Deferred
Compensation Plans Of State and Local Governments and Tax-Exempt Organizations
Section 457 of the Internal Revenue Code
Section 457
(a) Year Of Inclusion In Gross Income.
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In the case of
a participant in an eligible deferred compensation plan, any amount of
compensation deferred under the plan, and any income attributable to the
amounts so deferred, shall be includible in gross income only for the
taxable year in which such compensation or other income is paid or
otherwise made available to the participant or other beneficiary.
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(b) Eligible Deferred Compensation Plan
Defined.
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For purposes of
this Section, the term "eligible deferred compensation plan"
means a plan established and maintained by an eligible employer--
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(1)
in which only individuals who perform
service for the employer may be participants,
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(2)
which provides that (except as provided in
Paragraph (3)) the maximum amount which may be deferred under the plan
for the taxable year shall not exceed the lesser of--
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(B)
33-1/3 percent of the participant's
includible compensation,
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(3)
which may provide that, for 1 or more of the
participant's last 3 taxable years ending before he attains normal
retirement age under the plan, the ceiling set forth in Paragraph (2)
shall be the lesser of--
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(i)
the plan ceiling established for purposes of
Paragraph (2) for the taxable year (determined without regard to this
Paragraph), plus
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(ii)
so much of the plan ceiling established
for purposes of Paragraph (2) for taxable years before the taxable year
as has not previously been used under Paragraph (2) or this Paragraph,
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(4)
which provides that compensation will be
deferred for any calendar month only if an agreement providing for such
deferral has been entered into before the beginning of such month,
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(5)
which meets the distribution requirements
of Subsection (d), and
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(6)
except as provided in Subsection (g),
which provides that--
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(A)
all amounts of compensation deferred under
the plan,
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(B)
all property and rights purchased with
such amounts, and
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(C)
all income attributable to such amounts,
property, or rights, shall remain (until made available to the
participant or other beneficiary) solely the property and rights of the
employer (without being restricted to the provision of benefits under
the plan), subject only to the claims of the employer's general
creditors. A plan which is established and maintained by an employer
which is described in Subsection (e)(1)(A) and which is administered in
a manner which is inconsistent with the requirements of any of the
preceding paragraphs shall be treated as not meeting the requirements of
such Paragraph as of the 1st plan year beginning more than 180 days
after the date of notification by the Secretary of the inconsistency
unless the employer corrects the inconsistency before the 1st day of
such plan year.
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(c) Individuals Who Are Participants In More
Than 1 Plan.
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The maximum
amount of the compensation of any one individual which may be deferred
under Subsection (a) during any taxable year shall not exceed $7,500 (as
modified by any adjustment provided under Subsection (b)(3)).
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(2)
Coordination With Certain Other Deferrals.,
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In applying
Paragraph (1) of this Subsection--
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(A)
any amount excluded from gross income under
Section 403(b) for the taxable year, and
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(i)
excluded from gross income under Section
402(e)(3) or Section 402(h)(1)(B) or (k) for the taxable year, or 1
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(ii)
with respect to which a deduction is
allowable by reason of a contribution to an organization described in
Section 501(c)(18) for the taxable year, shall be treated as an amount
deferred under Subsection (a). In applying Section 402(g)(8)(A)(iii) or
403(b)(2)(A)(ii), an amount deferred under Subsection (a) for any year
of service shall be taken into account as if described in Section
402(g)(3)(C) or 403(b)(2)(A)(ii), respectively. Subparagraph (B) shall
not apply in the case of a participant in a rural cooperative plan (as
defined in Section 401(k)(7)).
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(d) Distribution Requirements.
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For purposes of
Subsection (b)(5), a plan meets the distribution requirements of this
Subsection if--
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(A)
under the plan amounts will not be made
available to participants or beneficiaries earlier than--
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(i)
the calendar year in which the participant
attains age 70-1/2,
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(ii)
when the participant is separated from
service with the employer, or
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(iii)
when the participant is faced with an
unforeseeable emergency (determined in the manner prescribed by the
Secretary in regulations), and
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(B)
the plan meets the minimum distribution
requirements of Paragraph (2).
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(2)
Minimum Distribution Requirements.
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A plan meets
the minimum distribution requirements of this Paragraph if such plan meets
the requirements of subparagraphs (A), (B), and (C):
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(A)
Application Of Section 401(a)(9)
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A plan meets
the requirements of this Subparagraph if the plan meets the requirements
of Section 401(a)(9).
