Guidance Coming, Comments Requested on § 457: IRS

In  Notice 2007-62 , the Internal Revenue Service (IRS) said that they, along with the Treasury Department, plan to issue guidance concerning the definitions of a bona fide severance pay plan under § 457(e)(11) and concerning the definition of substantial risk of forfeiture under § 457(f)(1)(B).

According to the notice, the guidance will provide that an arrangement is a bona fide severance pay plan under § 457(e)(11), and thus is not subject to the requirements of § 457, if:

• (1) the benefit is payable only upon involuntary severance from employment,
• (2) the amount payable does not exceed two times the employee’s annual rate of pay (taking into account only pay that does not exceed the maximum amount that may be taken into account under a qualified plan pursuant to § 401(a)(17) for the year in which the employee has a severance from employment), and
• (3) the plan provides that the payments must be completed by the end of the employee’s second taxable year following the year in which the employee separates from service.  

With respect to the requirement that benefits be payable only upon involuntary severance from employment, the IRS noted that, it is anticipated that the guidance would include exceptions for window programs, collectively bargained separation pay plans, and certain reimbursement or in-kind benefit arrangements (similar to the exceptions in § 1.409A-1(b)(9)(ii), (iv), and (v)).

According to the notice, the Treasury and IRS also anticipate issuing guidance regarding a substantial risk of forfeiture for purposes of § 457(f)(3)(B) under rules similar to those set forth under § 1.409A-1(d) - and that the upcoming guidance under § 457(f) will generally adopt the rules relating to substantial risk of forfeiture that are contained in § 1.409A-1(d).

As for how § 409A and 457(f) will interact under the anticipated standard, the IRS notice notes that, "under the rules at § 1.409A-1(b)(4)(i) relating to short-term deferrals, a deferral of compensation for purposes of § 409A does not occur if the plan under which a payment is made does not provide for a deferred payment and the service provider actually or constructively receives such payment on or before the first day of the applicable 2 ½ month period", and that under § 1.409A-1(a)(4), the inclusion in income of an amount under § 457(f) is treated as a payment of the amount for purposes of the short-term deferral rule contained in § 1.409A-1(b)(4).

The IRS goes on to note that if the standard for a substantial risk of forfeiture for purposes of § 409A described in Part IV of the notice is adopted, a substantial risk of forfeiture under § 457(f)(1)(B) could not lapse later than the date the substantial risk of forfeiture lapsed under § 409A and § 1.409A-1(d) - and that, accordingly, if a participant under an ineligible plan under § 457(f) included an amount of deferred compensation in gross income when it ceased to be subject to a substantial risk of forfeiture under § 457(f), the amount generally would not be subject to § 409A because the right to the amount and the payment would qualify as a short-term deferral under § 1.409A-1(a)(4).  

The notice goes on to state that the right to earnings on amounts that have previously been included under § 457(f) would be deferred compensation for purposes of § 409A unless the right to the earnings independently satisfied the requirements for an exclusion from coverage under § 409A.

The Treasury and the Service anticipate that the guidance described in the notice will be prospective, and that, with respect to periods before such guidance is issued, "no inference should be made from the anticipated guidance described in this notice regarding either the definition of a bona severance pay plan for purposes of § 457(e)(11)(A)(i) or the determination of substantial risk of forfeiture for purposes of § 457(f)."   It goes on to state, however, that "pending the issuance of further guidance, taxpayers may rely on the definition of a bona fide severance pay plan in the anticipated guidance described in section III of the notice for purposes of § 457(e)(11)(A)(i) and the rules regarding a substantial risk of forfeiture in the anticipated guidance described in the first two paragraphs of section IV of the notice for purposes of § 457(f).

Comments are specifically requested as to the extent to which transition guidance regarding the application of § 457(f) would be necessary and appropriate, and what such transition guidance would provide.

Written Comments

Written comments should be submitted by October 15, 2007.   Submissions may be sent to CC:PA:LPD:PR, (Notice 2007-62), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may also be hand delivered Monday through Friday between the hours of 8:30 a.m. and 4:00 p.m. to: Internal Revenue Service, CC:PA:LPD:PR, (Notice 2007-62), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. Alternatively, comments may be submitted via the Internet at notice.comments@irscounsel.treas.gov (Notice 2007-62). All comments will be available for public inspection.

The principal author of the notice is Cheryl Press of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).   For further information regarding this notice, you may contact Ms. Press at (202) 622-6060.