Deferred compensation plans of State and local governments and tax-exempt organizations
Year of inclusion in gross income
In general
Any amount of compensation deferred under an eligible deferred compensation 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 to the participant or other beneficiary, in the case of a plan of an eligible employer described in subsection (e)(1)(A), and
is paid or otherwise made available to the participant or other beneficiary, in the case of a plan of an eligible employer described in subsection (e)(1)(B).
Special rule for rollover amounts
Special rule for health and long-term care insurance
Eligible deferred compensation plan defined
For purposes of this section, the term “eligible deferred compensation plan” means a plan established and maintained by an eligible employer—
in which only individuals who perform service for the employer may be participants,
which provides that (except as provided in paragraph (3)) the maximum amount which may be deferred under the plan for the taxable year (other than rollover amounts) shall not exceed the lesser of—
the applicable dollar amount, or
100 percent of the participant’s includible compensation,
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—
twice the dollar amount in effect under subsection (b)(2)(A), or
the sum of—
the plan ceiling established for purposes of paragraph (2) for the taxable year (determined without regard to this paragraph), plus
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,
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,
which meets the distribution requirements of subsection (d), and
except as provided in subsection (g), which provides that—
all amounts of compensation deferred under the plan,
all property and rights purchased with such amounts, and
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.
Limitation
Distribution requirements
In general
For purposes of subsection (b)(5), a plan meets the distribution requirements of this subsection if—
under the plan amounts will not be made available to participants or beneficiaries earlier than—
the calendar year in which the participant attains age 70½,
when the participant has a severance from employment with the employer, or
when the participant is faced with an unforeseeable emergency (determined in the manner prescribed by the Secretary in regulations),
the plan meets the minimum distribution requirements of paragraph (2), and
in the case of a plan maintained by an employer described in subsection (e)(1)(A), the plan meets requirements similar to the requirements of section 401(a)(31).
Any amount transferred in a direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of transfer.
Minimum distribution requirements
Special rule for government plan
Other definitions and special rules
For purposes of this section—
Eligible employer
The term “eligible employer” means—
a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State, and
any other organization (other than a governmental unit) exempt from tax under this subtitle.
Performance of service
Participant
Beneficiary
Includible compensation
Compensation taken into account at present value
Community property laws
Income attributable
Benefits of tax exempt organization plans not treated as made available by reason of certain elections, etc.
In the case of an eligible deferred compensation plan of an employer described in subsection (e)(1)(B)—
Total amount payable is dollar limit or less
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—
the portion of such amount which is not attributable to rollover contributions (as defined in section 411(a)(11)(D)) does not exceed the dollar limit under section 411(a)(11)(A), and
such amount may be distributed only if—
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
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.
Election to defer commencement of distributions
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—
such election is made after amounts may be available under the plan in accordance with subsection (d)(1)(A) and before commencement of such distributions, and
the participant may make only 1 such election.
Transfers between plans
Certain plans excluded
In general
The following plans shall be treated as not providing for the deferral of compensation:
Any bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plan.
Any plan paying solely length of service awards to bona fide volunteers (or their beneficiaries) on account of qualified services performed by such volunteers.
Special rules applicable to length of service award plans
Bona fide volunteer
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—
reimbursement for (or a reasonable allowance for) reasonable expenses incurred in the performance of such services, or
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.
Limitation on accruals
Qualified services
Certain voluntary early retirement incentive plans
In general
If an applicable voluntary early retirement incentive plan—
makes payments or supplements as an early retirement benefit, a retirement-type subsidy, or a benefit described in the last sentence of section 411(a)(9), and
such payments or supplements are made in coordination with a defined benefit plan which is described in section 401(a) and includes a trust exempt from tax under section 501(a) and which is maintained by an eligible employer described in paragraph (1)(A) or by an education association described in clause (ii)(II),
such applicable plan shall be treated for purposes of subparagraph (A)(i) as a bona fide severance pay plan with respect to such payments or supplements to the extent such payments or supplements could otherwise have been provided under such defined benefit plan (determined as if section 411 applied to such defined benefit plan).
Applicable voluntary early retirement incentive plan
For purposes of this subparagraph, the term “applicable voluntary early retirement incentive plan” means a voluntary early retirement incentive plan maintained by—
a local educational agency (as defined in section 8101 of the Elementary and Secondary Education Act of 1965), or
an education association which principally represents employees of 1 or more agencies described in subclause (I) and which is described in section 501(c)(5) or (6) and exempt from tax under section 501(a).
Exception for nonelective deferred compensation of nonemployees
In general
Nonelective deferred compensation
Special rule for churches
Treatment of qualified governmental excess benefit arrangements
Applicable dollar amount
In general
Cost-of-living adjustments
Rollover amounts
General rule
In the case of an eligible deferred compensation plan established and maintained by an employer described in subsection (e)(1)(A), if—
any portion of the balance to the credit of an employee in such plan is paid to such employee in an eligible rollover distribution (within the meaning of section 402(c)(4)),
the employee transfers any portion of the property such employee receives in such distribution to an eligible retirement plan described in section 402(c)(8)(B), and
in the case of a distribution of property other than money, the amount so transferred consists of the property distributed,
then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid.
