County deferred compensation plan qualifies under section 457

Plain-English summary

A county adopted a nonqualified deferred compensation plan and related trust for its employees. The plan required advance deferral elections, applied the statutory annual and catch-up limits, restricted distributions to permitted events, and incorporated required minimum distribution rules. It also allowed qualifying emergency distributions, plan-to-plan transfers, and eligible rollovers while holding all assets in trust exclusively for participants and beneficiaries. The IRS ruled that the arrangement was an eligible governmental plan under section 457(b). Deferred compensation and earnings would be included in income when paid, qualifying rollovers would remain excluded, and the plan trust would be exempt under section 501(a).

Ruling snapshot

• Question: Did the county’s deferred compensation plan and related trust satisfy the section 457 requirements?
• Outcome: Approved
• Key authorities: IRC §§ 457(a), 457(b), 457(d), 457(e), 457(g), 501(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201545010 Third Party Communication: None
Release Date: 11/6/2015 Date of Communication: Not Applicable
Index Number: 457.00-00
Person To Contact:
------------------------ ------------------------ , ID No. -----------------
------------------------- -----------------------------------------------------
--------------------- Telephone Number:
------------------------------------ ----------------------
Refer Reply To:
CC:TEGE:EB:QP4
PLR-144283-14
Date: June 1, 2015

Legend

County C = ------------------------
State S = -----------------
Plan = ------------------------------------------------------------------------------------------

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

This responds to your letter of December 1, 2014, and subsequent correspondence
dated May 28 and 29, 2015, requesting a ruling concerning the Plan, which County C
intends to be an eligible deferred compensation plan under section 457(b) of the
Internal Revenue Code of 1986 (the Code).

The Plan is a nonqualified deferred compensation plan and related trust adopted by
County C of State S for the benefit of the employees of County C. It is represented that
County C is an eligible employer within the meaning of section 457(e)(1)(A).

Under the Plan, an employee becomes a participant by executing a deferral agreement
to defer compensation into the Plan. The election must be made prior to the beginning
of the month in which the employee’s compensation is paid or made available.

The Plan provides for a maximum amount that may be deferred by a participant in any
taxable year. It also provides for a catch-up contribution for amounts deferred for one or
more of the participant's last three taxable years ending before he or she attains normal
retirement age under the Plan. In addition, the Plan provides for age fifty-plus catch-up
contributions described in section 457(e)(18). The amounts that may be deferred under
the annual maximum limitation and the catch-up provisions are within the limitations of
section 457(c).
PLR-144283-14 2

Upon separation from service, participant’s account will be paid in accordance with the
payment option elected by the participant. Benefits under the plan will commence no
later than the latter of: April 1 of the year following the calendar year in which the
participant attains age 70 ½; or April 1 of the year following the calendar year in which
the participant has a separation from service. The Plan provides that the manner and
time of benefit payout must meet the distribution requirements of 401(a)(9) of the Code.

The Plan also provides for a distribution due to an unforeseeable emergency that is a
severe financial hardship resulting from extraordinary and unforeseeable circumstances
beyond the control of the participant under section 457(d)(2) and the regulations
thereunder.

The Plan provides for acceptance of transfers of a participant's account balance from
another eligible deferred compensation plan. The Plan provides for permissive plan to
plan transfers or rollovers of all or a portion of a participant's account to another eligible
governmental plan if the participant has terminated service and is a participant of the
other eligible plan. The Plan provides that amounts of compensation deferred under the
Plan are to be promptly remitted to and invested in a trust as described in section
457(g)(1) for the exclusive benefit of the participants and their beneficiaries. Each
participant shall direct the investment of his or her benefit amount.

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) provides that 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 and which meet the deferral limitations described in section 457(c); which
meets the distribution requirements described in section 457(d); which provides for
deferral elections described in section 457(b)(4); and, in the case of a governmental
plan, which requires the plan assets and income to be held in trust for the exclusive
benefit of participants and beneficiaries as described in section 457(g).

Section 457(e)(1) provides that 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 income tax.
PLR-144283-14 3

Section 457(b)(4) of the Code 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. An eligible plan may provide that if a participant
enters into an agreement providing for deferral by salary reduction under the plan, the
agreement will remain in effect until the participant revokes or alters the terms of the
agreement.

