These synopses are intended only as aids to the reader in

Bulletin No. 1999–9

March 1, 1999

Internal Revenue

bulletin

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

T.D. 8807, page 33.

REG–115433–98, page 54.

Temporary and final regulations relate to timely mailing

treated as timely filing and paying under section 7502 of the

Code.

T.D. 8813, page 34.

from a nonqualified deferred compensation plan are taken

into account as wages for purposes of the employment

taxes imposed by the Federal Unemployment Tax Act

(FUTA).

EXCISE TAX

REG–118620–97, page 46.

Final regulations under section 7701 of the Code provide

guidance regarding the definition of a trust as a United

States person (domestic trust) or a foreign trust.

Proposed regulations under section 4251 of the Code provide rules for the application of the communications excise

tax to prepaid telephone cards (PTCs). A public hearing will

be held on May 5, 1999.

EMPLOYEE PLANS

ADMINISTRATIVE

REG–245562–96, page 45.

REG–106219–98, page 51.

This amendment to the proposed regulations under section

401 of the Code provides guidance on the qualification of retirement plans which accept rollover contributions from employees.

EMPLOYMENT TAX

Proposed regulations under section 1502 of the Code provide specific rules that apply to the acquisition of the stock

of an S corporation by an affiliated group of corporations

that joins in the filing of a consolidated return. A public hearing on the proposed regulations will be held on March 31,

1999.

T.D. 8814, page 4.

Notice 99–12, page 44.

Final regulations under section 3121(v)(2) of the Code provide guidance as to when amounts deferred under or paid

from a nonqualified deferred compensation plan are taken

into account as wages for purposes of the employment

taxes imposed by the federal Insurance Contribution Act

(FICA).

Electronic funds transfer; failure to deposit penalty. This notice provides guidance relating to the waiver of the failure to

deposit penalty under section 6656 of the Code for certain

taxpayers first required to make federal tax deposits by

electronic funds transfers beginning on or after July 1,

1996.

T.D. 8815, page 31.

Announcement 99–17, page 59.

Final regulations under section 3306(r)(2) of the Code provide guidance as to when amounts deferred under or paid

The Announcement Relating to Court Decisions in 1999–4

I.R.B. 4 is corrected.

Finding Lists begin on page 61.

Index for January and February begins on page 63.

Department of the Treasury

Internal Revenue Service

Mission of the Service

and by applying the tax law with integrity and fairness to

all.

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities

2

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold

on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

will not be relied on, used, or cited as precedents by Service

personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin of the

succeeding quarterly and semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 3121.—Definitions

26 CFR 31.3121(v)(20–1: Treatment of amounts

deferred under certain nonqualified deferred

compensation plans.

T.D. 8814

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 31 and 602

Federal Insurance Contributions

Act (FICA) Taxation of Amounts

Under Employee Benefit Plans

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations under section 3121(v)(2)

of the Internal Revenue Code (Code) that

provide guidance as to when amounts deferred under or paid from a nonqualified

deferred compensation plan are taken into

account as wages for purposes of the employment taxes imposed by the Federal

Insurance Contributions Act (FICA).

Section 3121(v)(2), relating to treatment

of certain nonqualified deferred compensation, was added to the Code by section

324 of the Social Security Amendments

of 1983. These regulations provide guidance to employers who maintain nonqualified deferred compensation plans and to

participants in those plans.

DATES: Effective Date: These regulations are effective January 29, 1999.

Applicability Date: These regulations

are applicable on and after January 1,

2000. In addition, these regulations provide certain transition rules for amounts

deferred and benefits paid before January

1, 2000, including allowing employers to

use a reasonable, good faith interpretation

of section 3121(v)(2).

FOR FURTHER INFORMATION CONTACT: Janine Cook, Linda E. Alsalihi, or

Margaret A. Owens, (202) 622-6040 (not

a toll-free number).

March 1, 1999

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this final rule has been reviewed

and, pending receipt and evaluation of

public comments, approved by the Office

of Management and Budget (OMB) under

44 U.S.C. 3507 and assigned control

number 1545–1643.

The collection of information in this

regulation is in §31.3121(v)(2)–1(b)(2).

This information is required to implement

Code section 3121(v). This information

will be used to identify the material terms

of a plan. The collection of information is

required to obtain a benefit. The likely

recordkeepers are business or other forprofit institutions.

Comments on the collection of information should be sent to the Office of

Management and Budget, Attn: Desk

Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with

copies to the Internal Revenue Service

Attn: IRS Reports Clearance Officer,

OP:FS:FP, Washington, DC 20224. Comments on the collection of information

should be received by March 30, 1999.

Comments are specifically requested concerning:

Whether the collection of information is

necessary for the proper performance of

the functions of the IRS, including

whether the information will have practical utility;

The accuracy of the estimated burden associated with the collection of information (see below);

How the quality, utility, and clarity of the

information to be collected may be enhanced;

How the burden of complying with the collection of information may be minimized,

including through the application of automated collection techniques or other forms

of information technology; and

Estimates of capital or start-up costs and

costs of operation, maintenance, and purchase of services to provide information.

