§457. Deferred compensation plans of State and local governments and tax-exempt organizations
(a) Year of inclusion in gross income
In the case of a participant in an eligible 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 or otherwise made available to the participant or other beneficiary.
(b) Eligible deferred compensation plan defined
For purposes of this section, the term "eligible deferred compensation plan" means a plan established and maintained by an eligible employer-
(1) in which only individuals who perform service for the employer may be participants,
(2) which provides that (except as provided in paragraph (3)) the maximum amount which may be deferred under the plan for the taxable year shall not exceed the lesser of-
(A) $7,500, or
(B) 331/3 percent of the participant's includible compensation,
(3) which may provide that, for 1 or more of the participant's last 3 taxable years ending before he attains normal retirement age under the plan, the ceiling set forth in paragraph (2) shall be the lesser of-
(A) $15,000, or
(B) the sum of-
(i) the plan ceiling established for purposes of paragraph (2) for the taxable year (determined without regard to this paragraph), plus
(ii) so much of the plan ceiling established for purposes of paragraph (2) for taxable years before the taxable year as has not previously been used under paragraph (2) or this paragraph,
(4) which 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,
(5) which meets the distribution requirements of subsection (d), and
(6) which provides that-
(A) all amounts of compensation deferred under the plan,
(B) all property and rights purchased with such amounts, and
(C) all income attributable to such amounts, property, or rights,
shall remain (until made available to the participant or other beneficiary) solely the property and rights of the employer (without being restricted to the provision of benefits under the plan), subject only to the claims of the employer's general creditors.
A plan which is established and maintained by an employer which is described in subsection (e)(1)(A) and which is administered in a manner which is inconsistent with the requirements of any of the preceding paragraphs shall be treated as not meeting the requirements of such paragraph as of the 1st plan year beginning more than 180 days after the date of notification by the Secretary of the inconsistency unless the employer corrects the inconsistency before the 1st day of such plan year.
(c) Individuals who are participants in more than 1 plan
(1) In general
The maximum amount of the compensation of any one individual which may be deferred under subsection (a) during any taxable year shall not exceed $7,500 (as modified by any adjustment provided under subsection (b)(3)).
(2) Coordination with certain other deferrals
In applying paragraph (1) of this subsection-
(A) any amount excluded from gross income under section 403(b) for the taxable year, and
(B) any amount-
(i) excluded from gross income under section 402(e)(3) or section 402(h)(1)(B) for the taxable year, or
(ii) with respect to which a deduction is allowable by reason of a contribution to an organization described in section 501(c)(18) for the taxable year,
shall be treated as an amount deferred under subsection (a). In applying section 402(g)(8)(A)(iii) or 403(b)(2)(A)(ii), an amount deferred under subsection (a) for any year of service shall be taken into account as if described in section 402(g)(3)(C) or 403(b)(2)(A)(ii), respectively. Subparagraph (B) shall not apply in the case of a participant in a rural cooperative plan (as defined in section 401(k)(7)).
(d) Distribution requirements
(1) In general
For purposes of subsection (b)(5), a plan meets the distribution requirements of this subsection if-
(A) under the plan amounts will not be made available to participants or beneficiaries earlier than-
(i) the calendar year in which the participant attains age 70½,
(ii) when the participant is separated from service with the employer, or
(iii) when the participant is faced with an unforeseeable emergency (determined in the manner prescribed by the Secretary in regulations), and
(B) the plan meets the minimum distribution requirements of paragraph (2).
(2) Minimum distribution requirements
A plan meets the minimum distribution requirements of this paragraph if such plan meets the requirements of subparagraphs (A), (B), and (C):
(A) Application of section 401(a)(9)
A plan meets the requirements of this subparagraph if the plan meets the requirements of section 401(a)(9).
(B) Additional distribution requirements
A plan meets the requirements of this subparagraph if-
(i) in the case of a distribution beginning before the death of the participant, such distribution will be made in a form under which-
(I) the amounts payable with respect to the participant will be paid at times specified by the Secretary which are not later than the time determined under section 401(a)(9)(G) (relating to incidental death benefits), and
(II) any amount not distributed to the participant during his life will be distributed after the death of the participant at least as rapidly as under the method of distributions being used under subclause (I) as of the date of his death, or
(ii) in the case of a distribution which does not begin before the death of the participant, the entire amount payable with respect to the participant will be paid during a period not to exceed 15 years (or the life expectancy of the surviving spouse if such spouse is the beneficiary).