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(B)
Additional Distribution Requirements
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A plan meets
the requirements of this Subparagraph if--
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(i)
in the case of a distribution beginning
before the death of the participant, such distribution will be made in a
form under which--
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(I)
the amounts payable with respect to the
participant will be paid at times specified by the Secretary which are not
later than the time determined under Section 401(a)(9)(G) (relating to
incidental death benefits), and
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(II)
any amount not distributed to the
participant during his life will be distributed after the death of the
participant at least as rapidly as under the method of distributions
being used under subclause (I) as of the date of his death, or
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(ii)
in the case of a distribution which does not
begin before the death of the participant, the entire amount payable with
respect to the participant will be paid during a period not to exceed 15
years (or the life expectancy of the surviving spouse if such spouse is
the beneficiary).
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(C)
Nonincreasing Benefits.
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A plan meets
the requirements of this Subparagraph if any distribution payable over a
period of more than 1 year can only be made in substantially nonincreasing
amounts (paid not less frequently than annually).
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(e) Other Definitions And Special Rules.
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For purposes of
this Section--
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The term
"eligible employer" means--
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(A)
a State, political subdivision of a State,
and any agency or instrumentality of a State or political subdivision of a
State, and
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(B)
any other organization (other than a
governmental unit) exempt from tax under this subtitle.
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(2)
Performance Of Service.
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The performance
of service includes performance of service as an independent contractor
and the person (or governmental unit) for whom such services are performed
shall be treated as the employer.
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The term
"participant" means an individual who is eligible to defer
compensation under the plan.
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The term
"beneficiary" means a beneficiary of the participant, his
estate, or any other person whose interest in the plan is derived from the
participant.
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(5)
Includible Compensation.
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The term
"includible compensation" means compensation for service
performed for the employer which (taking into account the provisions of
this Section and other provisions of this chapter) is currently includible
in gross income.
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(6)
Compensation Taken Into Account At Present
Value.
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Compensation
shall be taken into account at its present value.
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(7)
Community Property Laws.
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The amount of
includible compensation shall be determined without regard to any
community property laws.
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Gains from the
disposition of property shall be treated as income attributable to such
property.
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(9)
Benefits Not Treated As Made Available By
Reason Of Certain Elections, Etc.
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(A)
Total Amount Payable Is $3,500 Or Less.
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The total
amount payable to a participant under the plan shall not be treated as
made available merely because the participant may elect to receive such
amount (or the plan may distribute such amount without the participant's
consent) if--
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(i)
such amount does not exceed $3,500, and
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(ii)
such amount may be distributed only if--
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(I)
no amount has been deferred under the plan
with respect to such participant during the 2-year period ending on the
date of the distribution, and
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(II)
there has been no prior distribution under
the plan to such participant to which this Subparagraph applied. A plan
shall not be treated as failing to meet the distribution requirements of
Subsection (d) by reason of a distribution to which this Subparagraph
applies.
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(B)
Election To Defer Commencement Of
Distributions.
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The total
amount payable to a participant under the plan shall not be treated as
made available merely because the participant may elect to defer
commencement of distributions under the plan if--
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(i)
such election is made after amounts may be
available under the plan in accordance with Subsection (A) and before
commencement of such distributions, and
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(ii)
the participant may make only 1 such
election.
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(10)
Transfers Between Plans.
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A participant
shall not be required to include in gross income any portion of the entire
amount payable to such participant solely by reason of the transfer of
such portion from 1 eligible deferred compensation plan to another
eligible deferred compensation plan.
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(11)
Certain Plans Excluded.
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The following
plans shall be treated as not providing for the deferral of compensation:
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(i)
Any bona fide vacation leave, sick leave,
compensatory time, severance pay, disability pay, or death benefit plan.
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(ii)
Any plan paying solely length of service
awards to bona fide volunteers (or their beneficiaries) on account of
qualified services performed by such volunteers.
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(B)
Special Rules Applicable To Length Of
Service Award Plans
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An individual
shall be treated as a bona fide volunteer for purposes of Subparagraph (A)(ii)
if the only compensation received by such individual for performing
qualified services is in the form of--
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(I)
reimbursement for (or a reasonable allowance
for) reasonable expenses incurred in the performance of such services, or
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(II)
reasonable benefits (including length of
service awards), and nominal fees for such services, customarily paid by
eligible employers in connection with the performance of such services
by volunteers.
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(ii)
Limitation On Accruals.
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A plan shall
not be treated as described in Subparagraph (A)(ii) if the aggregate
amount of length of service awards accruing with respect to any year of
service for any bona fide volunteer exceeds $3,000.
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For purposes of
this Paragraph, the term `qualified services' means fire fighting and
prevention services, emergency medical services, and ambulance services.