The estimated total annual recordkeeping burden for §31.3121(v)(2)–1(b)(2) is

4

12,500 hours. The annual estimated burden per recordkeeper varies from 2 hours

to 10 hours, depending on the individual

circumstances, with an estimated average

of 5 hours. The estimated number of

recordkeepers is 2,500.

Estimates of the reporting burden in

§31.3121(v)(2)–1(f) and (g) are reflected

in the burden estimates of Form 941, Employer’s Quarterly Federal Tax Return,

Form 941c, Supporting Statement To Correct Information, Form W-2, Wage and

Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless it displays a valid control number assigned by

the Office of Management and Budget.

Books or records relating to this 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.

Background

These regulations amend the Employment Tax Regulations (26 CFR part 31)

under section 3121(v)(2). Section

3121(v)(2) was added to the Internal Revenue Code (Code) by section 324 of the

Social Security Amendments of 1983

(1983 Amendments). Section 2662(f)(2)

of the Deficit Reduction Act of 1984

(DEFRA) amended section 324 of the

1983 Amendments.

Notice 94–96 (1994–2 C.B. 564) provides that until final regulations are issued, the IRS will not challenge an employer ’s determination of FICA tax

liability with respect to a nonqualified deferred compensation plan for periods before the effective date of any final regulations if the determination is based on a

reasonable, good faith interpretation of

section 3121(v)(2). On January 25, 1996,

a notice of proposed rulemaking (EE–

142–87) under section 3121(v)(2) was

published in the Federal Register (61

F.R. 2194), providing guidance related to

the Federal Insurance Contributions Act

1999–9 I.R.B.

(FICA) tax treatment of amounts deferred

under or paid from certain nonqualified

deferred compensation plans. On December 24, 1997, a notice of proposed rulemaking (REG–209484–87 and REG–

209807–95) under section 3121(v)(2) extending the proposed general effective

date of the regulations to January 1, 1998,

was published in the Federal Register

(62 F.R. 67304).

Comments regarding the 1996 proposed regulations were received from the

public, and on June 24, 1996, the IRS

held a public hearing concerning the proposed amendments. After consideration

of the public comments received and the

statements made at the public hearing, the

proposed regulations are adopted as revised by this Treasury decision.

Explanation of Provisions

Sections 3101 and 3111 impose FICA

tax on employees and employers, respectively. FICA tax consists of the Old-Age,

Survivors, and Disability Insurance

(OASDI) tax and the Hospital Insurance

(HI) tax. Generally, FICA tax is computed as a percentage of wages (as defined in section 3121(a)) with respect to

employment. Subject to specific exceptions, section 3121(a) defines wages as all

remuneration for employment. Section

31.3121(a)–2(a) provides that FICA tax is

imposed at the time the remuneration is

actually or constructively paid.

1983 Amendments

Prior to the 1983 Amendments, benefits under a nonqualified deferred compensation plan generally were wages subject to FICA tax at the time they were

actually or constructively paid, unless

certain retirement-related exclusions applied. These exclusions (former section

3121(a)(2)(A), (a)(3), and (a)(13)(A)(iii))

were repealed by the 1983 Amendments.

Thus, under the 1983 Amendments,

which generally apply to remuneration

paid after December 31, 1983, retirement

payments are no longer excluded from

wages. Instead, the 1983 Amendments

added section 3121(v)(2), which provides

a special timing rule for wages (within the

meaning of section 3121(a)) that consti-

1999–9 I.R.B.

tute an amount deferred under a nonqualified deferred compensation plan.1

Under section 3121(v)(2)(A), any

amount deferred under a nonqualified deferred compensation plan must be taken

into account as wages for FICA tax purposes as of the later of (1) when the services are performed or (2) when there is

no substantial risk of forfeiture of the

rights to such amount. This special timing rule may result in imposition of FICA

tax before the benefit payments under the

plan begin.

Section 3121(v)(2)(B) provides a special exclusion (the nonduplication rule)

that prevents double taxation. Once an

amount deferred under a nonqualified deferred compensation plan is taken into account as wages under the special timing

rule, the nonduplication rule provides that

neither that amount nor the income attributable to that amount is again treated as

FICA wages. Thus, benefit payments

under a nonqualified deferred compensation plan are not subject to FICA tax when

actually or constructively paid (i.e., under

the general timing rule for wage inclusion) if the benefit payments consist of

amounts deferred under the plan that were

previously taken into account as FICA

wages under the special timing rule plus

attributable income. Conversely, benefits

under a nonqualified deferred compensation plan are subject to FICA tax when actually or constructively paid to the extent

the benefits relate to an amount deferred

that was not previously taken into account

under the special timing rule.

Repeal of Wage Based Limitation

Section 3121(a)(1) imposes a dollar

limit on the annual amount of wages subject to the OASDI portion of FICA tax.

Section 13207 of the Omnibus Budget

Reconciliation Act of 1993 repealed the

dollar limit on the annual amount of

1 1 The 1983 Amendments did not amend the definition of net earnings from self- employment under

section 1402(a) or the timing of the tax on self-employment income under section 1401. Accordingly,

the special timing rule under section 3121(v)(2)

does not apply to nonqualified deferred compensation that constitutes net earnings from self-employment.

