
applicable date (October 1, 2018) is $79,885.
Example 3. (i) Facts. On October 1, 2017, an eligible employer
agrees to pay $100,000 to a participant at severance from
employment, but no payment will be made if the severance from
employment occurs on or after October 1, 2021.
(ii) Conclusion. Although paragraph (c)(1)(ii)(C)(2) of this
section provides that for purposes of determining when a payment
will be made, severance may be treated as if it occurred on the
fifth anniversary of the applicable date, that assumption would be
unreasonable under these facts and circumstances and would not be
permitted under paragraph (c)(1)(ii)(C)(2) of this section.
Accordingly, for purposes of determining the present value, an
assumption that severance from employment would occur after
September 30, 2021 would be unreasonable.
Example 4. (i) Facts. An eligible employer maintains a
supplemental executive retirement plan that provides a subsidized
early retirement benefit payable to participants between age 60 and
65. A 60 year old participant becomes vested in the right to the
subsidized early retirement benefit on December 31, 2017.
(ii) Conclusion. The assumption under paragraph (c)(1)(ii)(C)(2)
of this section would not be permitted for purposes of determining
the amount to be included in income because the nature of the
subsidized early retirement benefit causes it to decline in value
until it becomes worthless upon attainment of age 65. In other
words, the value of the subsidized early retirement benefit using
the assumption permitted in paragraph (c)(1)(ii)(C)(2) of this
section would result in a value of $0 and would be unreasonable
under the facts and circumstances.
Example 5. (i) Facts. On October 1, 2017, an eligible employer
agrees to provide compensation to an employee for prior services in
an amount equal to $100,000, plus interest at a reasonable rate,
with payment to be made at the time of the employee's severance from
employment. The participant's right to the compensation is not
subject to a substantial risk of forfeiture at any time.
(ii) Conclusion. Because the agreement provides for a reasonable
rate of interest, the amount included in income on the applicable
date (October 1, 2017) is $100,000.
Example 6. (i) Facts. The facts are the same as in Example 5 of
this paragraph (c)(1)(iv)(D), except that the right is subject to a
requirement that the participant continue to provide substantial
services for three additional years (which constitutes a substantial
risk of forfeiture as described in paragraph (e) of this section).
On October 1, 2020, when the substantial risk of forfeiture lapses,
the account balance is $116,147.
(ii) Conclusion. The amount included in income on the applicable
date (October 1, 2020) is $116,147.
Example 7. (i) Facts. The facts are the same as in Example 5 of
this paragraph (c)(1)(iv)(D), except that the rate of interest
credited on the account is 5% above a reasonable rate of interest.
On October 1,
[[Page 40565]]
2017, the sum of the $100,000 account balance, plus the present
value of the right to receive the difference between a reasonable
rate of return and the rate of return being credited on the account
(from October 1, 2017 until October 1, 2022) is $128,336. The
participant has a severance from employment on October 16, 2020, and
is paid $135,379 on that date.
(ii) Conclusion. The amount included in income on the applicable
date (October 1, 2017) is $128,336. Pursuant to paragraph (a)(5) of
this section, the $128,336 is treated as investment in the contract
for purposes of section 72 and, pursuant to paragraph (a)(4) of this
section, the participant recognizes an additional $7,043 ($135,379,
minus the $128,336 that was previously included in gross income for
2017) in income attributable to the payment on October 16, 2020.
Example 8. (i) Facts. The facts are the same as in Example 5 of
this paragraph (c)(1)(iv)(D), except that the employer also agrees
to pay the participant an amount that is estimated to be equal to
the federal, state, and local income taxes due (based on a fixed
percentage that is pre-specified in the agreement) attributable to
the amount included in income on the applicable date (October 1,
2017). In exchange for that tax payment, the amount payable upon
severance from employment is to be reduced by an amount equal to the
federal, state, and local income taxes for the taxable year of
payment that the employer estimates would otherwise have been due
but for the income inclusion in 2017. In satisfaction of this
obligation to make the tax payment, the employer pays the
participant $66,667 on April 15, 2018.
(ii) Conclusion. The present value on the applicable date
(October 1, 2017) is $100,000, plus the present value of the $66,667
payment to be made on April 15, 2018, minus the present value of the
reduction that will be applied at the time of payment (which, if
reasonable, may be assumed to be October 1, 2022 in accordance with
paragraph (c)(1)(ii)(C)(2) of this section).
