Borough's deferred compensation plan qualified under Section 457(b)

Plain-English summary

A political subdivision adopted a nonqualified deferred compensation plan and related trust for its employees and beneficiaries. The plan allowed timely compensation-deferral elections, designated Roth contributions, statutory catch-up contributions, participant loans, unforeseeable-emergency distributions, rollovers, and plan-to-plan transfers, while requiring assets to be held in trust exclusively for participants and beneficiaries. Based on the submitted information and representations, the IRS ruled that the plan was an eligible governmental plan under Section 457(b). Deferred compensation and earnings would generally be included in income when paid, eligible rollovers would not be included when transferred as provided by Section 457(e)(16), qualified Roth distributions would be tax-free, and the trust would be exempt under Section 501(a) if valid under state law. Significant plan modifications could make the ruling inapplicable.

Ruling snapshot

• Question: Does the borough's plan qualify as an eligible governmental deferred compensation plan under Section 457(b), with the stated tax treatment for deferrals, rollovers, Roth distributions, and its trust?
• Outcome: approved
• Key authorities: IRC §§ 72(p), 401(a)(9), 402, 402A, 457, 501(a); Treas. Reg. §§ 1.457-4 through 1.457-10

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202416009                                              Third Party Communication: None
 Release Date: 4/19/2024                                        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-114888-23
                                                                Date:
                                                                January 23, 2024




 Plan                          =      -------------------------------------------------------------------------------------------
                                      ------------------------------------------
 State S                       =      ----------------
 Borough B                     =      ---------------------------------------------------------


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

This responds to your letter of July 21, 2023, supplemented on January 16, 2024,
requesting a ruling concerning the Plan, which Borough B intends to be an eligible
deferred compensation plan under section 457(b) of the Internal Revenue Code (the
Code), effective as of --------------------.

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

Borough B is political subdivision of State S and an eligible employer within the meaning
of section 457(e)(1)(A). The Plan is a nonqualified deferred compensation plan and
related trust adopted by Borough C for the benefit of its employees and their
beneficiaries.

Under the Plan, an employee may become a participant by executing a deferral
agreement to defer compensation into the Plan. The deferral agreement may include a
designation that all or a portion of the deferral elected by the participant shall be treated
as Roth contributions in accordance with section 402A. The election must be made
before compensation is currently available to the employee. A new employee may
defer compensation payable in the calendar month during which the participant first
becomes an employee if an agreement providing for the deferral is entered into on or
before the first day on which the participant becomes an employee.
PLR-114888-23                                2


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 the participant 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).

The Plan allows participants to take loans from their plan accounts, subject to certain
restrictions. Loans made under the Plan are subject to rules in the Plan and section
72(p) and § 1.457-6(f)(2) of the Income Tax Regulations, including provisions restricting
the maximum amount and term of a plan loan.

Upon separation from service, a participant may elect a form of distribution of benefits
from that participant’s account. Benefits under the Plan will commence no later than the
later of: April 1 of the year following the calendar year in which the participant attains
age 73 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 section 401(a)(9).

Under the Plan, a participant (upon severance from employment) or beneficiary may
elect to have any portion of benefits deferred under the Plan that constitutes an eligible
rollover distribution described in section 402(c)(4) paid directly to another eligible
retirement plan described in section 402(c)(8)(B), such as an individual retirement
account (IRA), in a direct rollover, with nonspouse beneficiaries subject to certain
limitations set forth in section 402(c)(11). However, a direct rollover of an eligible
rollover distribution from a Roth contribution account may only be made to another
designated Roth account under an applicable retirement plan described in section
402A(e)(1) or to a Roth IRA described in section 408A, and only to the extent the
rollover is permitted under section 402(c).

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)(1)(A)(iii) and § 1.457-6(c).

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 of all or a portion of a participant’s account to another eligible
governmental plan if the participant has terminated service and, in the case of a plan-to-
plan transfer, 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
PLR-114888-23                                 3

exclusive benefit of the participants and their beneficiaries. Each participant shall direct
the investment of his or her benefit amount.

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
compensation is currently available to the individual. 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
PLR-114888-23                                 4

higher limit of the two. The total annual eligible deferral amount is limited by section
457(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 forty for purposes
of the three-year 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 in part that amounts distributed under an eligible
governmental plan will not be made available to participants or beneficiaries earlier than
(i) the calendar year in which the participant attains age 59 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
PLR-114888-23                                 5

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(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 eligible deferred compensation plan to another
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, §1.457-10(b)(2) provides that a transfer from an eligible
governmental plan to another eligible governmental plan is permitted if the following
conditions are met: (i) the transferor plan provides for transfers; (ii) the receiving plan
provides for the receipt of transfers; (iii) 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 (iv) in the case of a transfer for a
participant, the participant has had a severance from employment with the transferring
employer and is performing services for the entity maintaining the receiving plan.

Section 457(e)(16) 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. Section 402(c)(11) provides that nonspousal beneficiaries may elect to
have an eligible rollover distribution paid directly to an inherited IRA.
PLR-114888-23                                 6

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)(10), §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(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 1.457-7(b)(3) provides that, in accordance with section 72(p), the amount of any
loan from an eligible governmental plan to a participant or beneficiary is generally
treated as having been received as a plan distribution under section 72(p)(1) except to
the extent set forth in section 72(p)(2) and § 1.72(p)-(1) (relating to loans that do not
exceed a maximum amount and that are repayable in accordance with certain terms).
Thus, except to the extent a loan from a governmental section 457(b) plan
satisfies sections 72(p)(2), 1.72(p)-1, and 1.457-6(f)(2), any amount loaned from an
eligible governmental plan to a participant or beneficiary is includible in the gross
income of the borrower for the taxable year when the loan is made. If a loan made
under the Plan meets the requirements established under the Plan, the loan would
satisfy the requirements of sections 72(p)(2), 1.72(p)-1, and 1.457-6(f)(2), and thus
would not be treated as a taxable distribution under section 72(p)(1) solely because the
loan was made.

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).
PLR-114888-23                                7

                            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 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)), will not be includible in gross
                income for the taxable year in which paid (as provided in section
                457(e)(16)).

                            4.       Assuming that it is a valid trust under State S law, the trust established
                as part of the Plan is an organization exempt from tax under section
                501(a) in accordance with section 457(g)(2)(A), and benefits paid from
                the trust shall be includable in the gross income of the participant or
                beneficiary in the taxable year in which paid.

                            5.       Qualified distributions from the qualified Roth contribution program
                maintained pursuant to the Plan's provisions will not be includible in
                gross income under section 402A(d)(1).

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 does not address the validity of any Plan provisions under the laws of
State S.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party, as specified in Rev. Proc. 2024-1, 2024-1 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. 2024-1, section 11.05.

Except as specifically set forth above, 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 ruling.
PLR-114888-23                                        8

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

A copy of this letter has been sent to your authorized representatives in accordance
with a power of attorney on file in this office.


                                               Sincerely,



                                               Cheryl Press
                                               Senior Counsel, Qualified Plans Branch 4
                                               (Employee Benefits, Exempt Organizations, and
                                               Employment Taxes)


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