State deferred compensation plan qualified under section 457(b)

Plain-English summary

A state restated its governmental deferred compensation plan and requested rulings on its qualification under section 457(b). The plan covered eligible public employees and addressed deferrals, catch-up contributions, emergencies, small in-service distributions, loans, rollovers, service-credit purchases, required distributions, and an exclusive-benefit trust. The IRS ruled that the restated plan was an eligible section 457(b) plan. Deferred compensation and earnings would be included in income only when paid under the plan, and the section 457(g) trust would be treated as tax-exempt under section 501(a). All three rulings depended on the plan adopting a proposed amendment.

Ruling snapshot

• Question: Did the state's restated deferred compensation plan and trust satisfy sections 457(b) and 457(g)?
• Outcome: approved, contingent on adoption of the proposed amendment
• Key authorities: IRC §§ 401(a)(9), 402, 402A, 414, 415, 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: 201930009                                              Third Party Communication: None
Release Date: 7/26/2019                                        Date of Communication: Not Applicable
Index Number: 457.00-00
                                                               Person To Contact:
----------------------------                                   -------------------, ID No. ------------------
----------------------                                         Telephone Number:
------------------------------------------------------------   ----------------------
-------------------                                            Refer Reply To:
-----------------------------------                            CC: EEE:EB:QP3
------------------------------------                           PLR-126346-18
                                                               Date:
In Re: ---------------------------------------------------- April 04, 2019
------------------------------------------------------------
----------------------------------------------------




State Agency        =    ----------------------------------------------
Plan A              =    --------------------------------------------------------------------
Plan B              =    ----------------------------------------------------------------------
Trust               =    ----------------------------------------------------------------------------------
State               =    --------------

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

This letter responds to your authorized representative’s August 28, 2018 letter and
subsequent correspondence, on behalf of the State and its State Agency, requesting
rulings concerning the Plan, the State’s restated deferred compensation plan, which is
intended to be an eligible deferred compensation plan under section 457(b) of the
Internal Revenue Code of 1986 (the Code) amended under the Economic Growth and
Tax Relief Reconciliation Act (EGTRRA) of 2001 and subsequent legislation, and the
regulations thereunder. This letter does not address the supplement to the Plan.

The following facts and representations have been submitted under penalties of perjury
in support of your request:

The restated Plan has been adopted by State which is represented to be an eligible
governmental employer described in section 457(e)(1)(A). The State Agency
administers the Plan on behalf of the State.

Under the Plan, a participant, who must be an eligible employee of State or one of its
related agencies and its instrumentalities, may elect to defer compensation within the
Plan’s limits that would have been received for services rendered to the State in any
taxable year until death, severance from employment, attainment of age 70 1/2, or until

the occurrence of an unforeseeable emergency. The Plan also contains a provision
allowing for an unforeseeable emergency. Further, the Plan contains a provision
allowing for an in-service distribution of $5,000 or less to be paid to a participant from
his or her account in certain limited circumstances set forth thereunder and from his or
her account in certain limited circumstances set forth thereunder and in section
457(e)(9)(A).

Under the Plan, a participant, excluding a beneficiary, whose settlement date has not
occurred, may request an unforeseeable emergency withdrawal from the participant’s
account by filing a written or electronic request with the State Agency. A participant’s
request for an unforeseeable emergency withdrawal must include evidence deemed
necessary by the State Agency. Such request must be made at such time and in such
manner as the State Agency determines. An unforeseeable emergency withdrawal
made under the relevant section of the Plan shall be subject to the following terms and
conditions: a) A participant may withdraw all or any portion of his or her account and
withdrawals shall be withdrawn from the participant’s subaccounts and investment
alternatives in the order determined by the State Agency for withdrawals from the Plan.
b) An unforeseeable emergency withdrawal may be made only on account of severe
financial hardship to a participant resulting from: (i) An illness or accident of the
participant, the participant’s spouse, or the participant’s dependent (as defined by
section 152, without regard to section 152(b)(1), (b)(2) and (d)(1)(b);
(ii) Loss of property due to casualty; or (iii) Other similar extraordinary and
unforeseeable circumstances arising as a result of the events beyond the control of the
participant that would cause severe financial hardship to the participant if an emergency
withdrawal were not permitted.

Under the Plan, an emergency withdrawal may not be in excess of the amount
reasonably needed to satisfy the emergency need of the participant. For this purpose, a
distribution is not necessary to the extent the emergency is or may be relieved from
other financial resources available to the participant, including insurance
reimbursement, cessation of deferrals under the Plan A and Plan B, or liquidation of
other assets, to the extent the liquidation of such assets would not itself cause severe
financial hardship. In accordance with rules and procedures the State Agency may
establish, the amount of an unforeseeable emergency withdrawal may include the
amount necessary to pay any federal, state, or local income taxes or penalties
reasonably anticipated to result from the withdrawal.

The State Agency will determine whether the requirements for an unforeseeable
emergency are fulfilled under the Plan, after considering all of the relevant facts and
circumstances of each case.

The Plan permits the State Agency to allow the Plan’s participants to take loans from
their Plan accounts, subject to certain restrictions. The loan program complies with the
requirements of section 72(p) and its underlying regulations. Loans made under the

Plan are subject to the rules of the Plan and under § 1.457-6(f)(2) of the Income Tax
Regulations, including provisions restricting the maximum amount and term of the plan
loan.