(C) Nonincreasing benefits
A plan meets the requirements of this subparagraph if any distribution payable over a period of more than 1 year can only be made in substantially nonincreasing amounts (paid not less frequently than annually).
(e) Other definitions and special rules
For purposes of this section-
(1) Eligible employer
The term "eligible employer" means-
(A) a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State, and
(B) any other organization (other than a governmental unit) exempt from tax under this subtitle.
(2) Performance of service
The performance of service includes performance of service as an independent contractor and the person (or governmental unit) for whom such services are performed shall be treated as the employer.
(3) Participant
The term "participant" means an individual who is eligible to defer compensation under the plan.
(4) Beneficiary
The term "beneficiary" means a beneficiary of the participant, his estate, or any other person whose interest in the plan is derived from the participant.
(5) Includible compensation
The term "includible compensation" means compensation for service performed for the employer which (taking into account the provisions of this section and other provisions of this chapter) is currently includible in gross income.
(6) Compensation taken into account at present value
Compensation shall be taken into account at its present value.
(7) Community property laws
The amount of includible compensation shall be determined without regard to any community property laws.
(8) Income attributable
Gains from the disposition of property shall be treated as income attributable to such property.
(9) Benefits not treated as made available by reason of certain elections
If-
(A) the total amount payable to a participant under the plan does not exceed $3,500, and
(B) no additional amounts may be deferred under the plan with respect to the participant,
the amount payable to the participant under the plan shall not be treated as made available merely because such participant may elect to receive a lump sum payable after separation from service and within 60 days of the election.
(10) Transfers between plans
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 1 eligible deferred compensation plan to another eligible deferred compensation plan.
(11) Certain plans excepted
Any bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plan shall be treated as a plan not providing for the deferral of compensation.
(12) Exception for nonelective deferred compensation of nonemployees
(A) In general
This section shall not apply to nonelective deferred compensation attributable to services not performed as an employee.
(B) Nonelective deferred compensation
For purposes of subparagraph (A), deferred compensation shall be treated as nonelective only if all individuals (other than those who have not satisfied any applicable initial service requirement) with the same relationship to the payor are covered under the same plan with no individual variations or options under the plan.
(13) Special rule for churches
The term "eligible employer" shall not include a church (as defined in section 3121(w)(3)(A)) or qualified church-controlled organization (as defined in section 3121(w)(3)(B)).
(f) Tax treatment of participants where plan or arrangement of employer is not eligible
(1) In general
In the case of a plan of an eligible employer providing for a deferral of compensation, if such plan is not an eligible deferred compensation plan, then-
(A) the compensation shall be included in the gross income of the participant or beneficiary for the 1st taxable year in which there is no substantial risk of forfeiture of the rights to such compensation, and
(B) the tax treatment of any amount made available under the plan to a participant or beneficiary shall be determined under section 72 (relating to annuities, etc.).
(2) Exceptions
Paragraph (1) shall not apply to-
(A) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a),
(B) an annuity plan or contract described in section 403,
(C) that portion of any plan which consists of a transfer of property described in section 83, and
(D) that portion of any plan which consists of a trust to which section 402(b) applies.
(3) Definitions
For purposes of this subsection-
(A) Plan includes arrangements, etc.
The term "plan" includes any agreement or arrangement.
(B) Substantial risk of forfeiture
The rights of a person to compensation are subject to a substantial risk of forfeiture if such person's rights to such compensation are conditioned upon the future performance of substantial services by any individual.
(Added
Amendments
1992-Subsec. (c)(2)(B)(i).
1989-Subsec. (d)(1)(A)(iii).
Subsec. (d)(2)(B)(i)(I).
Subsec. (e)(13).
1988-Subsec. (c)(2).
Subsec. (d)(1)(A).
Subsec. (d)(2)(B)(i)(I).
Subsec. (d)(10).
Subsec. (d)(11).
"(A)
"(B)
Subsec. (e)(9).
Subsec. (e)(11).
Subsec. (e)(12).
Subsec. (e)(13).
1986-
1984-Subsec. (e)(2).
1980-Subsec. (d)(9)(B).