5

wages subject to the HI portion of FICA

tax, effective for 1994 and later years.

Application of these Regulations to Taxes

Imposed by the Railroad Retirement Tax

Act

In accordance with the cross-reference

in section 3231(e)(8)(B), the provisions

of section 3121(v)(2) and these final regulations also apply for purposes of the

taxes imposed by the Railroad Retirement

Tax Act under sections 3201 through

3231.

Overview of Final Regulations

In general, comments received on the

proposed regulations were favorable and,

accordingly, the final regulations retain

the general structure and substance of the

proposed regulations, including a wide

variety of examples illustrating the substance of the final regulations. However,

commentators made a number of specific

recommendations for modifications and

clarifications of the regulations. In response to these comments, the final regulations incorporate the modifications and

clarifications described below.

• The proposed regulations provided that

certain types of benefits do not result

from the deferral of compensation and,

accordingly, are not subject to the special timing rule under section

3121(v)(2). The final regulations generally retain these rules. However, in

response to comments, the final regulations allow certain cost-of-living adjustments provided to former employees to

be treated as deferred compensation for

purposes of section 3121(v)(2) and provide transition relief for window programs that begin before the effective

date of the final regulations. The final

regulations also clarify the rules under

which stock options, death benefits, disability benefits, and severance pay are

excluded from the special timing rule.

• The final regulations retain the distinction between the method of calculating

the amount deferred (and the income on

that amount) for account balance plans

and the method for nonaccount balance

plans, but provide additional guidance

simplifying those calculations. The

final regulations provide that a plan that

March 1, 1999

bases benefits on an account balance

but permits optional forms (such as annuities) can use the simple methodology that applies to account balance

plans if the plan terms preclude a subsidized optional form. Also, a nonaccount balance plan that provides multiple benefit distribution options or

commencement dates under plan terms

that preclude subsidized optional forms

and commencement dates can determine the amount deferred by assuming

that a participant elects to receive the

normal form of payment (regardless of

which option is actually elected).

• The final regulations clarify the rules

governing when income under an account balance plan is excluded from

FICA wages. The final regulations also

provide that, while the determination of

whether an account balance plan is

using a reasonable interest rate generally is made annually, a rate that is

specified for a fixed period of up to five

years is treated as reasonable for that

period if it was reasonable when it was

specified (even if it ceases to be reasonable during the period for which it is

specified).

• The final regulations retain the structure

of the rules in the proposed regulations

under which FICA tax payments are not

required to be made on amounts that are

not reasonably ascertainable until certain uncertainties related to benefit payments are resolved. Those rules permit

earlier inclusion with a true-up at the

resolution date, when those uncertainties are resolved. However, the final

regulations modify the calculation of

the true-up to eliminate the risk that additional amounts will have to be taken

into account at the resolution date because of changes in interest rates between the early inclusion date and the

resolution date.

• The final regulations permit an employer to choose how the amounts deferred under a plan over a series of

years can be allocated among those

years when the plan formula does not

do so by its terms (for example, where

the plan has a benefit formula that includes an offset of another plan’s benefit).

• The final regulations retain the flexibility provided in the proposed regulations

permitting an employer to delay the

March 1, 1999

date on which amounts deferred are

taken into account to a later date within

the year, and also broaden and simplify

two options that provide additional time

to calculate the amount deferred. The

first option permits an employer to estimate the amount deferred and then adjust it at any time within three months.

Alternatively, FICA tax payment can be

postponed by treating the entire amount

deferred as if it were deferred on a date

that is within three months of the date

the amount is otherwise required to be

taken into account, provided that the

amount deferred is increased by interest

at the applicable federal rate2 (AFR)

until it is included in wages.

• The final regulations include a number

of special transition rules that provide

relief to employers that, prior to the effective date of the regulations, followed

a reasonable, good faith interpretation

of section 3121(v)(2). Under the final

regulations, amounts deferred for 1994

and 1995 can be taken into account,

without interest, as late as March 31,

2000. Further, the final regulations reflect the transition rule in the proposed

regulations under which amounts deferred that would have been required or

permitted to be taken into account before 1994 are treated as having been

correctly taken into account before

1994.

Summary of Comments Received and

Changes Made

a. Application of the Special Timing

Rule

The special timing rule provided under

section 3121(v)(2) is set forth in paragraph (a) of the regulations. The special

timing rule imposes FICA tax on amounts

deferred under nonqualified deferred

compensation plans at the later of the date

when the services creating the right to the

amount deferred are performed and the

date on which the right to that amount is

no longer subject to a substantial risk of

forfeiture. This date usually is earlier than

when any benefit is paid. Several commentators requested clarification as to

2 The regulations define the applicable federal

rate as the mid-term applicable federal rate, as defined pursuant to section 1274(d), for January 1 of

the calendar year, compounded annually.

6

whether the special timing rule is elective

and whether failure to comply with the

special timing rule may lead to the imposition of interest or penalties. The special

timing rule is not elective and, if an employer does not take an amount deferred

into account (including payment of any

resulting FICA tax) when required by section 3121(v)(2), interest and penalties

may be imposed. Moreover, to the extent

that the amount deferred is not taken into

account in accordance with the special

timing rule, the nonduplication rule,

under which amounts deferred that are

properly taken into account under the special timing rule are excluded from FICA

wages upon payment, does not apply.

b. Amounts or Benefits that Do Not

Result from the Deferral of

Compensation

The definition of a nonqualified deferred compensation plan for purposes of

section 3121(v)(2) is set forth in paragraph (b) of the regulations. A number of

comments were received on the rules in

the proposed regulations for determining

whether an amount or benefit results from

the deferral of compensation subject to

the special timing rule of section

3121(v)(2). The final regulations make

several clarifications and changes to reflect these comments. The regulations

clarify that the grant (as well as the exercise) of stock options, stock appreciation

rights, and other stock value rights generally is not subject to section 3121(v)(2).

Thus, FICA tax is not imposed at the time

of grant, but is generally imposed at the

time of exercise. No inference is intended

as to whether or not these options and

rights are deferred compensation for any

tax purposes other than section

3121(v)(2).

The final regulations retain the rule in

the proposed regulations that benefits established after termination of employment

are not subject to section 3121(v)(2).

However, in response to comments, the

final regulations provide an exception

under which certain payments to which

the employee obtains a legally binding

right after termination of employment that

are in the nature of cost-of-living adjustments are nonetheless subject to section

3121(v)(2).

The final regulations retain the rule in

the proposed regulations that window

1999–9 I.R.B.

benefits do not result from the deferral of

compensation. However, the final regulations include a transition rule under which

window benefits can be treated as subject

to section 3121(v)(2) if the window program commences prior to January 1, 2000

(the general effective date of the final regulations). Payments made pursuant to a

window program that qualifies for the

transition rule are not subject to FICA tax

under the general timing rule at the time

payment is made, provided that the present value of the window benefits has

been taken into account under section

3121(v)(2) on a timely basis.

c. Account Balance Plans

Paragraph (c) of the regulations defines

account balance plan and provides that,

for purposes of section 3121(v)(2), the

amount deferred under an account balance plan generally is based on the

amount of principal credited to the account. Commentators asked whether a

plan that permits optional forms of benefit

can be treated as an account balance plan.

The final regulations provide that if the

plan’s terms preclude subsidies of optional forms of benefit (for example, if,

under the terms of the plan at the time the

amount is deferred, alternative forms of

payment will be actuarially equivalent to

the account balance based on a rate of interest that will be reasonable at the time

the optional form is elected), the plan

does not fail to be an account balance plan

merely because of the availability of optional forms of benefit.

d. Income and Reasonable Rate of

Interest

Under paragraph (d) of the proposed

regulations, if an account balance plan

credits income based on a reasonable rate

of interest or a rate of return that does not

exceed the rate of return on a predetermined actual investment specified under

the plan, FICA tax would not be imposed

on that income. A number of commentators requested clarification as to whether a

rate of interest that was fixed for an extended period could be reasonable for this

purpose. The final regulations clarify that

the determination of whether interest

credited under an account balance plan is

reasonable is generally made annually.

However, a rate that is specified for a

1999–9 I.R.B.

fixed period of up to five years and that

was reasonable when it was specified is

treated as continuing to be reasonable

(even if it subsequently ceases to be reasonable during the period for which it is

specified).

The final regulations also clarify what

constitutes a predetermined actual investment and provide rules for determining

the amount deferred in cases in which income is credited under a plan that uses

neither a predetermined actual investment

nor a reasonable interest rate. In these

cases, the final regulations generally provide for the income credited in excess of

AFR to be treated as an additional amount

deferred. However, the final regulations

provide that if the employer takes into account as an additional amount deferred

the income credited to the extent it exceeds a reasonable rate of interest calculated by the employer, the remaining income (which is no greater than a

reasonable rate of interest) is excluded

from FICA wages.

Some commentators suggested that the

employer’s creditworthiness should be

permitted to be considered in determining

whether the interest rate credited under a

plan of the employer is reasonable. The

final regulations, like the proposed regulations, permit the amount deferred to be

calculated after application of a discount

to reflect the time value of money and the

risk that benefits will not be paid due to

death. However, no discount is permitted

for the risk that the amount deferred will

not be paid by the employer. Permitting

employers to implicitly achieve the same

result through the interest rate credited

under an account balance plan would be

inconsistent with this restriction. Accordingly, the final regulations do not permit

the employer’s creditworthiness to be

considered in determining whether the interest rate credited under a plan of the employer is reasonable.

e. Treatment of Amounts Deferred that

are not Reasonably Ascertainable

Paragraph (e) of the final regulations

retains the rule in the proposed regulations that the amount deferred need not be

taken into account until it is reasonably

ascertainable. This rule addresses the difficulty of determining the appropriate

amount to be taken into account for a plan

7

that provides benefits that are not fixed

until certain future events occur, such as a

nonaccount balance plan with subsidized

optional forms or a long-term incentive

plan that depends on subsequent corporate performance. The final regulations

retain the rule in the proposed regulations

that allows optional inclusion of these

amounts at an earlier date with a true-up

at the resolution date when the amount

deferred becomes reasonably ascertainable.

