PLR 201142002: IRS approves a governmental deferred compensation plan

Plain-English summary

The IRS approved a restated deferred compensation plan maintained by a municipal corporation as an eligible governmental plan under IRC § 457(b). The ruling confirms that properly deferred compensation and related income are generally included in the participant's income when paid, rather than when deferred. It also concludes that the plan's trust satisfies § 457(g) and is treated as tax-exempt under § 501(a). The ruling depends on the plan's described terms and may not remain applicable if the plan is significantly modified.

Ruling snapshot

• Question: Does the restated plan qualify under IRC § 457(b), and does its trust satisfy § 457(g)?
• Outcome: Approved.
• Key authorities: IRC §§ 457, 401(a)(9), 501(a), and 6110(k)(3); Treas. Reg. § 1.401(a)(9)-1 through 1.401(a)(9)-9.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201142002
Third Party Communication: None
Release Date: 10/21/2011
Date of Communication: Not Applicable
Index Number: 457.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:TEGE:EB:QP2
PLR-101498-11
Date:
July 01, 2011

Legend

X = ----------------------------------------------------------------

State S = ----------------

Plan = -----------------------------------------------------------------------------------------
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Dear ------------:

This responds to your authorized representative's letter, on behalf of X, requesting a ruling concerning the restated deferred compensation plan (the "Plan") which X intends to be an updated eligible deferred compensation plan for employees of X under section 457(b) of the Internal Revenue Code (the “Code”), as amended under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”). The Plan previously received a private letter ruling on July 30, 2001. X is represented to be a municipal corporation organized and existing under the laws of State S, and is an "eligible employer" within the meaning of section 457(e)(1)(A).

Under the Plan, the participant may elect to make deferrals into the Plan from includible compensation as defined in section 415(c)(3) of the Code. In addition, the participant may elect to make deferrals into the Plan of accumulated sick pay, accumulated vacation pay, and accumulated back pay as permitted by section 457 and the regulations there under. The participant’s election must be entered into before the first day of the month in which such amounts would otherwise be paid or made available. Commencement of distributions must begin by the latest date permitted under section 401(a)(9).
PLR-101498-11
2

X has established a trust pursuant to the Plan. The assets of the Plan shall be held for the exclusive benefit of participants and their beneficiaries. The trustee may accept rollover contributions from all eligible retirement plans as defined in section 401(c)(8)(B) of the Code.

The Plan permits participants to receive distributions in the event of an unforeseeable emergency. Only circumstances of severe financial hardships of the participant shall constitute unforeseeable emergencies resulting from (A) an illness or accident of the participant); (B) loss of the participant’s property due to casualty; or (C) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant (including, but not limited to, imminent foreclosure of or eviction from the participant’s primary residence, and the need to pay burial or funeral expenses of a participant’s deceased spouse or dependent.

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)(1)(A) of the Code provides that in the case of a participant in an eligible governmental 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 to the participant or beneficiary.

Section 457(b)(5) of the Code prescribes that an eligible deferred compensation plan must meet the distribution requirements of section 457(d).

Section 457(d)(1)(A) of the Code provides that for a section 457 plan to be an eligible plan, the plan must have distribution requirements providing that under the plan amounts will not be made available to participants or beneficiaries earlier than i) the calendar year in which the participant attains age 70 1/2, ii) when the participant has a severance from employment with the employer, or iii) when the participant is faced with an unforeseeable emergency as determined under Treasury regulations.

Section 457(d)(2) requires a plan to meet the minimum distribution requirements of section 401(a)(9) as described in section 1.401(a)(9)-1 thru 1.401(a)(9)-9.

Section 457(e)(1)(A) defines an eligible employer to be a state, political subdivision of a state, and any agency or instrumentality of a state or political subdivision of a state.

Section 457(g) provides that a plan maintained by an eligible governmental employer shall not be treated as an eligible deferred compensation plan unless all assets and rights purchased with such deferred compensation amounts and all income attributable to such amounts, property, or rights of the plan are held in trust for the exclusive benefit of participants and their beneficiaries. Section 457(g)(2)(A) provides that a trust described in section 457(g)(1) shall be treated as an organization exempt from tax under section 501(a).
PLR-101498-11
3

Based upon the information submitted and the representations made, we conclude as follows:

1. The Plan, as amended and restated effective ------------------------, and further
   amended on -------------------, and -----------------, constitutes an eligible deferred compensation plan as defined in section 457(b) of the Code, as amended, and the regulations there under.

2. Amounts of compensation deferred in accordance with the terms of the Plan,
   including any income attributable to the deferred compensation, will be includible under section 457(a)(1)(A) in the recipient's gross income only for the taxable year or years in which the amounts are paid to a participant or beneficiary in accordance with the terms of the Plan.

3. The trust associated with the Plan satisfies all applicable requirements of section
   457(g), and will be treated as an organization exempt from taxation under section 501(a).

   Except as expressly provided herein, no opinion is expressed or implied concerning
   the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. If the Plan is significantly modified, this ruling will not necessarily remain applicable.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,
/Cheryl E. Press/

Cheryl E. Press
Senior Counsel, Qualified Plans 2 (Employee Benefits)
(Tax Exempt & Government Entities)

Enclosure
Copy for purposes of section 6110

cc: