New Proposed Regulations under Code Sections 457 and 409A

Section 457 Regulations

Today, the IRS published the long expected proposed regulations under section 457 of the Internal Revenue Code that prescribe rules applicable to deferred compensation plans established by tax-exempt organizations and State or local governments (such as 457(f) plans, 457(b) plans, 457(e)(11) plans, and employment agreements that are affected by that Code section). These regulations include rules for determining (1) when amounts deferred under such plans and agreements are includible in taxable income, (2) the amounts that are includible in income, and (3) the types of plans and agreements that are subject to the rules. (On the bright side, an early reading indicates that the proposed regulations allow some new and more flexible design features not previously available to tax-exempt organizations.) The new rules under section 457 will affect virtually every tax-exempt entity, various employee groups (e.g., executives, physicians, faculty, etc.) and all administrators of deferred compensation plans.

Section 409A Regulations

In addition, also today, the IRS published proposed regulations that “clarify or modify” certain provisions of the 2007 final regulations, and the 2008 proposed regulations, under section 409A of the Internal Revenue Code. These regulations will affect most employers and various employee groups, including both tax-exempt and for-profit employers and their respective employees.

Application to Tax-Exempt and For-Profit Employers and Employee Groups

To be clear, the 457 regulations apply only to tax-exempt employers and State and local governments. The 409A regulations apply to all employers, including both tax-exempt and for-profit employers. Tax-exempt employers are impacted by both regulations and for-profit employers only by the 409A regulations.

Projected Effective Dates

The section 457 proposed regulations are set to apply to “compensation deferred under a plan” for calendar years beginning after the date the rules are published as final regulations. The section 409A proposed regulations are set to apply when they are published as final regulations. The new rules under both sets of the proposed regulations may be relied upon immediately (although the current final regulations and other guidance continue to apply for now).

Next Steps

In future e-Alerts we will be providing some additional information about required changes, optional design changes and the timing for the implementation of these changes to plans and employment agreements and other appropriate planning steps. Should you have any questions or comments in the meantime, please contact us.

Categories: Regulations