IRS Revenue Ruling
2000-33

 Code Sec. 457

<<FULL TEXT>>

26 CFR 1.457-1: Compensation deferred under eligible deferred compensation
plans.

Cash or deferred arrangements; nonqualified deferred compensation. This
ruling specifies the criteria to be met in order to automatically defer a
certain percentage of an employee's compensation into that employee's
account in an eligible deferred compensation plan sponsored by the
eligible employer.


REV. RUL. 2000-33

ISSUE

Will a deferred compensation plan fail to be an "eligible deferred
compensation plan" described in section 457(b) of the Internal Revenue
Code merely because deferrals are made under an arrangement whereby a
fixed percentage of an employee's compensation is deferred on the
employee's behalf under the plan unless the employee affirmatively elects
to receive the amount in cash?


FACTS

County M, a political subdivision of State X, maintains Plan A, an
eligible deferred compensation plan described in section 457(b). Under
Plan A, any employee of County M, including a newly hired employee, may
choose to enter into an agreement pursuant to which the employee's taxable
compensation is reduced and deferrals to the employee's account in Plan A
are credited by County M on the employee's behalf. The employee may
designate a percentage of the employee's compensation as elective
deferrals, subject to the limitations of section 457(b). Plan A does not
permit any other type of deferrals, and no other plan of County M permits
employees to make elective deferrals. Deferrals under Plan A are
immediately nonforfeitable and are subject to the limitations and
requirements of section 457(b).

County M proposes to implement, effective the next January 1, an
automatic election feature in Plan A under which, if a newly hired or
current employee has not affirmatively elected to receive cash
compensation or to have at least 2 percent of compensation deferred under
Plan A, his or her compensation will automatically be reduced by 2
percent, and this amount will be credited to the employee's account in
Plan A. An election not to make deferrals or to defer a different
percentage of compensation can be made at any time. Elections filed at a
later date are effective for the month next following the date the
election is filed.

in the case of a new employee, the election not to make deferrals will
be effective for the first month after the individual first became an
employee and for subsequent months (until superseded by a subsequent
election) if filed within a reasonable period of time ending before the
beginning of the month. Thus, if a new employee files an election to
receive cash in lieu of making deferrals and the election is filed a
reasonable period ending before the beginning of the first month after the
individual first becomes an employee, then no deferrals for that (or any
subsequent) month are made on the employee's behalf to Plan A until the
employee makes a subsequent affirmative election to reduce his or her
compensation. At the time the employee is hired, the employee will receive
a notice that explains the automatic election and the employee's right to
elect to have no such deferrals made under the plan or to alter the amount
of those deferrals, including the procedure for exercising that right and
the timing for implementation of any such election.

The proposed amendment to Plan A also provides that, with respect to
current employees, if the employee files an election to receive cash in
lieu of making deferrals and the election is filed during the reasonable
period ending on the January 1 effective date, then no deferrals for the
period beginning on or after the January 1 effective date are made on the
employee's behalf under Plan A until the employee makes a subsequent
affirmative election to reduce his or her compensation. At the beginning
of the reasonable period ending on the January 1 effective date, each
current employee receives a notice that explains the new automatic
election and the employee's right to elect to have no such deferrals made
under the plan or to alter the amount of those deferrals, including the
procedure for exercising that right and the timing for implementation of
any such election.

Thereafter, each employee is notified annually of his or her deferral
percentage, and of his or her right to change the percentage or to elect
not to make deferrals, including the procedure for exercising that right
and the timing for implementation of any such election.

Plan A provides that deferrals will be invested in accordance with the
participant's election among a broad range of investment funds held by the
trustee of Plan A or, if no investment election is made by a participant,
in the trust's balanced fund which includes both diversified equity and
fixed income investments.


LAW AND ANALYSIS

Section 457(a) provides that 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.

Section 457(b) defines the term "eligible deferred compensation plan."
Section 457(b)(4) and section 1.457-2(g) of the Income Tax Regulations
provide that an "eligible deferred compensation plan" must provide that
compensation will be deferred for any calendar month only if an agreement
providing for the deferral has been entered into before the beginning of
such month.

No provision of section 457(b) limits deferrals under an eligible plan
to elective or voluntary deferrals, nor do the provisions of section
457(b) (including the limitations of section 457(b)(2) and (3))
distinguish between elective or voluntary deferrals and other types of
deferrals. See Notice 87-13, Q&A 26, 1987-1 C.B. 432, 444. In the case of
these other types of deferrals, the requirements of section 457(b)(4) are
satisfied without the employee entering into an agreement to defer
compensation. Rather, the obligation of the employer (or the obligation of
the employee as a condition of employment) satisfies section 457(b)(4).

Similarly, the automatic election procedure described above will not
cause a plan to fail the requirements of section 457(b)(4). In the absence
of an affirmative election to the contrary entered into before the
beginning of the month, deferrals with respect to compensation for the
month will be made pursuant to the automatic election procedure.
Alternatively, if an employee makes an affirmative election to change the
automatic election and receive a corresponding amount in cash, the
employee's affirmative election will govern any deferrals for the month.
In either case, the deferrals for a month with respect to an employee are
clearly established before the beginning of the month, and the
requirements of section 457(b)(4) are satisfied.


HOLDING

Where, as under the proposed amendment to Plan A, the obligation to
make deferrals with respect to an employee's compensation for a month is
established before the beginning of a month by either an automatic
election or by an agreement to alter the terms of the automatic election
and receive cash in lieu of making deferrals, an eligible deferred
compensation plan will satisfy the requirements of section 457(b)(4).


PAPERWORK REDUCTION ACT

The collection of information contained in this revenue ruling has been
reviewed and approved by the Office of Management and Budget (OMB) in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control
number 1545-1695.

An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless the collection of
information displays a valid OMB control number.

The collection of information in this revenue ruling is in the third,
fourth, and fifth paragraphs in the section headed "FACTS". The collection
of information is necessary to ensure that the increased retirement
savings due to automatic enrollment is truly voluntary. The collection of
information is needed to obtain a benefit. The likely respondents are
state and local governmental entities, and to a lesser extent,
not-for-profit organizations.

The estimated total annual reporting burden is 500 hours. The estimated
average annual burden per respondent is 1 hour. The estimated number of
respondents is 500. The estimated annual frequency of responses is on
occasion.

Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any Internal Revenue law. Generally, tax returns and tax
return information are confidential, as required by 26 U.S.C. 6103.


DRAFTING INFORMATION

The principal author of this revenue ruling is John Tolleris of the
Office of Associate Chief Counsel (Tax Exempt and Government Entities).
For further information regarding this revenue ruling, contact him at
(202) 622-6060 (not a toll free number).

<<END RULING>>
 

TO CONTACT
DON FITCH CPA

Phone Don Fitch CPA Toll Free at (877)CPA-Help or (877)272-4357 or on our Direct Line at (760)674-1722.