A participant’s election under the Plan to defer compensation not yet paid (including
post-severance compensation paid within a limited period after severance from
employment) must be filed prior to the beginning of the month in which the
compensation to be deferred is paid or made available. The Plan provides for a
maximum amount that may be deferred by a participant in any taxable year and also
provides for a catch-up computation for amounts deferred for one or more of the
participant’s last three taxable years ending before he attains normal retirement age
under the Plan.

The amounts that may be deferred by a participant in the Plan under the annual
maximum limitation and the catch-up provisions are within the limitations of section
457(b), including the section 457(c) coordinated deferral provision.

The Plan also provides for the age 50 plus catch-up contributions described in section
415(v) and 457(e)(18). However, the Plan provides that a participant can only utilize one
of the two catch-up contribution provisions during a single year.

With certain limitations, a participant, beneficiary or alternate payee may elect the
manner in which his/her deferred amounts will be distributed. The Plan provides that the
manner and time of benefit payout must meet the distribution requirements of section
401(a)(9) and 457(d).

The Plan provides that amounts of compensation deferred thereunder are to be
transferred to and held in a trust (Trust) described in section 457(g)(1) for the exclusive
benefit of the participants and their beneficiaries. All amounts deferred under the Plan
must be transferred to the Trust within a short period after such compensation would
otherwise have been paid in compliance with § 1.457-8(a)(2)(II). The rights of any
participant or beneficiary to payments pursuant to the Plan are generally non-assignable
and not subject to transfer or alienation.

Under the Plan, a participant may elect to have any portion of an allowable distribution
transferred to an eligible retirement plan described in section 402(c)(8)(B) such as an
individual retirement account (IRA) in a direct rollover.

The Plan also provides, that a participant, prior to severance from employment, or a
beneficiary or alternate payee may elect, pursuant to section 457(e)(17) and in
accordance with the State Agency’s rules, to transfer a portion or all of the amount in
his/her section 457(b) plan account to a defined benefit governmental plan, described in
section 414(d), that accepts such transfers, to purchase permissive service credit

described in section 415(n)(3)(A) or make a repayment to which section 415 does not
apply under section 415(k)(3) pursuant to the terms of such transferee plan.

Section 457 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) 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.

Section 457(b)(4) 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.

Under section 402A(a), applicable retirement plans may include a qualified Roth
contribution program. Section 402A(e)(1) provides that eligible governmental deferred
compensation plans are applicable retirement plans. Section 402A(a)(1) provides that
elective deferrals of compensation which are designated Roth contributions under
qualified Roth contribution programs are not excluded from income in the year of
deferral. Section 402A(d)(1) provides that qualified distributions from designated Roth
accounts are not includible in gross income.

Section 457(b)(2) 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).

Section 1.457-4(c)(3)(v)(A) 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 70 ½. Alternatively, a plan may provide that a
participant is allowed to designate a normal retirement age within these ages. For
purposes of the last-three-years 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) provides a special
exception for qualified police and firefighters to retire as early as age 40 for purposes of
the last-three-years catch-up provision.

Section 1.457-5 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). 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).

Section 457(d)(1)(A) 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 ½, (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) provides the requirements for an 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) 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.

Section 457(d)(3) 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). Section 1.457-6(e) 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., $5,000 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) 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 section 457(b) eligible deferred compensation plan
to another section 457(b) eligible deferred compensation plan. Section 1.457-10(b)(1)
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) 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) provides that with respect to an eligible retirement plan established
and maintained by a governmental employer, if (i) any portion of the balance to the
credit of an employee in the plan is paid to him/her in an eligible rollover distribution
within the meaning of section 402(c)(4), (ii) the employee transfers any portion of the
property received 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. Section 402(c)(11) provides that non-spousal beneficiaries may elect to
have an eligible rollover distribution paid directly to an inherited IRA.

Under § 1.457-10(e), 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.

Consistent with section 414(p), § 1.457-10(c) 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.

Section 457(e)(17) 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 1.457-10(b)(8)(i) clarifies that such a transfer may be
made before severance from employment.

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). Section 457(g)(3) provides that custodial accounts and contracts
described in section 401(f) will be treated as trusts under rules similar to the rules under
section 401(f).

Based upon the provisions of the Plan summarized above and the documents and
representations provided, we conclude as follows:

1.    The restated Plan of State constitutes an eligible deferred compensation plan as
defined in section 457(b).

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) in the recipient’s gross income only 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.     The Trust under the Plan, established by State, satisfied the requirement of
section 457(g), and the Trust shall be treated as an organization exempt from taxation
under section 501(a).

The rulings contained in this letter are based upon the Plan’s adoption of a proposed
amendment. Failing to adopt the proposed amendment will nullify the rulings contained
within this letter.

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.

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

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, as specified in Rev. Proc. 2019-1, 2019-1 I.R.B. 1, section
7.01(16)(b). This office has not verified any of the material submitted in support of the
request for ruling, and such material is subject to verification on examination. The
Associate office will revoke or modify a letter ruling and apply the revocation
retroactively if there has been a misstatement or omission of controlling facts; the facts
at the time of the transaction are materially different from the controlling facts on which
the ruling was based; or, in the case of a transaction involving a continuing action or
series of actions, the controlling facts change during the course of the transaction. See
Rev. Proc. 2019-1, section 11.05.


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


                                                   Sincerely,




                                                   Chery Press
                                                   Senior Counsel
                                                   Qualified Plans Branch 4
                                                   Office of Associate Chief Counsel
                                                   (Employee Benefits, Exempt
                                                   Organizations and Employment Taxes)