Deferred compensation plans of State and local governments and tax-exempt organizations
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—
in which only individuals who perform service for the employer may be participants,
which provides that (except as provided in paragraph (3)) the maximum amount which may be deferred under the plan for the taxable year (other than rollover amounts) shall not exceed the lesser of—
the applicable dollar amount, or
100 percent of the participant’s includible compensation,
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—
twice the dollar amount in effect under subsection (b)(2)(A), or
the sum of—
the plan ceiling established for purposes of paragraph (2) for the taxable year (determined without regard to this paragraph), plus
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,
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,
which meets the distribution requirements of subsection (d), and
except as provided in subsection (g), which provides that—
all amounts of compensation deferred under the plan,
all property and rights purchased with such amounts, and
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.
Other definitions and special rules
For purposes of this section—
The term “eligible employer” means—
a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State, and
any other organization (other than a governmental unit) exempt from tax under this subtitle.
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.
The term “participant” means an individual who is eligible to defer compensation under the plan.
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.
The term “includible compensation” has the meaning given to the term “participant’s compensation” by section 415(c)(3).
Compensation taken into account at present value
Compensation shall be taken into account at its present value.
Community property laws
The amount of includible compensation shall be determined without regard to any community property laws.
Gains from the disposition of property shall be treated as income attributable to such property.
Benefits of tax exempt organization plans not treated as made available by reason of certain elections, etc.
In the case of an eligible deferred compensation plan of an employer described in subsection (e)(1)(B)—
Total amount payable is dollar limit or less
The total amount payable to a participant under the plan shall not be treated as made available merely because the participant may elect to receive such amount (or the plan may distribute such amount without the participant’s consent) if—
the portion of such amount which is not attributable to rollover contributions (as defined in section 411(a)(11)(D)) does not exceed the dollar limit under section 411(a)(11)(A), and
such amount may be distributed only if—
no amount has been deferred under the plan with respect to such participant during the 2-year period ending on the date of the distribution, and
there has been no prior distribution under the plan to such participant to which this subparagraph applied.
A plan shall not be treated as failing to meet the distribution requirements of subsection (d) by reason of a distribution to which this subparagraph applies.
Election to defer commencement of distributions
The total amount payable to a participant under the plan shall not be treated as made available merely because the participant may elect to defer commencement of distributions under the plan if—
such election is made after amounts may be available under the plan in accordance with subsection (d)(1)(A) and before commencement of such distributions, and
the participant may make only 1 such election.
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.
Certain plans excluded
The following plans shall be treated as not providing for the deferral of compensation:
Any bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plan.
Any plan paying solely length of service awards to bona fide volunteers (or their beneficiaries) on account of qualified services performed by such volunteers.
Special rules applicable to length of service award plans
Bona fide volunteer
An individual shall be treated as a bona fide volunteer for purposes of subparagraph (A)(ii) if the only compensation received by such individual for performing qualified services is in the form of—
reimbursement for (or a reasonable allowance for) reasonable expenses incurred in the performance of such services, or
reasonable benefits (including length of service awards), and nominal fees for such services, customarily paid by eligible employers in connection with the performance of such services by volunteers.
Limitation on accruals
A plan shall not be treated as described in subparagraph (A)(ii) if the aggregate amount of length of service awards accruing with respect to any year of service for any bona fide volunteer exceeds $6,000.
Cost of living adjustment
In the case of taxable years beginning after December 31, 2017, the Secretary shall adjust the $6,000 amount under clause (ii) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter beginning July 1, 2016, and any increase under this paragraph that is not a multiple of $500 shall be rounded to the next lowest multiple of $500.
Special rule for application of limitation on accruals for certain plans
In the case of a plan described in subparagraph (A)(ii) which is a defined benefit plan (as defined in section 414(j)), the limitation under clause (ii) shall apply to the actuarial present value of the aggregate amount of length of service awards accruing with respect to any year of service. Such actuarial present value with respect to any year shall be calculated using reasonable actuarial assumptions and methods, assuming payment will be made under the most valuable form of payment under the plan with payment commencing at the later of the earliest age at which unreduced benefits are payable under the plan or the participant’s age at the time of the calculation.
For purposes of this paragraph, the term “qualified services” means fire fighting and prevention services, emergency medical services, and ambulance services.
Certain voluntary early retirement incentive plans
If an applicable voluntary early retirement incentive plan—
makes payments or supplements as an early retirement benefit, a retirement-type subsidy, or a benefit described in the last sentence of section 411(a)(9), and
such payments or supplements are made in coordination with a defined benefit plan which is described in section 401(a) and includes a trust exempt from tax under section 501(a) and which is maintained by an eligible employer described in paragraph (1)(A) or by an education association described in clause (ii)(II),
such applicable plan shall be treated for purposes of subparagraph (A)(i) as a bona fide severance pay plan with respect to such payments or supplements to the extent such payments or supplements could otherwise have been provided under such defined benefit plan (determined as if section 411 applied to such defined benefit plan).