Example 9. (i) Facts. An eligible employer credits $100,000 on
December 31, 2017, to the account of a participant under an
ineligible plan, subject to the condition that the amount will be
forfeited if the participant voluntarily terminates employment
before December 31, 2019. The account balance will be credited with
notional annual earnings based on the greater of the return of a
designated S&P 500 index fund or a specified rate of interest and
will be paid on December 31, 2025.
(ii) Conclusion. Under paragraph (c)(1)(iv)(C) of this section,
the sum of the amount credited to the participant's account as of
the applicable date (December 31, 2019) and the present value
(determined under paragraph (c)(1)(i) of this section) of the right
to future earnings based on the greater of the return of the
designated S&P 500 index fund or the specified rate of interest must
be included in the participant's gross income on the applicable
date.
(v) Application of the general calculation rules to formula
amounts. With respect to a right to receive a formula amount, the
amount or amounts of future payments under the plan, for purposes of
determining the present value as of an applicable date, is determined
based on all of the facts and circumstances existing as of that date.
This determination must reflect reasonable, good faith assumptions with
respect to any contingencies as to the amount of the payment, both with
respect to each contingency and with respect to all contingencies in
the aggregate. An assumption based on the facts and circumstances as of
the applicable date may be reasonable even if the facts and
circumstances change in the future so that when the amount payable is
determined in a subsequent year, the amount payable is a greater (or
lesser) amount. In such a case, the increase (or decrease) due to the
change in the facts and circumstances is treated as earnings (or
losses). For purposes of this paragraph (c)(1)(v), an amount payable is
a formula amount to the extent that the amount payable in a future
taxable year is dependent upon factors that, after applying the
assumptions and other rules set forth in this section, are not
determinable as of the applicable date, such that the amount payable
may not be readily determined as of that date under the other
provisions of this section. If some portion of an amount payable is not
a formula amount, the amount payable with respect to such portion is
determined under the rules applicable to amounts that are not formula
amounts, and only the balance of the amount payable is determined under
the rules applicable to formula amounts.
(vi) Treatment of payment restrictions. The rules in Sec. 1.409A-
4(b)(2)(v) apply for purposes of determining the treatment of payment
restrictions.
(vii) Treatment of alternative times and forms of a future payment.
The rules in Sec. 1.409A-4(b)(2)(vi) apply for purposes of determining
the treatment of alternative times and forms of a future payment.
(viii) Reimbursement and in-kind benefit arrangements. The rules in
Sec. 1.409A-4(b)(4) apply for purposes of determining the present
value of reimbursement and in-kind benefit arrangements.
(ix) Split-dollar life insurance arrangements. The rules in Sec.
1.409A-4(b)(5) apply for purposes of determining the present value of
benefits provided under a split-dollar life insurance arrangement.
(2) Forfeiture or other permanent loss of right to compensation
previously included in income--(i) In general. If a participant has
included compensation under a plan in income pursuant to paragraph
(a)(2) or (4) of this section, but all or a portion of that
compensation is never paid under the plan, the participant is entitled
to a deduction for the taxable year in which the entire remaining right
to the payment of the compensation is permanently forfeited under the
plan's terms or otherwise permanently lost. The deduction to which the
participant is entitled equals the excess of the amounts included in
income under paragraphs (a)(2) and (4) of this section with respect to
the compensation over the total amount of the compensation actually
received that constitutes investment in the contract under paragraph
(a)(5) of this section.
(ii) Forfeiture or permanent loss of right. For purposes of this
paragraph (c)(2), a mere diminution in the amount payable under the
plan due to a deemed investment loss, an actuarial reduction, or any
other decrease in the amount deferred under the plan is not treated as
a forfeiture or permanent loss of the right if the participant retains
the right to any payment under the plan (whether or not such right is
subject to a substantial risk of forfeiture as described in paragraph
(e) of this section). In addition, an amount payable under a plan is
not treated as forfeited or otherwise permanently lost if another
amount or an obligation to make a payment in a future year is
substituted for the original amount. However, an amount payable under a
plan is treated as permanently lost if the participant's right to
receive payment of the amount becomes wholly worthless during the
taxable year. Whether the right to receive payment has become wholly
worthless is determined based on the relevant facts and circumstances
existing as of the last day of the relevant taxable year.