Under the proposed regulations, the

early inclusion amount was to be accumulated to the resolution date at an interest

rate (and with a mortality assumption, if

appropriate) that was reasonable at the

early inclusion date. That accumulated

amount was then compared to the present

value of payments using actuarial assumptions that were reasonable at the resolution date. This methodology exposes

the employer to the risk that an additional

amount could be required to be taken into

account at the resolution date solely as a

result of changes in interest rates between

the early inclusion date and the resolution

date. In response to comments, this trueup methodology has been modified.

Under the final regulations, in performing the true-up, the amount taken into account at the early inclusion date is converted to an actuarially equivalent benefit

payment stream in the form, and with the

commencement date, in which benefits

are actually paid. The conversion is done

using actuarial assumptions that were reasonable as of the early inclusion date.

The benefit payment stream thus derived

is compared to the benefits actually

payable. To the extent the benefit payment stream actually payable exceeds the

benefit payment stream that is actuarially

equivalent to the amount taken into account at the early inclusion date, the present value of the excess (determined using

actuarial assumptions that are reasonable

as of the resolution date) must be taken

into account on the resolution date. If the

benefit payment stream that is actuarially

equivalent to the amount taken into account at the early inclusion date equals (or

exceeds) the actual benefit payment

stream, no additional amount is required

to be taken into account at the resolution

date, regardless of any changes in interest

rates between the early inclusion date and

the resolution date. This method—an an-

March 1, 1999

nuity purchase model—eliminates the

risk that the employer will be required to

take additional amounts into account

merely because of interest rate changes

between the early inclusion date and the

resolution date.

In addition, the final regulations provide that an amount deferred under certain nonaccount balance plans that permit

optional forms of benefit or alternative

commencement dates will not fail to be

reasonably ascertainable merely because

the form or commencement date has not

been selected. If the terms of a nonaccount balance plan, at the time an amount

is deferred, provide that the amount

payable under each optional form and

commencement date will be equivalent

using actuarial assumptions that are reasonable at the resolution date (generally,

the time the optional form and commencement date are selected) the amount

deferred can be calculated based solely on

the normal form of payment commencing

at normal commencement date (regardless of which optional form or commencement date is ultimately selected).

For this purpose, the normal form of benefit commencing at normal commencement date is the form and date of commencement under which the payments

due to an employee under the plan are expressed, before adjustments for form or

timing of commencement of payments.

The final regulations clarify how to allocate amounts deferred among periods

for purposes of the early inclusion rules,

including a rule requested by commentators concerning plan offsets. For example, the final regulations provide a rule to

determine how amounts deferred are to be

allocated among years in cases in which

an employee obtains a legally binding

right in each of several years to receive

payments from a nonqualified deferred

compensation plan that provides a specified gross benefit for the years which is to

be offset by the benefits payable under a

qualified plan. Under this rule, the

amount deferred in the first year may be

treated as equal to the gross benefit for the

year, reduced by the offset applicable at

the end of the first year (even if the offset

increases after the end of that year). The

same method applies to subsequent years,

with adjustments for amounts allocated to

an earlier year.

March 1, 1999

The regulations also retain the rule of

administrative convenience that was in

the proposed regulations under which the

amount deferred during a year can be

treated as required to be taken into account at any later date during the year,

provided that income attributable to the

amount deferred through that date is included. Thus, in a nonaccount balance

plan this rule permits the present value of

amounts deferred throughout a year to be

determined as of the end of the year based

on the employee’s age and appropriate actuarial assumptions at the end of the year.

f. Withholding Rules

For purposes of withholding and depositing FICA tax, paragraph (f) of the

final regulations provides that an amount

deferred under a nonqualified deferred

compensation plan generally is treated as

wages paid by the employer and received

by the employee at the time it is taken into

account under section 3121(v)(2) and

these regulations. However, in certain situations, the employer may be unable to

readily calculate the amount deferred for

a given year by December 31 of that year.

The proposed regulations provided relief

in these situations by allowing employers

to use either of two alternative methods,

the estimated method and the lag method,

for withholding and depositing FICA tax.

The final regulations provide broader

relief by permitting these methods to be

used as of any date during the year and for

the methods to be available without regard to whether the amount deferred can

be readily calculated. Thus, the final regulations provide that, under the estimated

method, an employer may make a reasonable estimate of the amount deferred as of

the date the amount deferred is required to

be taken into account. If the employer

underestimates the amount deferred that

should have been taken into account and,

therefore, deposits less FICA tax than the

amount due, the employer may treat the

shortfall as wages either on the estimate

date or on any date that is within three

months thereafter. If the employer overestimates the amount deferred that should

have been taken into account as wages on

the estimate date, the employer may claim

a refund or credit in accordance with sections 6402, 6413, and 6511. If the employer treats any shortfall as wages on the

8

estimate date or overestimates the amount

deferred on the estimate date, the employer must correct any previously-reported wage information.

Further, the final regulations provide

that, under the second alternative method,

the lag method, an employer may treat the

amount deferred on any date as wages

paid on any date that is no later than three

months following the date the amount deferred is required to be taken into account.

