Volunteer firefighter plan qualifies as a length of service award plan

Plain-English summary

A city established a plan providing retirement, death, and disability benefits to long-serving volunteer firefighters and rescue-service volunteers. Eligible members performed fire, emergency medical, and related services and received only expense reimbursement, reasonable benefits, and nominal fees. The plan limited total awards for each year of service to $3,000 and kept its assets subject to the claims of the city or state's general creditors until payment. The IRS ruled that the arrangement was a length of service award plan under IRC § 457(e)(11), so sections 457(b) and 457(f) did not apply. Payments were excluded from FICA wages under section 3121(a)(5)(I) and became taxable income under section 451 only when paid or otherwise made available without substantial restriction.

Ruling snapshot

• Question: Did the volunteer firefighter benefit arrangement qualify as a section 457 length of service award plan, and how were its payments taxed?
• Outcome: Approved; the plan qualified, payments were not FICA wages, and income arose when paid or made available
• Key authorities: IRC §§ 451, 457(e)(11), and 3121(a)(5)(I)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201508001 Third Party Communication: None
Release Date: 2/20/2015 Date of Communication: Not Applicable
Index Number: 457.00-00; 457.09-00;
457.09-08 Person To Contact:
------------------------------------------------
------------------------ Telephone Number:
--------------------------------- --------------------
------------------------------------ Refer Reply To:
------------------ CC:TEGE:EB:QP2
---------------------------------- PLR-119863-14
Date:
November 7, 2014

Plan = ---------------------------------------------------------------------------------

City C = ------------------------

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

Date 1 = ----------------

Statute X = ----------------------------------------------

Dear ----------------:

This letter responds to your authorized representative’s letter and subsequent
correspondence, on behalf of City C and its Plan, requesting rulings related to the
Plan’s status as a length of service award plan (LOSAP) described in section
457(e)(11)(B) of the Internal Revenue Code of 1986 (Code). City C is represented to be
an eligible employer described in section 457(e)(1).

City C of State S established the Plan in order to provide length of service awards in the
form of retirement, death, and disability benefits to long-term eligible volunteers
providing qualified services to fire departments and rescue services in City C. The
volunteer firefighters who participate in the Plan provide fire protection and prevention
services as well as emergency medical services and response to emergency
management situations. Under the Plan, benefits are provided only to volunteers who
receive no compensation for providing such services other than reimbursement for (or a
PLR 119863-14 2

reasonable allowance for) reasonable expenses incurred in the performance of such
services, or reasonable benefits (including benefits under the Plan) and nominal fees for
such services, customarily paid by eligible employers in connection with the
performance of such services by volunteers.

The Plan further provides that benefits are available only to persons whose names are
carried as volunteer firefighters on the active membership roll of City C’s volunteer
firefighters. To be carried on the active membership roll, a volunteer must meet the
criteria and standards established by the fire chief. The Plan covers members who
meet the eligibility criteria as of the Plan’s effective date, Date 1, as well as all future
new members.

The Plan is intended to be funded solely by contributions from State S. However, the
Plan requires City C to make quarterly contributions to the Plan’s trust fund when (and
in the amount) indicated by the applicable actuarial valuation of the Plan.

Once a member has met the Plan’s age and service requirements, the member is
entitled to a monthly benefit in an amount determined under the Plan. The Plan also
includes provisions for a reduced, early retirement benefit. In addition to the monthly
retirement benefit, each member receives a supplemental benefit, funded exclusively by
a portion of the existing excess State S premium tax reserve and future premium tax
revenues received by the Plan pursuant to Statute X. The Plan provides with respect to
any year of credited service that the aggregate amount of length of service awards,
including all benefits under the Plan, such as retirement, disability, and supplemental
benefits, shall not exceed $3,000.

The Plan provides that all assets of the trust or in the Statute X tax revenues will remain
solely the property and right of City C or State S, as applicable, subject only to the
claims of City C or State S’s general creditors, until made available to the member or
the member’s beneficiary. The rights of any member or beneficiary to payments under
the Plan are nonassignable and nontransferable.

Section 451(a) of the Code and section 1.451-1(a) of the regulations provide that an
item of gross income is includible in gross income for the taxable year in which actually
or constructively received by a taxpayer using the cash receipts and disbursements
method of accounting. Under section 1.451-2(a) of the regulations, income is
constructively received in the taxable year during which it is credited to the taxpayer’s
account, set apart, or otherwise made available so that the taxpayer may draw on it at
any time. However, income is not constructively received if the taxpayer’s control of its
receipt is subject to substantial limitations or restrictions.

