SERVICE CONFIRMS DELAY IN EFFECTIVE DATE FOR NOTICE 87-13.

Notice 88-8

Section 457 of the Internal Revenue Code, as amended by the Tax Reform Act of 1986, provides that amounts of compensation deferred under certain "eligible deferred compensation plans" maintained by state and local governments and tax-exempt organizations are only included in a participant's, or beneficiary's, gross income in the taxable year in which the compensation is paid or otherwise made available to that individual. In general, where the plan is not an "eligible deferred compensation plan", the amounts deferred are included in the individual's gross income in the first taxable year of the individual for which there is no substantial risk of forfeiture. Question and answer 26 in Notice 87-13 published in I.R.B. 1987-4, (Jan. 26, 1987) clarifies that section 457 applies to all deferred compensation plans of such employers, which may include nonelective deferred compensation plans as well as certain vacation leave, sick leave, compensatory time, severance pay, disability pay, and death benefit plans.

The Service understands that prior to the publication of Notice 87-13 certain state and local governments and tax-exempt organizations believed that section 457 was not applicable to any nonelective deferred compensation, vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plans. The Service is attempting to develop rules clarifying the extent to which section 457 applies to such plans.

In the meantime, the Service has determined that a nonelective deferred compensation plan maintained by a state or local government, or tax-exempt organization, will not be subject to the provisions of section 457 for taxable years of employees beginning before January 1, 1988.

In addition, the Service has determined that a bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plan maintained by a state or local government or a tax-exempt organization will not be subject to the provisions of section 457 for taxable years of employees beginning before the issuance of guidance describing the extent to which these forms of compensation are subject to section 457. The exemption applies to such plans whether they are elective or nonelective.

No inference should be drawn from this notice as to the future treatment of such plans under section 457. The Service is currently studying a number of issues raised under section 457. Further guidance will be provided on these issues.

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

For further information regarding this notice, contact Rhonda G. Migdail on (202) 566-3938 (not a toll-free call).