Section 457(b)(2) of the Code provides the basic limits on the amount of eligible annual
deferrals. However, a catch-up amount described in section 457(b)(3) may be added to
this amount for participants that are within three years of the normal retirement age or,
for participants age 50 or older, a catch-up amount may be added as described in
section 457(e)(18). A participant eligible for both catch-up provisions is entitled to use
the higher limit of the two. The total annual eligible deferral amount is limited by section
457(c). Coordination of the basic limits and the catch-up limits is described in §1.457-
4(c) of the Income Tax Regulation ("regulations").

Section 1.457-4(c)(3)(v)(A) of the regulations provides that a plan may define the
normal retirement age for purposes of the last-three-years catch-up provision as any
age that is on or after the earlier of age 65 or the age at which participants have the
right to retire and receive, under the basic defined benefit pension plan of the State or
tax-exempt entity (or a money purchase pension plan in which the participant also
participates if the participant is not eligible to participate in a defined benefit plan),
immediate retirement benefits without actuarial or similar reduction because of
retirement before some later specified age, and that is not later than age seventy and a
half. Alternatively, a plan may provide that a participant is allowed to designate a
normal retirement age within these ages. For purposes of the three-year catch-up
provision an entity sponsoring more than one eligible plan may not permit a participant
to have more than one normal retirement age under the eligible plans it sponsors.
Section 1.457-4(c)(3)(v)(B) of the regulations provides a special exception for qualified
police and firefighters to retire as early as age forty for purposes of the three-year catch-
up provision.

Section 1.457-5 of the regulations provides that the section 457(c) eligible-deferral
amount limitation is applied to all eligible plans in which a participant participates in a
tax year and is determined on an aggregate basis. If a participant has annual deferrals
under more than one eligible plan and the applicable catch-up amount is not the same
for each such eligible plan for the taxable year, section 457(c) is applied using the
catch-up amount under whichever plan has the largest catch-up amount applicable to
the participant. To the extent that the combined annual deferral amount exceeds the
maximum deferral limitation, the amount is treated as an excess deferral under §1.457-
4(e) of the regulations. For purposes of determining whether there is an excess deferral
resulting from a failure of a plan to apply the deferral limitations, all plans under which
an individual participates by virtue of his or her relationship with a single employer are
treated as a single plan (without regard to any differences in funding).
PLR-144283-14 4

Section 457(d)(1)(A) of the Code provides that amounts distributed under an eligible
plan 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.

Section 1.457-6(c)(2) of the regulations provides the requirements for a unforeseeable
emergency distribution. An unforeseeable emergency must be defined in the plan as a
severe financial hardship of the participant or beneficiary resulting from an illness or
accident of the participant or beneficiary, the participant's or beneficiary's spouse, or the
participant's or beneficiary's dependent; loss of the participant's or beneficiary's property
due to casualty (including the need to rebuild a home following damage to a home not
otherwise covered by homeowner's insurance, e.g., as a result of a natural disaster); or
other similar extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the participant or the beneficiary. Whether a participant or
beneficiary is faced with an unforeseeable emergency is determined based on the
relevant facts and circumstances of each case. However, a distribution on account of
unforeseeable emergency may not be made to the extent that such emergency is or
may be relieved through reimbursement or compensation from insurance or otherwise,
by liquidation of the participant's assets, to the extent the liquidation of such assets
would not itself cause severe financial hardship, or by cessation of deferrals under the
plan. Further, distributions because of an unforeseeable emergency must be limited to
the amount reasonably necessary to satisfy the emergency need (which may include
any amounts necessary to pay any federal, state, or local income taxes or penalties
reasonably anticipated to result from the distribution).
Section 457(d)(2) of the Code requires a plan to meet the minimum distribution
requirements of section 401(a)(9). These requirements are described in §1.401(a)(9)-1
through 1.401(a)(9)-9 of the regulations.

Section 457(d)(3) of the Code provides that a governmental plan will not fail to meet the
distribution requirements if it provides for in-service distributions of a limited-dollar
amount which meet the requirements of section 457(e)(9)(A) and §1.457-6(e) of the
regulations. Section 1.457-6(e) of the regulations is satisfied if the participant's total
amount deferred (the participant's total account balance) which is not attributable to
rollover contributions is not in excess of the dollar limit under section 411(a)(11)(A) (i.e.,
$5000 adjusted for inflation), no amount has been deferred under the plan by or for the
participant during the two-year period ending on the date of the distribution, and there
has been no prior distribution under the plan to the participant of this kind.

