State deferred compensation plan qualifies under section 457(b)

Plain-English summary

A state adopted a nonqualified deferred compensation plan and related trust for its employees and their beneficiaries. The plan limited deferrals, permitted statutory catch-up contributions, restricted distributions, allowed qualifying rollovers and transfers, and held assets in trust for participants. The IRS ruled that the plan is an eligible governmental deferred compensation plan under IRC § 457(b). Deferred compensation and earnings will generally enter a recipient's income when paid, while eligible rollover distributions will not be included when properly transferred. The IRS also ruled that the trust is exempt under IRC § 501(a), assuming it is valid under state law.

Ruling snapshot

• Question: Does the state's deferred compensation plan qualify under IRC § 457(b), and how are its deferrals, rollovers, and trust treated for federal tax purposes?
• Outcome: Approved, the plan qualifies and the related tax treatment follows the stated section 457 rules
• Key authorities: IRC §§ 401(a)(9), 402(c), 414(p), 457(a), 457(b), 457(c), 457(d), 457(e), 457(g), 501(a); Treas. Reg. §§ 1.457-4, 1.457-5, 1.457-6, 1.457-10

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202533007 Third Party Communication: None
Release Date: 8/15/2025 Date of Communication: Not Applicable
Index Number: 457.05-00
Person To Contact:
------------------------------------------------------------ ----------------------, ID No. -----------------
------------------- Telephone Number:
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--------------------------------------- Refer Reply To:
CC:EEE:EB:QP4
PLR-121332-24
Date:
May 19, 2025

LEGEND

Plan = -----------------------------------------------------------------------------------------------
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State A = ------------------

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

This is in response to a request for a ruling under section 457 of the Internal Revenue
Code (Code), submitted on your behalf by your authorized representative on November
11, 2024, and supplemented on March 19, 2025.

The following facts and representations have been submitted under penalties of perjury
in support of the rulings requested:

State A is 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 State A for the
benefits 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 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-121332-24 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).

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).

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
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
PLR-121332-24 3

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.

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).

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
PLR-121332-24 4

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
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
PLR-121332-24 5

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.

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
PLR-121332-24 6

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).

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 A 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.

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 A.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer, and on Taxpayer’s behalf by Taxpayer’s authorized
representative, and accompanied by a penalty of perjury statement executed by
Taxpayer, as specified in Rev. Proc. 2024-1, 2024-1 I.R.B. 1, section 7.01(16)(b). 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. 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
PLR-121332-24 7

facts materially change during the course of the transaction. See Rev. Proc. 2024-1,
section 11.05.

This letter is directed only to the taxpayer requesting it. Section 6110(k)(3) 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.

                                           Sincerely,



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

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