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(12)
Exception For Nonelective Deferred
Compensation Of Nonemployees
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This Section
shall not apply to nonelective deferred compensation attributable to
services not performed as an employee.
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(B)
Nonelective Deferred Compensation.
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For purposes of
Subparagraph (A), deferred compensation shall be treated as 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.
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(13)
Special Rule For Churches. --The term
"eligible employer" shall not include a church (as defined in
Section 3121(w)(3)(A)) or qualified church-controlled organization (as
defined in Section 3121(w)(3)(B)).
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(14)
Treatment Of Qualified Governmental Excess
Benefit Arrangements.
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Subsections
(b)(2) and (c)(1) shall not apply to any qualified governmental excess
benefit arrangement (as defined in Section 415(m) (3)), and benefits
provided under such an arrangement shall not be taken into account in
determining whether any other plan is an eligible deferred compensation
plan.
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(15)
Cost-of-living Adjustment Of Maximum
Deferral Amount.
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The Secretary
shall adjust the $7,500 amount specified in subsections (b)(2) and (c)(1)
at the same time and in the same manner as under Section 415(d), except
that the base period shall be the calendar quarter ending September 30,
1994, and any increase under this Paragraph which is not a multiple of
$500 shall be rounded to the next lowest multiple of $500.
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(f) Tax Treatment Of Participants Where Plan Or
Arrangement Of Employer Is Not Eligible.
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In the case of
a plan of an eligible employer providing for a deferral of compensation,
if such plan is not an eligible deferred compensation plan, then--
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(A)
the compensation shall be included in the
gross income of the participant or beneficiary for the 1st taxable year in
which there is no substantial risk of forfeiture of the rights to such
compensation, and
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(B)
the tax treatment of any amount made
available under the plan to a participant or beneficiary shall be
determined under Section 72 (relating to annuities, etc.).
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Paragraph (1)
shall not apply to--
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(A)
a plan described in Section 401(a) which
includes a trust exempt from tax under Section 501(a),
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(B)
an annuity plan or contract described in
Section 403,
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(C)
that portion of any plan which consists of
a transfer of property described in Section 83,
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(D)
that portion of any plan which consists of
a trust to which Section 402(b) applies, and
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(E)
a qualified governmental excess benefit
arrangement described in Section 415(m).
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For purposes of
this Subsection--
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(A)
Plan Includes Arrangements, Etc.
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The term
"plan" includes any agreement or arrangement.
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(B)
Substantial Risk Of Forfeiture.
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The rights of a
person to compensation are subject to a substantial risk of forfeiture if
such person's rights to such compensation are conditioned upon the future
performance of substantial services by any individual.
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(g) Governmental Plans Must Maintain Set-asides
For Exclusive Benefit Of Participants.
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A plan
maintained by an eligible employer described in Subsection (e)(1)(A) shall
not be treated as an eligible deferred compensation plan unless all assets
and income of the plan described in Subsection (b)(6) are held in trust
for the exclusive benefit of participants and their beneficiaries.
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(2)
Taxability Of Trusts And Participants.
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For purposes of
this Title--
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(A)
a trust described in Paragraph (1) shall
be treated as an organization exempt from taxation under Section 501(a),
and
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(B)
notwithstanding any other provision of
this Title, amounts in the trust shall be includible in the gross income
of participants and beneficiaries only to the extent, and at the time,
provided in this Section.
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(3)
Custodial Accounts And Contracts.
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For purposes of
this Subsection, custodial accounts and contracts described in Section
401(f) shall be treated as trusts under rules similar to the rules under
Section 401(f).
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(Added Pub. L. 95-600, Title I, Section 131(a), Nov. 6, 1978, 92 Stat. 2779, and
amended Pub. L. 96-222, Title I, Section 101(a)(4), Apr. 1, 1980, 94 Stat. 196;
Pub. L. 98-369, div. A, Title IV, Section 491(d)(33), July 18, 1984, 98 Stat.
851; Pub. L. 99-514, Title XI, Section 1107(a), Oct. 22, 1986, 100 Stat. 2426;
Pub. L. 100-647, Title I, Section 1011(e)(1), (2), (9), (10), Title VI, Section
6064(a)-(c), 6071(c), Nov. 10, 1988, 102 Stat. 3460, 3461, 3700, 3701, 3705;
Pub. L. 101-239, Title VII, Section 7811(g)(4), (5), 7816(j), Dec. 19, 1989, 103
Stat. 2409, 2421; Pub. L. 104-188, Title I, Section 1421(b)(3)(C), 1444(b)(3),
1447(a), (b), 1448(a), (b), 1458(a), Aug. 20, 1996, 110 Stat. 1755.)
Last updated:
03-04
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