Section 457(e)(10) of the Code provides that 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 one eligible deferred compensation
plan to another eligible deferred compensation plan. Section 1.457-10(b)(1) of the
PLR-144283-14 5

regulations provides that an eligible government plan may transfer amounts to, and
receive amounts from, an eligible government plan if certain conditions are met.

With regard to transfers from an eligible governmental plan to another eligible
governmental plan of the same employer, §1.457-10(b)(4) of the regulations provides
that a transfer from an eligible governmental plan to another eligible governmental plan
is permitted if the following conditions are met: (i) the transfer is from an eligible
governmental plan to another eligible governmental plan of the same employer; (ii) the
transferor plan provides for transfers; (iii) the receiving plan provides for the receipt of
transfers; (iv) the participant or beneficiary whose amounts deferred are being
transferred will have an amount deferred immediately after the transfer at least equal to
the amount deferred with respect to that participant or beneficiary immediately before
the transfer; and (v) the participant or beneficiary whose deferred amounts are being
transferred is not eligible for additional annual deferrals in the receiving plan unless the
participant or beneficiary is performing services for the entity maintaining the receiving
plan.

Section 457(e)(16) of the Code provides that, with regard to rollover distributions, for an
eligible deferred compensation plan if (i) 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)), (ii) 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 (iii) 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. Under §1.457-10(e) of the regulations, an eligible governmental plan that
permits eligible rollover distributions made from another eligible retirement plan to be
paid into the eligible governmental plan is required to provide that it will separately
account for any eligible rollover distributions it receives. Amounts contributed to an
eligible governmental plan as eligible rollover distributions are not taken into account for
purposes of the annual limit on annual deferrals by a participant but are otherwise
treated in the same manner as amounts deferred under the plan. Section 1.402(c)-2(b)
of the regulations provides that a distributee other than the employee or the employee's
surviving spouse (or a spouse or former spouse who is an alternate payee under a
qualified domestic relations order) is not permitted to roll over distributions.

Consistent with section 414(p)(10) of the Code, §1.457- 10(c) of the regulations
provides for distributions made pursuant to a qualified domestic relations order. If a
distribution or payment is made from an eligible plan to an alternate payee pursuant to a
qualified domestic relations order, rules similar to the rules of section 402(e)(1)(A) apply
to the distribution. Section 414(p)(8) provides that the term "alternate payee" means
any spouse, former spouse, child or other dependent of a participant who is recognized
by a domestic relations order as having a right to receive all, or a portion of, the benefits
payable under a plan with respect to such participant.
PLR-144283-14 6

Section 457(e)(17) of the Code provides that 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(k)(3) does not apply.

Section 457(g) of the Code 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).

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

  1.        The Plan is an eligible deferred compensation plan as defined in section
            457(b) of the Code and the regulations.

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

  3.        Amounts distributed from the Plan in an eligible rollover distribution
            (within the meaning of section 402(c)(4) of the Code), shall not be
            includible in gross income for the taxable year in which paid as provided
            in section 457(e)(16).

  4.        The trust established as part of the Plan meets the requirements of
            section 457(g)(1) of the Code and is an organization exempt from tax
            under section 501(a) of the Code.

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal 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.
PLR-144283-14 7

Temporary or final regulations pertaining to one or more of the issues addressed in this
ruling have not yet been adopted. Therefore, this ruling will be modified or revoked by
the adoption of temporary or final regulations; to the extent the regulations are
inconsistent with any conclusion in the letter ruling. See section 11.04 of Rev. Proc.
2010-1, 2010-1 I.R.B. 1, 49. However, when the criteria in section 11.06 of Rev. Proc.
2010-1, 2010-1 I.R.B. 1, 50 are satisfied, a ruling is not revoked or modified retroactively
except in rare or unusual circumstances.

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

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

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 Press /
                                   Cheryl E. Press
                                   Senior Counsel, Qualified Plans Branch 4
                                   (Employee Benefits)
                                   (Tax Exempt & Government Entities)