(iii) Examples. The provisions of this paragraph (c)(2) are
illustrated in the following examples:
Example 1. (i) Facts. On October 1, 2017, an eligible employer
establishes an ineligible plan for a participant under which the
employer agrees to pay the amount credited to the participant's
account when the participant has a severance from employment. The
obligation to make the payment is not subject to a substantial risk
of forfeiture. The account balance on October 1, 2017 is $125,000,
and the participant includes $125,000 in income in 2017. The plan
subsequently experiences notional investment losses, and the
participant receives $75,000 from the plan in a lump-sum
distribution in 2024, when the participant has a severance from
employment. The $75,000 lump-sum distribution represents all amounts
due to the participant under the plan.
[[Page 40566]]
(ii) Conclusion. For 2024, the participant is entitled to deduct
$50,000 (the excess of the amount included in income under paragraph
(a)(2) of this section ($125,000) over the amount actually received
that constitutes investment in the contract under paragraph (a)(5)
of this section ($75,000)).
Example 2. (i) Facts. The facts are the same facts as in
Example 1 of this paragraph (c)(2)(iii), except that the plan
provides that the participant will receive the deferred compensation
in three installments (1/3 of the account balance in 2024, 1/2 of
the then remaining account balance in 2025, and the remaining
balance in 2026), and that the sum of all three installments is
$75,000.
(ii) Conclusion. The participant is entitled to deduct $50,000
in the taxable year of the last installment payment (2026)
($125,000, reduced by the sum of the amounts received in 2024, 2025,
and 2026 ($75,000)).
(d) Definition of deferral of compensation--(1) In general--(i)
Legally binding right. A plan provides for the deferral of compensation
with respect to a participant for purposes of section 457(f) and this
section if, under the terms of the plan and the relevant facts and
circumstances, the participant has a legally binding right during a
calendar year to compensation that, pursuant to the terms of the plan,
is or may be payable to (or on behalf of) the participant in a later
calendar year. Whether a plan provides for the deferral of compensation
for purposes of section 457(f) and this section is determined based on
the relevant facts and circumstances at the time that the participant
obtains a legally binding right to the compensation, or, if later, when
a plan is amended to convert a right that does not provide for a
deferral of compensation into a right that does provide for a deferral
of compensation. For example, if a plan providing for retiree health
care does not initially provide for a deferral of compensation but is
later amended to provide the ability to receive future cash payments
instead of health benefits, it may become a plan that provides for the
deferral of compensation at the time of the amendment. An amount of
compensation deferred under a plan that provides for the deferral of
compensation within the meaning of section 457(f) and this section does
not cease to be an amount subject to section 457(f) and this section by
reason of any change to the plan that would otherwise recharacterize
the right to the amount as a right that does not provide for the
deferral of compensation with respect to such amount. In addition, any
change under the plan that results in an exchange of an amount deferred
under the plan for some other right or benefit that would otherwise be
excluded from the participant's gross income does not affect the
characterization of the plan as one that provides for a deferral of
compensation.
(ii) Discretion to reduce or eliminate compensation. A participant
does not have a legally binding right to compensation to the extent
that the compensation may be reduced or eliminated unilaterally by the
employer or another person after the services creating the right to the
compensation have been performed. However, if the facts and
circumstances indicate that the discretion to reduce or eliminate the
compensation is available or exercisable only upon a condition, or the
discretion to reduce or eliminate the compensation lacks substantive
significance, a participant is considered to have a legally binding
right to the compensation. Whether the discretion to reduce or
eliminate compensation lacks substantive significance depends on all
the relevant facts and circumstances. However, if the participant to
whom the compensation may be paid has effective control of the person
retaining the discretion to reduce or eliminate the compensation, or
has effective control over any portion of the compensation of the
person retaining the discretion to reduce or eliminate the
compensation, or is a member of the family (as defined in section
267(c)(4) but also including the spouse of any member of the family) of
the person retaining the discretion to reduce or eliminate the
compensation, the discretion to reduce or eliminate the compensation is
not treated as having substantive significance. Compensation is not
considered subject to unilateral reduction or elimination merely
because it may be reduced or eliminated by operation of the objective
terms of the plan, such as the application of a nondiscretionary,
objective provision creating a substantial risk of forfeiture or the
application of a formula that provides for benefits to be offset by
benefits provided under another plan (such as a plan that is qualified
under section 401(a)).
(2) Short-term deferrals. For purposes of section 457(f) and this
section, a deferral of compensation does not occur under a plan with
respect to any payment for which a deferral of compensation does not
occur under section 409A pursuant to Sec. 1.409A-1(b)(4) (short-term
deferrals), except that, for purposes of this paragraph, in applying
the rules provided in Sec. 1.409A-1(b)(4) the meaning of substantial
risk of forfeiture under Sec. 1.457-12(e) applies in each place that
term is used (and not the meaning of substantial risk of forfeiture
provided under Sec. 1.409A-1(d)).
(3) Recurring part-year compensation. For purposes of section
457(f) and this section and notwithstanding paragraph (d)(2) of this
section, a deferral of compensation does not occur under a plan with
respect to an amount that is recurring part-year compensation (as
defined in Sec. 1.409A-2(a)(14)), if the plan does not defer payment
of any of the recurring part-year compensation to a date beyond the
last day of the 13th month following the first day of the service
period for which the recurring part-year compensation is paid, and the
amount of the recurring part-year compensation does not exceed the
annual compensation limit under section 401(a)(17) for the calendar
year in which the service period commences.
(4) Certain other exceptions. For purposes of section 457(f) and
this section, a deferral of compensation does not occur to the extent
that a plan provides for:
(i) The payment of expense reimbursements, medical benefits, or in-
kind benefits, as described in Sec. 1.409A-1(b)(9)(v)(A), (B), or (C);
(ii) Certain indemnification rights, liability insurance, or legal
settlements, as described in Sec. 1.409A-1(b)(10), or (11); or
(iii) Taxable educational benefits for an employee (which, for this
purpose, means solely benefits consisting of educational assistance, as
defined in section 127(c)(1) and the regulations thereunder,
attributable to the education of an employee, and does not include any
benefits provided for the education of any other person, including any
spouse, child, or other family member of the employee).
(5) Interaction with section 409A--(i) In general. The rules of
section 457(f) apply to an ineligible plan separately and in addition
to any requirements applicable to the plan under section 409A.
(ii) Acceleration of the time or schedule of a payment. Although
section 457(f) and this section do not preclude the acceleration of
payments, see Sec. 1.409A-3(a) for the general rules and exceptions
relating to the acceleration of payments that are subject to section
409A.
(iii) Example. The provisions of this paragraph (d)(5) are
illustrated in the following example:
Example. (i) Facts. On December 1, 2017, an eligible employer
establishes an account balance plan for an employee that is subject
to section 457(f), under which an initial amount is credited to the
account and is increased periodically by earnings based on a
reasonable specified rate of interest. The entire account balance is
subject to a substantial risk of forfeiture until December
[[Page 40567]]
1, 2021. Under the terms of the plan, the account balance will be
paid in three annual installments on each January 15, beginning in
2024 (one third of the balance for the first installment, one half
of the then remaining balance for the second installment, and the
remaining balance for the third installment). However, in 2022, the
plan is amended to provide for payments to begin in 2023, such that
the plan fails to comply with the requirements of section 409A
during 2022. The account balance is: $100,000 on December 1, 2021;
$118,000 on December 31, 2022; $120,000 on January 15, 2023 (so that
the payment made that day is $40,000 ($120,000/3)); $88,000 on
January 15, 2024 (so that the payment made that day is $44,000
($88,000/2)); and $50,000 on January 15, 2025 (so that the payment
made that day is $50,000).
(ii) Conclusion: Federal income tax treatment in 2021. The plan
provides for a deferral of compensation to which section 457(f)
applies. Under section 457(f) and paragraph (a)(2) of this section,
the $100,000 amount of the account balance on December 1, 2021, when
the benefits cease to be subject to a substantial risk of
forfeiture, is included in the employee's gross income on that date.
(iii) Conclusion: Federal income tax treatment after 2021--(1)
Treatment in 2022 under section 409A. Because the arrangement fails
to meet the requirements of section 409A in 2022, the employee has
gross income under section 409A equal to the account balance on
December 31, 2022, reduced by the amount previously included in
income. Accordingly, the amount included in gross income under
section 409A is equal to $18,000 (the $118,000 account balance on
December 31, 2022, reduced by the $100,000 previously included in
income under section 457(f) for 2021). The amount included in gross
income under section 409A is subject to an additional 20 percent tax
under section 409A(a)(1)(B)(i)(II) and a premium interest tax under
section 409A(a)(1)(B)(i)(I).