Various revenue rulings have considered the tax consequences of nonqualified deferred
compensation arrangements. Rev. Rul. 60-31, Situations 1-3, 1960-1 C.B. 174, holds
that a mere promise to pay, not represented by notes or secured in any way, does not
PLR 119863-14 3

constitute receipt of income within the meaning of the cash receipts and disbursements
method of accounting. See also, Rev. Rul. 69-650, 1969-2 C.B. 106, and Rev. Rul. 69-
649, 1969-2 C.B. 106.

Section 457 of the Code governs the taxation of eligible deferred compensation plans of
eligible employers. The term “eligible employer” is defined in section 457(e)(1) as 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 subtitle A of the Code. An “eligible deferred compensation
plan” as defined in section 457(b) must, among other things, provide that the maximum
amount which may be deferred under the plan for a taxable year shall not exceed the
lesser of the applicable dollar amount (which is $17,500 for 2014) or 100 percent of the
participant’s includible compensation.

Section 457(f)(1)(A) provides that if a plan of an eligible employer providing for a
deferral of compensation is not an eligible deferred compensation plan, compensation
deferred under such plan shall be included in the participant’s gross income for the first
taxable year in which there is no substantial risk of forfeiture of the rights to such
compensation.

Section 457(e)(11)(A)(ii) provides that a plan paying solely length of service awards to
bona fide volunteers or their beneficiaries on account of qualified service performed by
such volunteers is treated as not providing for the deferral of compensation under
section 457. Section 457(e)(11)(C) defines qualified services as fire fighting and
prevention services, emergency medical services and ambulance services.

Section 457(e)(11)(B) provides special rules applicable to a LOSAP. Section
457(e)(11)(B)(i) defines the term “bona fide volunteer” to include only persons whose
only compensation received for performing qualified services are reimbursements for (or
reasonable allowances for) reasonable expenses incurred in performing 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.

Section 457(e)(11)(B)(ii) provides that a LOSAP may not provide for an aggregate
amount of length of service awards accruing with respect to any year of service by a
volunteer that exceeds $3,000.

The Plan established by City C satisfies the requirements of section 457(e)(11)(A)(ii).
The Plan applies only to volunteers who provide qualified services as defined in section
457(e)(11)(C), i.e., fire fighting and prevention services, emergency medical services,
and ambulance services. The Plan also satisfies section 457(e)(11)(B)(i) by limiting
eligible volunteers to persons who receive no compensation for their services other than
reimbursements for reasonable expenses, nominal fees, or reasonable benefits
PLR 119863-14 4

customarily paid by eligible employers in connection with the performance of qualified
services by volunteers. Finally, the Plan satisfies section 457(e)(11)(B)(ii) by limiting the
aggregate amount of awards for any year of service to $3,000.

Since the Plan qualifies as a LOSAP under section 457(e)(11)(A)(ii), neither section
457(a) nor section 457(f) apply to benefits under the Plan. Instead, amounts
distributable under the Plan are includible in gross income under section 451 and the
regulations thereunder, when paid or made available without substantial limitation or
restriction.

Section 3121(a)(5)(I) provides that any payment made to, or on behalf of, an employee
or his beneficiary under a plan described in section 457(e)(11)(A)(ii) and maintained by
an eligible employer as defined in section 457(e)(1) is not treated as “wages” for
purposes of determining whether the Federal Insurance Contribution Act (FICA) tax
applies to such payment.

In light of the original documents and information presented on May 9, 2014, including
the relevant State S statutory provisions, the proposed restated Plan submitted on
November 7, 2014 (which it is represented will be adopted by City C), and the other
representations made, we conclude as follows:

1. City C’s Plan constitutes a LOSAP described in section 457(e)(11)(B) of the Code.
   Therefore, the Plan is not subject to sections 457(b) or (f) of the Code.

2. Amounts paid to members under the Plan are not wages for purposes of FICA tax,
   pursuant to section 3121(a)(5)(I).

3. Amounts paid or otherwise made available to eligible members under the Plan are
   includible in the recipient’s gross income in accordance with section 451 only in the
   taxable year(s) when such amounts are paid or otherwise made available.

No opinion is expressed concerning the timing of the inclusion in income of amounts
deferred under any deferred compensation plan other than the Plan described above.
The information contained in the letter ruling is based on the information and
representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. If the Plan is significantly modified, this
ruling will not necessarily remain applicable.
PLR 119863-14 5

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.

                                  Sincerely,

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

Enclosure
Copy for purposes of section 6110

cc: