PLR 200030009: Executive deferred compensation agreement qualifies under section 457

Plain-English summary

Three related tax-exempt employers proposed a deferred compensation agreement for a shared executive. The agreement limited annual deferrals, deferred payment until separation or an unforeseeable emergency, and left the assets subject to the employers' general creditors. The IRS ruled that the agreement was an eligible plan under section 457(b) and that deferred amounts and earnings would be included in income when paid or otherwise made available. The ruling required adoption of the revised agreement submitted in February 2000 and applied only to deferrals made after the ruling date. The IRS also said significant modifications or later inconsistent regulations could affect it.

Ruling snapshot

• Question: Did the executive agreement qualify under section 457(b), and when would deferred compensation be taxable?
• Outcome: Approved for the revised agreement and later deferrals.
• Key authorities: IRC §§ 457(a), 457(b), and 457(d); Treas. Reg. § 1.457-2(h)(4)-(5).

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Index No. 457.01-00 457.05-03
Number: 200030009
Release Date: 7/28/2000

CC:EE:1 - PLR-100044-00

April 24, 2000.

Entity A =

Entity B =

Entity C =

Executive E =

This responds to your letter of December 16, 1999, and subsequent correspondence,
requesting a ruling concerning the Deferred Compensation Agreement (the "Agreement"), that
Entities A, B, and C (the "Entities"), three closely related entities represented to be tax-exempt
eligible employers described in section 457(e)(1)(B), have reached with Executive E and intend
to meet the requirements for being an eligible deferred compensation plan under section 457(b)
of the Internal Revenue Code of 1986.

Under the Agreement, the Entities will credit nonqualified deferred compensation benefits
provided thereunder to a bookkeeping account for the benefit of E, represented to be a key
executive of all the Entities, for services to the Entities. Distribution of such amounts would be
deferred until E separates from service with the Entities or until the occurrence of an
unforeseeable emergency, whichever occurs earlier. The Agreement provides for a maximum
deferred compensation amount that may be credited for the benefit of E, the participant, or his
beneficiary in any taxable year. The amounts that may be deferred under the annual maximum
limitation are within the limitations set out in section 457 of the Code.

The Agreement includes provisions for determining the time and the manner in which the
participant’s deferred amounts will be distributed to the participant or to his beneficiary after the
participant’s separation or death. The Agreement’s provisions regarding withdrawals for

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unforeseeable emergencies authorize only limited hardship withdrawals in limited
circumstances, in accordance with § 1.457-2(h)(4) and (5 ) of the Income Tax Regulations.
Notwithstanding these above-described provisions, the manner and time of post-separation
benefit payout must meet the minimum distribution requirements of sections 401(a)(9) and
457(d) of the Code.

The Agreement provides that all amounts deferred under the plan and all income
attributable to such amounts will remain (until made available to the participant or beneficiary)
solely the property and rights of the Entities, subject only to the claims of their general creditors.
The Agreement also provides that a participant or beneficiary has only an unsecured right to
benefits under the Agreement, and no right or claim against the assets of the employer. The
rights of any participant or beneficiary to payments under the Agreement are nonassignable.

Section 457 of the Code provides rules for the deferral of compensation by an individual
participating in an eligible deferred compensation plan (as defined in section 457(b)).

Section 457(a) of the Code provides that 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 beneficiary.

Based on the provisions of the Agreement summarized above, we conclude as follows:

1.     The Entities' Deferred Compensation Agreement with Executive E is an eligible deferred
compensation plan as defined in section 457(b) of the Internal Revenue Code of 1986.

2.     Amounts of compensation deferred in accordance with the Agreement, including any
income attributable to the deferred compensation, will be includible in gross income for
the taxable year or years in which amounts are paid or otherwise made available to the
participant or his beneficiary in accordance with the terms of the Agreement.

No opinion is expressed concerning the timing of the inclusion in income of amounts
deferred under any deferred compensation plan other than the Agreement described above. If
the Agreement is significantly modified, this ruling will not necessarily remain applicable.

This ruling is directed only to Entities A, B, and C and to Executive E and his
beneficiaries. In addition, this ruling is applicable only if the Entities adopt the revised
Agreement submitted on February 09, 2000. Also, this ruling applies only to deferrals made
after the date of this ruling. Section 6110(k)(3) of the Code provides that this ruling may not be
used or cited as precedent.

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PLR-100044-00

Temporary or final regulations pertaining to one or more of the issues addressed in this
ruling have not yet been adopted. Therefore, this ruling may be modified or revoked if the
adopted temporary or final regulations are inconsistent with any conclusion in the ruling. See
section 12.04 of Rev. Proc. 2000-1, 2000-1 I.R.B. 4, 46. However, when the criteria in section
12.05 of Rev. Proc. 2000-1 are satisfied, a ruling is not revoked or modified retroactively except
in rare or unusual circumstances.

Sincerely yours,

ROBERT D. PATCHELL
Assistant Chief, Branch 1
Office of the Associate
Chief Counsel
(Employee Benefits and
Exempt Organizations)

Enclosure:

Copy for section 6110 purposes