In addition, in response to comments, the

final regulations simplify use of the lag

method by permitting the FICA tax due to

be calculated using a fixed rate of interest,

not less than AFR, rather than on the basis

of income under the plan.

Effective Dates

These final regulations are applicable

on and after January 1, 2000. However,

the final regulations include certain special transition provisions for periods before January 1, 2000.

For amounts deferred and benefits paid

before the January 1, 2000 general effective date, an employer may rely on a reasonable, good faith interpretation of section 3121(v)(2), taking into account Notice

94–96. The final regulations specifically

provide that an employer will be deemed

to have determined FICA tax liability and

satisfied FICA tax withholding requirements in accordance with a reasonable,

good faith interpretation of section

3121(v)(2) if that liability is determined in

accordance with the final regulations and

the withholding method and timing comply with the final regulations. An employer will also be deemed to have determined FICA tax liability and satisfied

FICA tax withholding requirements in accordance with a reasonable, good faith interpretation of section 3121(v)(2) if that liability is determined in accordance with

the proposed regulations and the withholding method and timing comply with the

proposed regulations. Whether an employer has made a reasonable, good faith

interpretation of section 3121(v)(2) will be

determined based on the relevant facts and

circumstances, including consistency of

treatment by the employer and the extent

to which the employer has resolved unclear issues in its favor.

The regulations address consistency in

the treatment of stock options, stock ap-

1999–9 I.R.B.

preciation rights, or other stock value

rights that are exercised before the January 1, 2000 general effective date. Under

the final regulations, the grant of these

options and rights cannot be treated as

subject to section 3121(v)(2) after December 31, 1999, and FICA tax generally

applies at exercise. For periods before

January 1, 2000, an employer that treats

the grant of such an option or right as subject to section 3121(v)(2) has not acted in

accordance with a reasonable, good faith

interpretation of section 3121(v)(2) if the

employer has not treated that grant and all

earlier grants as subject to section

3121(v)(2).

The final regulations include a transition rule for periods3 before 1994 that applies if the employer acted in accordance

with a reasonable, good faith interpretation of section 3121(v)(2). Under this

rule, an amount deferred that would be required or permitted to be taken into account in any period that ends prior to January 1, 1994, under the final regulations,

is treated as if it had been taken into account in accordance with the final regulations.4 For example, in the case of an

amount deferred before 1994 that was not

reasonably ascertainable, the employer is

treated as having taken the amount deferred into account at an early inclusion

date before 1994 using a method permitted in the final regulations, including anticipation of the actual form in which the

benefit payments attributable to the

amount deferred are paid and the actual

date of commencement. Thus, the employer is not required to pay any additional FICA tax when the amount deferred

becomes reasonably ascertainable or

when the benefit payments attributable to

the amount deferred are actually or constructively paid.

3 For purposes of FICA tax, the period of limitations is generally based on calendar quarters

(whereas, for purposes of the Federal Unemployment Tax Act (FUTA) tax, the period of limitations

is based on calendar years). See section 6501.

4 The proposed regulations (as amended in 1997)

included a similar rule applicable to periods that

were closed as of January 1, 1998 (which generally

would have been periods before 1994). Commentators recommended that this rule apply even if the period is kept open beyond the normal period of limitations, such as by agreement with the IRS or by a

claim for refund. In response to those comments,

the final regulations provide that this rule applies to

all periods prior to 1994 regardless of whether the

period remains

1999–9 I.R.B.

The final regulations include a new

transition rule for amounts deferred that

were required to be taken into account in

1994 or 1995. Under the final regulations, an employer will be treated as taking the amount deferred into account

under the final regulations to the extent

the employer takes the amount into account by treating it as wages paid by the

employer and received by the employee

as of any date prior to April 1, 2000. The

amount taken into account before April 1,

2000, is not required to be increased by

attributable income or interest.

These and the other transition provisions of the final regulations are in addition to the interest-free adjustment procedures that are available under section

6205 at any time before the period of limitations has expired. Thus, for example,

with respect to a FICA tax return (Form

941) for a period before the effective date,

an employer may make an adjustment to

take an amount deferred under a nonqualified deferred compensation plan into account in accordance with the final regulations if the period is still open.

Section 31.3121(v)(2)–2 of the final

regulations provides special rules relating

to a March 24, 1983 agreement and certain agreements adopted after March 24,

1983, and before January 1, 1984. The

final regulations also include certain clarifications to the transition rules that have

been made in response to comments on

the proposed regulations, including clarification of the effect of post-1983 amendments.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not

apply to these regulations, and because

the notice of proposed rulemaking was issued prior to March 29, 1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6)

does not apply. Pursuant to section

7805(f) of the Internal Revenue Code, the

notice of proposed rulemaking preceding

these regulations was submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment on

their impact on small business.

9

Drafting Information

The principal authors of these regulations are Janine Cook, Linda E. Alsalihi,

and Margaret A. Owens, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). However, other personnel from the IRS and

Treasury Department participated in their

development.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 31 and 602

are amended as follows:

PART 31—EMPLOYMENT TAXES

AND COLLECTION OF INCOME TAX

AT SOURCE

Paragraph 1. The authority citation for

part 31 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Sections 31.3121(v)(2)–1 and

31.3121(v)(2)–2 are added to read as follows:

§31.3121(v)(2)–1 Treatment of amounts

deferred under certain nonqualified

deferred compensation plans.