(2) Federal income tax treatment of first installment payment in
2023--(i) Earnings previously included under section 409A. The first
$18,000 of the $40,000 payment in 2023 is excluded from gross income
under section 409A as a result of the earlier inclusion of that
amount in income in 2022 due to the section 409A violation. See
Sec. 1.409A-4(f).
(ii) Deferral of compensation under section 457(f). The amount
of the investment in the contract (described in paragraph (a)(5) of
this section) allocated to the remaining $22,000 of the installment
paid in 2023 is $33,333 ($100,000/3), so no amount is included in
gross income for 2023.
(3) Federal income tax treatment of second installment payment
in 2024. The employee has unused investment in the contract from
2023 in the amount of $11,333 ($33,333-$22,000). Assuming that the
employee elects to redetermine the amount recognized for the current
and subsequent years in 2024 pursuant to Sec. 1.72-4(d)(3)(ii), the
amount included in gross income for 2024 is $5,000 (the payment of
$44,000, reduced by the portion of the remaining investment in the
contract that is allocable to the installment, which is $39,000
(($100,000-$22,000)/2)).
(4) Federal income tax treatment of third installment payment in
2025. The amount included in gross income for 2025 is $11,000 (the
payment of $50,000, reduced by the remaining investment in the
contract of $39,000).
(e) Rules relating to substantial risk of forfeiture--(1)
Substantial risk of forfeiture--(i) In general. An amount of
compensation is subject to a substantial risk of forfeiture only if
entitlement to the amount is conditioned on the future performance of
substantial services, or upon the occurrence of a condition that is
related to a purpose of the compensation if the possibility of
forfeiture is substantial. An amount is not subject to a substantial
risk of forfeiture if the facts and circumstances demonstrate that the
forfeiture condition is unlikely to be enforced (see paragraph
(e)(1)(v) of this section). If a plan provides that entitlement to an
amount is conditioned on involuntary severance from employment without
cause (which includes, for this purpose, a voluntary severance from
employment that is treated as involuntary under Sec. 1.457-
11(d)(2)(ii)), the right is subject to a substantial risk of forfeiture
if the possibility of forfeiture is substantial.
(ii) Substantial future services. For purposes of paragraph
(e)(1)(i) of this section, the determination of whether an amount of
compensation is conditioned on the future performance of substantial
services is based on the relevant facts and circumstances, such as
whether the hours required to be performed during the relevant period
are substantial in relation to the amount of compensation.
(iii) Condition related to a purpose of the compensation. For
purposes of paragraph (e)(1)(i) of this section, a condition related to
a purpose of the compensation must relate to the participant's
performance of services for the employer or to the employer's
governmental or tax-exempt activities (as applicable) or organizational
goals.
(iv) Noncompetition conditions. For purposes of paragraph (e)(1)(i)
of this section, an amount of compensation will not be treated as
subject to a substantial risk of forfeiture merely because the right to
payment of the amount is conditioned, directly or indirectly, upon the
employee refraining from the future performance of certain services,
unless each of the of the following conditions is satisfied:
(A) The right to payment of the amount is expressly conditioned
upon the employee refraining from the future performance of services
pursuant to an enforceable written agreement.
(B) The employer makes reasonable ongoing efforts to verify
compliance with noncompetition agreements (including the noncompetition
agreement applicable to the employee).
(C) At the time that the enforceable written agreement becomes
binding, the facts and circumstances demonstrate that the employer has
a substantial and bona fide interest in preventing the employee from
performing the prohibited services and that the employee has bona fide
interest in, and ability to, engage in the prohibited competition.
Factors taken into account for this purpose include the employer's
ability to show significant adverse economic consequences that would
likely result from the prohibited services; the marketability of the
employee based on specialized skills, reputation, or other factors; and
the employee's interest, financial need, and ability to engage in the
prohibited services.
(v) Enforcement of forfeiture condition. To constitute a
substantial risk of forfeiture, the possibility of actual forfeiture in
the event that the forfeiture condition occurs must be substantial
based on the relevant facts and circumstances. Factors to be considered
for this purpose include, but are not limited to, the extent to which
the employer has enforced forfeiture conditions in the past, the level
of control or influence of the employee with respect to the
organization and the individual(s) who would be responsible for
enforcing the forfeiture condition, and the likelihood that such
provisions would be enforceable under applicable law.
(2) Addition or extension of risk of forfeiture--(i) General rule.
The initial addition or extension of any risk of forfeiture after a
legally binding right to compensation arises, including the application
of a risk of forfeiture to a plan providing for deferrals of current
compensation (an additional or extended risk of forfeiture), will be
disregarded unless the plan meets the requirements of paragraphs
(e)(2)(ii) through (v) of this section.
(ii) Benefit must be materially greater. A deferred amount will not
be subject to a substantial risk of forfeiture for purposes of section
457 and this section after the date on which an employee could have
received the amount, unless the present value of the amount made
subject to the additional or extended substantial risk of forfeiture
(disregarding the risk of forfeiture in determining the present value
of the amount) is materially greater than the present value of the
amount the employee otherwise would have received absent the initial or
extended risk of forfeiture. For purposes of this paragraph (e)(2)(ii),
present value is determined in accordance with the rules described in
paragraph (c) of this
[[Page 40568]]
section as of the applicable date for the amount the employee otherwise
would have received absent the initial or extended risk of forfeiture.
In addition, an amount is materially greater for purposes of this
paragraph (e)(2)(ii) only if the present value of the amount subject to
the additional or extended substantial risk of forfeiture is more than
125 percent of the present value of the amount that the employee would
have received absent the additional or extended risk of forfeiture. For
this purpose, compensation that the participant would receive for
continuing to perform services, regardless of whether the deferred
amount is subjected to an additional or extended substantial risk of
forfeiture, is not taken into account.
(iii) Minimum two years of substantial future services. The
employee must be required to perform substantial services in the
future, or refrain from competing pursuant to an agreement that meets
the requirements of paragraph (e)(1)(iv) of this section, for a minimum
of two years after the date that the employee could have received the
compensation in the absence of the additional or extended substantial
risk of forfeiture. For example, if an employee elects to defer a fixed
percentage from each semi-monthly payroll, the two year minimum applies
to each semi-monthly payroll amount that would otherwise have been
paid. Notwithstanding the two year minimum, a plan may provide that
that the substantial future service condition will lapse upon death,
disability, or involuntary severance from employment without cause.
(iv) Timing. The parties must agree in writing to any addition or
extension of a substantial risk of forfeiture under this paragraph
(e)(2). In the case of an initial addition of a substantial risk of
forfeiture if none previously existed (for example, in the case of a
deferral of current compensation), this written agreement must be
entered into before the beginning of the calendar year in which any
services that give rise to the compensation are performed, and, in the
case of an extension of a substantial risk of forfeiture, the written
agreement must be entered into at least 90 days before an existing
substantial risk of forfeiture would have lapsed. If an employee with
respect to whom compensation is made subject to an initial or extended
substantial risk of forfeiture was not providing services to the
employer at least 90 days before the addition or extension, the
addition or extension may be agreed to in writing within 30 days after
commencement of employment but only with respect to amounts
attributable to services rendered after the addition or extension is
agreed to in writing.
(v) Substitutions. For purposes of paragraph (e)(2) of this
section, if an amount is forfeited or relinquished and replaced, in
whole or part, with a right to another amount (or benefit) that is a
substitute for the amount that was forfeited or relinquished and that
is subject to a risk of forfeiture, the risk of forfeiture will be
disregarded unless the requirements of paragraphs (e)(2)(ii) through
(iv) of this section are satisfied.
(3) Examples. The provisions of this paragraph (e) are illustrated
in the following examples:
Example 1. (i) Facts. On January 15, 2017, an employee has a
severance from employment with an eligible employer and enters into
an agreement with the eligible employer under which the eligible
employer agrees to pay the employee $250,000 on January 15, 2018, if
the employee provides consulting services to the employer until that
date. The consulting services required are insubstantial in relation
to the payment. The employee provides the required consulting
services for the employer through January 15, 2018.
(ii) Conclusion. The consulting services provided by the former
employee do not constitute substantial services because they are
insubstantial in relation to the payment. Accordingly, the present
value of $250,000 payable on January 15, 2018 is includible in the
employee's gross income on January 15, 2017.
