June 23, 2016

Treasury Issues Two Proposed Regulations on Deferred Compensation

On June 21, 2016, the Department of the Treasury (Treasury) issued two related proposed regulations on deferred compensation. The first proposed regulation addresses deferred compensation plans of state and local governments and tax-exempt organizations under Section 457 of the Internal Revenue Code (Code). The second proposed regulation addresses the application of Code §409A to nonqualified deferred compensation. Comments on both sets of proposed regulations are due by September 20, 2016.

The proposed §457 regulation amends a final regulation issued in 2003 to address statutory changes since 2003 and issues not addressed in the 2003 regulations. It also coordinates with the approach taken under the §409A final regulations and concurrently published §409A proposed regulations. Among the issues addressed are rules for determining when amounts deferred under these plans are includible in income, the amounts that are includible in income, and the types of plans that are not subject to these rules. Although the regulation is not applicable until adopted in final form, the Treasury allows taxpayers to rely on the proposed regulation in the interim. Applicability dates following adoption of the final regulation will be delayed for plans maintained pursuant to collective bargaining agreements and plans that require legislative approval.

The proposed §409A regulation amends specific provisions of the final §409A regulation adopted in 2007 and replaces portions of additional proposed §409A regulations on income inclusion issued in 2008. This proposed regulation addresses specific problems and issues identified since the earlier regulations and is not intended to be a general revision of, or to make broad changes to, the existing final regulations or the 2008 proposed regulations. Although the regulations are not applicable until adopted in final form, taxpayers may rely on this proposed regulation. The proposed regulation also clarifies the Treasury’s interpretation of specific provisions of the existing final regulation. The Treasury provides that contrary readings of those provisions of the final regulations may no longer be taken.

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