(a) Timing of wage inclusion—(1)

General timing rule for wages. Remuneration for employment that constitutes

wages within the meaning of section

3121(a) generally is taken into account

for purposes of the Federal Insurance

Contributions Act (FICA) taxes imposed

under sections 3101 and 3111 at the time

the remuneration is actually or constructively paid. See §31.3121(a)–2(a).

(2) Special timing rule for an amount

deferred under a nonqualified deferred

compensation plan—(i) In general. To

the extent that remuneration deferred

under a nonqualified deferred compensation plan constitutes wages within the

meaning of section 3121(a), the remuneration is subject to the special timing rule

described in this paragraph (a)(2). Remuneration is considered deferred under a

nonqualified deferred compensation plan

within the meaning of section 3121(v)(2)

and this section only if it is provided pursuant to a plan described in paragraph (b)

of this section. The amount deferred

under a nonqualified deferred compensa-

March 1, 1999

tion plan is determined under paragraph

(c) of this section.

(ii) Special timing rule. Except as otherwise provided in this section, an amount

deferred under a nonqualified deferred

compensation plan is required to be taken

into account as wages for FICA tax purposes as of the later of—

(A) The date on which the services

creating the right to that amount are performed (within the meaning of paragraph

(e)(2) of this section); or

(B) The date on which the right to that

amount is no longer subject to a substantial risk of forfeiture (within the meaning

of paragraph (e)(3) of this section).

(iii) Inclusion in wages only once

(nonduplication rule). Once an amount

deferred under a nonqualified deferred

compensation plan is taken into account

(within the meaning of paragraph (d)(1)

of this section), then neither the amount

taken into account nor the income attributable to the amount taken into account

(within the meaning of paragraph (d)(2)

of this section) is treated as wages for

FICA tax purposes at any time thereafter.

(iv) Benefits that do not result from a

deferral of compensation. If a nonqualified deferred compensation plan (within

the meaning of paragraph (b)(1) of this

section) provides both a benefit that results from the deferral of compensation

(within the meaning of paragraph (b)(3)

of this section) and a benefit that does not

result from the deferral of compensation,

the benefit that does not result from the

deferral of compensation is not subject to

the special timing rule described in this

paragraph (a)(2). For example, if a nonqualified deferred compensation plan provides retirement benefits which result

from the deferral of compensation and

disability pay (within the meaning of

paragraph (b)(4)(iv)(C) of this section)

which does not result from the deferral of

compensation, the retirement benefits

provided under the plan are subject to the

special timing rule in this paragraph (a)(2)

and the disability pay is not.

(v) Remuneration that does not constitute wages. If remuneration under a nonqualified deferred compensation plan

does not constitute wages within the

meaning of section 3121(a), then that remuneration is not taken into account as

wages for FICA tax purposes under either

March 1, 1999

the general timing rule described in paragraph (a)(1) of this section or the special

timing rule described in this paragraph

(a)(2). For example, benefits under a

death benefit plan described in section

3121(a)(13) do not constitute wages for

FICA tax purposes. Therefore, these benefits are not included as wages under the

general timing rule described in paragraph (a)(1) of this section or the special

timing rule described in this paragraph

(a)(2), even if the death benefit plan

would otherwise be considered a nonqualified deferred compensation plan within

the meaning of paragraph (b)(1) of this

section.

(b) Nonqualified deferred compensation plan—(1) In general. For purposes

of this section, the term nonqualified deferred compensation plan means any plan

or other arrangement, other than a plan

described in section 3121(a)(5), that is established (within the meaning of paragraph (b)(2) of this section) by an employer for one or more of its employees,

and that provides for the deferral of compensation (within the meaning of paragraph (b)(3) of this section). A nonqualified deferred compensation plan may be

adopted unilaterally by the employer or

may be negotiated among or agreed to by

the employer and one or more employees

or employee representatives. A plan may

constitute a nonqualified deferred compensation plan under this section without

regard to whether the deferrals under the

plan are made pursuant to an election by

the employee or whether the amounts deferred are treated as deferred compensation for income tax purposes (e.g.,

whether the amounts are subject to the deduction rules of section 404). In addition,

a plan may constitute a nonqualified deferred compensation plan under this section whether or not it is an employee benefit plan under section 3(3) of the

Employee Retirement Income Security

Act of 1974 (ERISA), as amended (29

U.S.C. 1002(3)). For purposes of this

section, except where the context indicates otherwise, the term plan includes a

plan or other arrangement.

(2) Plan establishment—(i) Date plan

is established. For purposes of this section, a plan is established on the latest of

the date on which it is adopted, the date

on which it is effective, and the date on

10

which the material terms of the plan are

set forth in writing. For purposes of this

section, a plan will be deemed to be set

forth in writing if it is set forth in any

other form that is approved by the Commissioner. The material terms of the plan

include the amount (or the method or formula for determining the amount) of deferred compensation to be provided under

the plan and the time when it may or will

be provided.