Example 2. (i) Facts. On January 27, 2020, an eligible employer
agrees to pay an employee an amount equal to $120,000 on January 1,
2023, provided that the employee continues to provide substantial
services to the employer through that date. In 2021, the parties
enter into a written agreement to extend the date through which
substantial services must be performed to January 1, 2025, in which
event, the employer will pay an amount that has a present value of
$145,000 on January 1, 2023.
(ii) Conclusion. As of the date the initial risk of forfeiture
would have lapsed, the present value of the compensation subject to
the extended substantial risk of forfeiture is not materially
greater than the present value of the amount previously deferred
under the plan ($145,000 is not more than 125% of $120,000) and,
therefore, the intended extension of the substantial risk of
forfeiture is disregarded under the provisions of paragraph (e)(2)
of this section. Accordingly, the employee will recognize income, on
the applicable date (January 1, 2023) in an amount equal to $120,000
(the amount that is not subject to a substantial risk of forfeiture
on that date, disregarding the intended extension). With respect to
the amount that is ultimately paid under the plan on January 1,
2025, the employee is treated as having investment in the contract
of $120,000 (pursuant to paragraph (a)(5) of this section).
Example 3. (i) Facts. On December 31, 2017, a participant
enters into an agreement to defer $15,000 of the participant's
current compensation that would otherwise be paid during 2018, with
payment of the deferred amounts to be made on December 31, 2024, but
only if the participant continues to provide substantial services
until December 31, 2024. Under the terms of the agreement, the
participant's periodic payments of current compensation are reduced,
and a corresponding amount is credited (with a 30% employer match)
to an account earning a reasonable rate of interest. The present
value of the amount payable on December 31, 2024 is 130% of the
present value of the amount deferred.
(ii) Conclusion. The amounts deferred are subject to a
substantial risk of forfeiture because the plan satisfies the
requirements of paragraphs (e)(2)(ii) through (v) of this section.
Example 4. (i) Facts. Employee A is a well-known college sports
coach with a long history of success in a sports program at
University X. University X reasonably expects that the loss of
Employee A would be substantially detrimental to its sports program
and would result in significant financial losses. Employee A has
bona fide interest in continuing to work as a college sports coach
and is highly marketable. On June 1, 2020, Employee A and University
X enter into a written agreement under which Employee A agrees to
provide substantial services to University X until June 1, 2023. The
parties further agree that University X will pay $500,000 to
Employee A on June 1, 2025 if Employee A has not performed services
as a sports coach before that date for any other college or
university with a sports program similar to that of University X.
The agreement is enforceable under applicable law and University X
would be reasonably expected to enforce it.
(ii) Conclusion. The $500,000 payable under the agreement is
subject to a substantial risk of forfeiture until June 1, 2025, and
includible in Employee A's gross income on that date.
0
Par. 12. Newly-designated Sec. 1.457-13 is revised to read as follows:
Sec. 1.457-13 Applicability dates.
(a) General applicability date. Except as otherwise provided in
paragraph (b) of this section, Sec. Sec. 1.457-1 through 1.457-12
apply to compensation deferred under a plan for calendar years
beginning after the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register,
including deferred amounts to which the legally binding right arose
during prior calendar years that were not previously included in income
during one or more prior calendar years.
(b) Special applicability dates--(1) Plans maintained pursuant to
collective bargaining agreements. In the case of a plan maintained
pursuant to one or more collective bargaining agreements that have been
ratified and are in effect on the date of publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register, these regulations will not
[[Page 40569]]
apply with respect to compensation deferred under the plan before the
earlier of:
(i) The date on which the last of the collective bargaining
agreements terminates (determined without regard to any extension
thereof after the date of publication of the Treasury decision adopting
these rules as final regulations in the Federal Register); or
(ii) The first day of the third calendar year beginning after the
date of publication of the Treasury decision adopting these rules as
final regulations in the Federal Register.
(2) Governmental plans. If legislation is required to amend a
governmental plan, these regulations will not apply to compensation
deferred under that plan in taxable years ending before the day
following the end of the second legislative session of the legislative
body with the authority to amend the plan that begins after the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-14329 Filed 6-21-16; 8:45 am]
BILLING CODE 4830-01-P