Certain rules made applicable
Reporting
Trustee-to-trustee transfers to purchase permissive service credit
No amount shall be includible in gross income by reason of a direct trustee-to-trustee transfer to a defined benefit governmental plan (as defined in section 414(d)) if such transfer is—
for the purchase of permissive service credit (as defined in section 415(n)(3)(A)) under such plan, or
a repayment to which section 415 does not apply by reason of subsection (k)(3) thereof.
Coordination with catch-up contributions for individuals age 50 or older
In the case of an individual who is an eligible participant (as defined by section 414(v)) and who is a participant in an eligible deferred compensation plan of an employer described in paragraph (1)(A), subsections (b)(3) and (c) shall be applied by substituting for the amount otherwise determined under the applicable subsection the greater of—
the sum of—
the plan ceiling established for purposes of subsection (b)(2) (without regard to subsection (b)(3)), plus
the applicable dollar amount for the taxable year determined under section 414(v)(2)(B)(i), or
the amount determined under the applicable subsection (without regard to this paragraph).
Tax treatment of participants where plan or arrangement of employer is not eligible
In general
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—
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
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.).
Exceptions
Paragraph (1) shall not apply to—
a plan described in section 401(a) which includes a trust exempt from tax under section 501(a),
an annuity plan or contract described in section 403,
that portion of any plan which consists of a transfer of property described in section 83,
that portion of any plan which consists of a trust to which section 402(b) applies,
a qualified governmental excess benefit arrangement described in section 415(m), and
that portion of any applicable employment retention plan described in paragraph (4) with respect to any participant.
Definitions
For purposes of this subsection—
Plan includes arrangements, etc.
Substantial risk of forfeiture
Employment retention plans
For purposes of paragraph (2)(F)—
In general
Other rules
Limitation
Treatment
Applicable employment retention plan
The term “applicable employment retention plan” means an employment retention plan maintained by—
a local educational agency (as defined in section 9101 1
an education association which principally represents employees of 1 or more agencies described in clause (i) and which is described in section 501(c)(5) or (6) and exempt from taxation under section 501(a).
Employment retention plan
The term “employment retention plan” means a plan to pay, upon termination of employment, compensation to an employee of a local educational agency or education association described in subparagraph (C) for purposes of—
retaining the services of the employee, or
rewarding such employee for the employee’s service with 1 or more such agencies or associations.
Governmental plans must maintain set-asides for exclusive benefit of participants
In general
Taxability of trusts and participants
For purposes of this title—
a trust described in paragraph (1) shall be treated as an organization exempt from taxation under section 501(a), and
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.
Custodial accounts and contracts
Death benefits under USERRA-qualified active military service
Source
(Added Pub. L. 95–600, title I, § 131(a),Notes
Inflation Adjusted Items for Certain Years
References in Text
Amendments
Effective Date of 2015 Amendment
Effective Date of 2014 Amendment
Effective Date of 2008 Amendment
Effective Date of 2006 Amendment
In general.—
The amendments made by this section [amending this section and sections 623 and 1002 of Title 29, Labor] shall take effect on the date of the enactment of this Act [
Tax amendments.—
The amendments made by subsections (a)(1) and (b) [amending this section] shall apply to taxable years ending after the date of the enactment of this Act [
ERISA amendments.—
The amendment made by subsection (c) [amending section 1002 of Title 29, Labor] shall apply to plan years ending after the date of the enactment of this Act [
Construction.—
Nothing in the amendments made by this section [amending this section and sections 623 and 1002 of Title 29, Labor] shall alter or affect the construction of the Internal Revenue Code of 1986, the Employee Retirement Income Security Act of 1974 [29 U.S.C. 1001 et seq.], or the Age Discrimination in Employment Act of 1967 [29 U.S.C. 621 et seq.] as applied to any plan, arrangement, or conduct to which such amendments do not apply.”
Effective Date of 2002 Amendment
Effective Date of 2001 Amendment
Effective Date of 1997 Amendment
Effective Date of 1996 Amendment
In general.—
Except as provided in paragraph (2), the amendments made by this section [amending this section] shall apply to assets and income described in section 457(b)(6) of the Internal Revenue Code of 1986 held by a plan on and after the date of the enactment of this Act [
Transition rule.—
In the case of a plan in existence on the date of the enactment of this Act, a trust need not be established by reason of the amendments made by this section before
Effective Date of 1992 Amendment
Effective Date of 1989 Amendment
Effective Date of 1988 Amendment
In general.—
The amendments made by this section [amending this section] shall apply to taxable years beginning after
Exception for certain collectively bargained plans.—
In general.—
Section 457 of the 1986 Code (as in effect before and after the amendments made by section 1107 of the Reform Act [Pub. L. 99–514]) shall not apply to nonelective deferred compensation provided under a plan in existence on
Nonelective plan.—
For purposes of this paragraph, a nonelective plan is a plan which covers a broad group of employees and under which the covered employees earn nonelective deferred compensation under a definite, fixed and uniform benefit formula.
Termination.—
This paragraph shall cease to apply to a plan as of the effective date of the first material modification of the plan agreed to after
Treatment of certain nonelective deferred compensation.—
Section 457 of the 1986 Code shall not apply to amounts deferred under a nonelective deferred compensation plan maintained by an eligible employer described in section 457(e)(1)(A) of the 1986 Code (as in effect after the Reform Act [Pub. L. 99–514])—
if such amounts were deferred from periods before
if—
such amounts are deferred from periods on or after such date pursuant to an agreement which—
was in writing on such date, and
on such date provides for a deferral for each taxable year covered by the agreement of a fixed amount or of an amount determined pursuant to a fixed formula, and
the individual with respect to whom the deferral is made was covered under such agreement on such date.
Subparagraph (B) shall not apply to any taxable year ending after the date on which any modification of the amount or formula described in subparagraph (B)(i)(II) agreed to in writing before
Study.—
The Secretary of the Treasury or his delegate shall conduct a study on the tax treatment of deferred compensation paid by State and local governments and tax-exempt organizations (including deferred compensation paid to independent contractors). Not later than
Effective Date of 1986 Amendment
In general.—
Except as provided in this subsection, the amendments made by this section [amending this section] shall apply to taxable years beginning after
Transfers and cash-outs.—
Paragraphs (9) and (10) of section 457(e) of the Internal Revenue Code of 1986 (as amended by this section) shall apply to taxable years beginning after
Application to tax-exempt organizations.—
In general.—
Except as provided in subparagraph (B), the application of section 457 of the Internal Revenue Code of 1986 by reason of the amendments made by this section to deferred compensation plans established and maintained by organizations exempt from tax shall apply to taxable years beginning after
Existing deferrals and arrangements.—
Section 457 of such Code shall not apply to amounts deferred under a plan described in subparagraph (A) which—
were deferred from taxable years beginning before
are deferred from taxable years beginning after
was in writing on
on such date provides for a deferral for each taxable year covered by the agreement of a fixed amount or of an amount determined pursuant to a fixed formula.
Clause (ii) shall not apply to any taxable year ending after the date on which any modification to the amount or formula described in subclause (II) is effective. Amounts described in the first sentence shall be taken into account for applying section 457 to other amounts deferred under any deferred compensation plan. This subparagraph shall only apply to individuals who were covered under the plan and agreement on
Deferred compensation plans for state judges.—
The amendments made by this section shall not apply to any qualified State judicial plan (as defined in section 131(c)(3)(B) of the Revenue Act of 1978 [set out as a note below] as amended by section 252 of the Tax Equity and Fiscal Responsibility Act of 1982).
Special rule for certain deferred compensation plans.—
The amendments made by this section shall not apply—
to employees on
to to [sic] individuals eligible to participate on
but only with respect to deferrals under such plan.”
Effective Date of 1984 Amendment
Effective Date of 1980 Amendment
Effective Date
Eligibility for Participation in Retirement Plans
Plan Amendments Not Required Until January 1, 1998
Plan Amendments Not Required Until January 1, 1994
Plan Amendments Not Required Until January 1, 1989
Transitional Rules
In general.—
In the case of any taxable year beginning after
any amount of compensation deferred under a plan of a State providing for a deferral of compensation (other than a plan described in section 457(e)(2) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]), 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, but
the maximum amount of the compensation of any one individual which may be excluded from gross income by reason of clause (i) and by reason of section 457(a) of such Code during any such taxable year shall not exceed the lesser of—
$7,500, or
33⅓ percent of the participant’s includible compensation.
Application of catch-up provisions in certain cases.—
If, in the case of any participant for any taxable year, all of the plans are eligible State deferred compensation plans, then clause (ii) of subparagraph (A) of this paragraph shall be applied with the modification provided by paragraph (3) of section 457(b) of such Code.
Applications of certain coordination provisions.—
In applying clause (ii) of subparagraph (A) of this paragraph and section 403(b)(2)(A)(ii) of such Code, rules similar to the rules of section 457(c)(2) of such Code shall apply.
Meaning of terms.—
Except as otherwise provided in this paragraph, terms used in this paragraph shall have the same meaning as when used in section 457 of such Code.”
Deferred Compensation Plans for State Judges
In general.—
The amendments made by this section [enacting this section and provisions set out as notes under this section] shall not apply to any qualified State judicial plan.
Qualified state judicial plan.—
For purposes of subparagraph (A), the term ‘qualified State judicial plan’ means any retirement plan of a State for the exclusive benefit of judges or their beneficiaries if—
such plan has been continuously in existence since
under such plan, all judges eligible to benefit under the plan—
are required to participate, and
are required to contribute the same fixed percentage of their basic or regular rate of compensation as judge,
under such plan, no judge has an option as to contributions or benefits the exercise of which would affect the amount of includible compensation,
the retirement payments of a judge under the plan are a percentage of the compensation of judges of that State holding similar positions, and
the plan during any year does not pay benefits with respect to any participant which exceed the limitations of section 415(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954].”