Effective Date of 1992 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Section 1011(e)(9) of
Amendment by section 1011(e)(1), (2), (10) of
Section 6064(d) of
"(1)
"(2)
"(A)
"(B)
"(C)
"(3)
"(A) if such amounts were deferred from periods before July 14, 1988, or
"(B) if-
"(i) such amounts are deferred from periods on or after such date pursuant to an agreement which-
"(I) was in writing on such date, and
"(II) on such date provides for a deferral for each taxable year covered by the agreement of a fixed amount or of an amount determined pursuant to a fixed formula, and
"(ii) the individual with respect to whom the deferral is made was covered under such agreement on such date.
Subparagraph (B) shall not apply to any taxable year ending after the date on which any modification of the amount or formula described in subparagraph (B)(i)(II) agreed to in writing before January 1, 1989, is effective. The preceding sentence shall not apply to a modification agreed to in writing before January 1, 1989, which does not increase any benefit of a participant. Amounts described in the first sentence of this paragraph shall be taken into account for purposes of applying section 457 of the 1986 Code to other amounts deferred under any eligible deferred compensation plan.
"(4)
[The due date for the report on the study referred to in section 6064(d)(4) of
Amendment by section 6071(c) of
Effective Date of 1986 Amendment
Section 1107(c) of
"(1)
"(2)
"(3)
"(A)
"(B)
"(i) were deferred from taxable years beginning before January 1, 1987, or
"(ii) are deferred from taxable years beginning after December 31, 1986, pursuant to an agreement which-
"(I) was in writing on August 16, 1986,
"(II) on such date provides for a deferral for each taxable year covered by the agreement of a fixed amount or of an amount determined pursuant to a fixed formula.
Clause (ii) shall not apply to any taxable year ending after the date on which any modification to the amount or formula described in subclause (II) is effective. Amounts described in the first sentence shall be taken into account for applying section 457 to other amounts deferred under any deferred compensation plan. This subparagraph shall only apply to individuals who were covered under the plan and agreement on August 16, 1986.
"(4)
"(5)
"(A) to employees on August 16, 1986, of a nonprofit corporation organized under the laws of the State of Alabama maintaining a deferred compensation plan with respect to which the Internal Revenue Service issued a ruling dated March 17, 1976, that the plan would not affect the tax-exempt status of the corporation, or
"(B) to to [sic] individuals eligible to participate on August 16, 1986, in a deferred compensation plan with respect to which a letter dated November 6, 1975, submitted the original plan to the Internal Revenue Service, an amendment was submitted on November 19, 1975, and the Internal Revenue Service responded with a letter dated December 24, 1975,
but only with respect to deferrals under such plan."
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1980 Amendment
Amendment by
Effective Date
Section 131(c)(1) of
Plan Amendments Not Required Until January 1, 1994
For provisions directing that if any amendments made by subtitle B [§§521–523] of title V of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1100–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Transitional Rules
Section 131(c)(2) of
"(A)
"(i) any amount of compensation deferred under a plan of a State providing for a deferral of compensation (other than a plan described in section 457(e)(2) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]), 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 or otherwise made available to the participant or other beneficiary, but
"(ii) the maximum amount of the compensation of any one individual which may be excluded from gross income by reason of clause (i) and by reason of section 457(a) of such Code during any such taxable year shall not exceed the lesser of-
"(I) $7,500, or
"(II) 331/3 percent of the participant's includible compensation.
"(B)
"(C)
"(D)
Deferred Compensation Plans for State Judges
Section 131(c)(3) of
"(A)
"(B)
"(i) such plan has been continuously in existence since December 31, 1978,
"(ii) under such plan, all judges eligible to benefit under the plan-
"(I) are required to participate, and
"(II) are required to contribute the same fixed percentage of their basic or regular rate of compensation as judge,
"(iii) under such plan, no judge has an option as to contributions or benefits the exercise of which would affect the amount of includible compensation,
"(iv) the retirement payments of a judge under the plan are a percentage of the compensation of judges of that State holding similar positions, and
"(v) the plan during any year does not pay benefits with respect to any participant which exceed the limitations of section 415(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]."
Section Referred to in Other Sections
This section is referred to in sections 219, 403, 414, 818, 3121, 4974, 6051 of this title; title 11 section 101; title 12 section 1821; title 42 section 409.