Applicable voluntary early retirement incentive plan
For purposes of this subparagraph, the term “applicable voluntary early retirement incentive plan” means a voluntary early retirement incentive plan maintained by—
a local educational agency (as defined in section 8101 of the Elementary and Secondary Education Act of 1965), or
an education association which principally represents employees of 1 or more agencies described in subclause (I) and which is described in section 501(c)(5) or (6) and exempt from tax under section 501(a).
Exception for nonelective deferred compensation of nonemployees
This section shall not apply to nonelective deferred compensation attributable to services not performed as an employee.
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.
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)).
Treatment of qualified governmental excess benefit arrangements
Subsections (b)(2) and (c)(1) shall not apply to any qualified governmental excess benefit arrangement (as defined in section 415(m)(3)), and benefits provided under such an arrangement shall not be taken into account in determining whether any other plan is an eligible deferred compensation plan.
Applicable dollar amount
The applicable dollar amount is $15,000.
In the case of taxable years beginning after December 31, 2006, the Secretary shall adjust the $15,000 amount under subparagraph (A) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter beginning July 1, 2005, and any increase under this paragraph which is not a multiple of $500 shall be rounded to the next lowest multiple of $500.
In the case of an eligible deferred compensation plan established and maintained by an employer described in subsection (e)(1)(A), if—
any portion of the balance to the credit of an employee in such plan is paid to such employee in an eligible rollover distribution (within the meaning of section 402(c)(4)),
the employee transfers any portion of the property such employee receives in such distribution to an eligible retirement plan described in section 402(c)(8)(B), and
in the case of a distribution of property other than money, the amount so transferred consists of the property distributed,
then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid.
Certain rules made applicable
The rules of paragraphs (2) through (7), (9), and (11) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A).
Rollovers under this paragraph shall be reported to the Secretary in the same manner as rollovers from qualified retirement plans (as defined in section 4974(c)).
Trustee-to-trustee transfers to purchase permissive service credit
No amount shall be includible in gross income by reason of a direct trustee-to-trustee transfer to a defined benefit governmental plan (as defined in section 414(d)) if such transfer is—
for the purchase of permissive service credit (as defined in section 415(n)(3)(A)) under such plan, or
a repayment to which section 415 does not apply by reason of subsection (k)(3) thereof.
Coordination with catch-up contributions for individuals age 50 or older
In the case of an individual who is an eligible participant (as defined by section 414(v)) and who is a participant in an eligible deferred compensation plan of an employer described in paragraph (1)(A), subsections (b)(3) and (c) shall be applied by substituting for the amount otherwise determined under the applicable subsection the greater of—
the sum of—
the plan ceiling established for purposes of subsection (b)(2) (without regard to subsection (b)(3)), plus
the applicable dollar amount for the taxable year determined under section 414(v)(2)(B)(i), or
the amount determined under the applicable subsection (without regard to this paragraph).
[Pub. L. 95–600, title I, § 131(a)], Nov. 6, 1978, [92 Stat. 2779]; amended [Pub. L. 96–222, title I, § 101(a)(4)], Apr. 1, 1980, [94 Stat. 196]; [Pub. L. 98–369, div. A, title IV, § 491(d)(33)], July 18, 1984, [98 Stat. 851]; [Pub. L. 99–514, title XI, § 1107(a)], Oct. 22, 1986, [100 Stat. 2426]; [Pub. L. 100–647, title I, § 1011(e)(1)], (2), (9), (10), title VI, §§ 6064(a)–(c), 6071(c), Nov. 10, 1988, [102 Stat. 3460], 3461, 3700, 3701, 3705; [Pub. L. 101–239, title VII], §§ 7811(g)(4), (5), 7816(j), Dec. 19, 1989, [103 Stat. 2409], 2421; [Pub. L. 102–318, title V, § 521(b)(26)], July 3, 1992, [106 Stat. 312]; [Pub. L. 104–188, title I], §§ 1421(b)(3)(C), 1444(b)(2), (3), 1447(a), (b), 1448(a), (b), 1458(a), Aug. 20, 1996, [110 Stat. 1796], 1810, 1812, 1813, 1819; [Pub. L. 105–34, title X, § 1071(a)(2)], Aug. 5, 1997, [111 Stat. 948]; [Pub. L. 107–16, title VI], §§ 611(d)(3)(B), (e), 615(a), 632(c)(1), 641(a)(1)(A)–(C), 646(a)(3), 647(b), 648(b), 649(a), (b), June 7, 2001, [115 Stat. 98], 102, 115, 118, 119, 126–128; [Pub. L. 107–147, title IV, § 411](o)(9), (p)(5), Mar. 9, 2002, [116 Stat. 49], 51; [Pub. L. 109–280, title VIII], §§ 829(a)(4), 845(b)(3), title XI, § 1104(a)(1), (b), Aug. 17, 2006, [120 Stat. 1002], 1015, 1058, 1059; [Pub. L. 110–245, title I, § 104(c)(3)],