(ii) Plan amendments. In the case of

an amendment that increases the amount

deferred under a nonqualified deferred

compensation plan, the plan is not considered established with respect to the additional amount deferred until the plan, as

amended, is established in accordance

with paragraph (b)(2)(i) of this section.

(iii) Transition rule for written plan requirement. For purposes of this section,

an unwritten plan that was adopted and

effective before March 25, 1996, is

treated as established under this section as

of the later of the date on which it was

adopted or became effective, provided

that the material terms of the plan are set

forth in writing before January 1, 2000.

(3) Plan must provide for the deferral

of compensation—(i) Deferral of compensation defined. A plan provides for

the deferral of compensation with respect

to an employee only if, under the terms of

the plan and the relevant facts and circumstances, the employee has a legally

binding right during a calendar year to

compensation that has not been actually

or constructively received and that, pursuant to the terms of the plan, is payable

to (or on behalf of) the employee in a later

year. An employee does not have a

legally binding right to compensation if

that compensation may be unilaterally reduced or eliminated by the employer after

the services creating the right to the compensation have been performed. For this

purpose, compensation is not considered

subject to unilateral reduction or elimination merely because it may be reduced or

eliminated by operation of the objective

terms of the plan, such as the application

of an objective provision creating a substantial risk of forfeiture (within the

meaning of section 83). Similarly, an employee does not fail to have a legally

binding right to compensation merely because the amount of compensation is de-

1999–9 I.R.B.

termined under a formula that provides

for benefits to be offset by benefits provided under a plan that is qualified under

section 401(a), or because benefits are reduced due to investment losses or, in a

final average pay plan, subsequent decreases in compensation.

(ii) Compensation payable pursuant to

the employer’s customary payment timing

arrangement. There is no deferral of

compensation (within the meaning of this

paragraph (b)(3)) merely because compensation is paid after the last day of a

calendar year pursuant to the timing

arrangement under which the employer

ordinarily compensates employees for

services performed during a payroll period described in section 3401(b).

(iii) Short-term deferrals. If, under a

nonqualified deferred compensation plan,

there is a deferral of compensation

(within the meaning of this paragraph

(b)(3)) that causes an amount to be deferred from a calendar year to a date that

is not more than a brief period of time

after the end of that calendar year, then, at

the employer’s option, that amount may

be treated as if it were not subject to the

special timing rule described in paragraph

(a)(2) of this section. An employer may

apply this option only if the employer

does so for all employees covered by the

plan and all substantially similar nonqualified deferred compensation plans. For

purposes of this paragraph (b)(3)(iii),

whether compensation is deferred to a

date that is not more than a brief period of

time after the end of a calendar year is determined in accordance with §1.404(b)1T, Q&A-2, of this chapter.

(4) Plans, arrangements, and benefits

that do not provide for the deferral of

compensation—(i) In general. Notwithstanding paragraph (b)(3)(i) of this section, an amount or benefit described in

any of paragraphs (b)(4)(ii) through (viii)

of this section is not treated as resulting

from the deferral of compensation for

purposes of section 3121(v)(2) and this

section and, thus, is not subject to the special timing rule of paragraph (a)(2) of this

section.

(ii) Stock options, stock appreciation

rights, and other stock value rights. The

grant of a stock option, stock appreciation

right, or other stock value right does not

constitute the deferral of compensation

for purposes of section 3121(v)(2). In ad-

1999–9 I.R.B.

dition, amounts received as a result of the

exercise of a stock option, stock appreciation right, or other stock value right do

not result from the deferral of compensation for purposes of section 3121(v)(2) if

such amounts are actually or constructively received in the calendar year of the

exercise. For purposes of this paragraph

(b)(4)(ii), a stock value right is a right

granted to an employee with respect to

one or more shares of employer stock

that, to the extent exercised, entitles the

employee to a payment for each share of

stock equal to the excess, or a percentage

of the excess, of the value of a share of

the employer’s stock on the date of exercise over a specified price (greater than

zero). Thus, for example, the term stock

value right does not include a phantom

stock or other arrangement under which

an employee is awarded the right to receive a fixed payment equal to the value

of a specified number of shares of employer stock.

(iii) Restricted property. If an employee receives property from, or pursuant to, a plan maintained by an employer, there is no deferral of

compensation (within the meaning of section 3121(v)(2)) merely because the value

of the property is not includible in income

(under section 83) in the year of receipt

by reason of the property being nontransferable and subject to a substantial risk of

forfeiture. However, a plan under which

an employee obtains a legally binding

right to receive property (whether or not

the property is restricted property) in a future year may provide for the deferral of

compensation within the meaning of paragraph (b)(3) of this section and, accordingly, may constitute a nonqualified deferred compensation plan, even though

benefits under the plan are or may be paid

in the form of property.

(iv) Certain welfare benefits—(A) In

general. Vacation benefits, sick leave,

compensatory time, disability pay, severance pay, and death benefits do not result

from the deferral of compensation for

purposes of section 3121(v)(2), even if

those benefits constitute wages within the

meaning of section 3121(a).

(B) Severance pay. Benefits that are

provided under a severance pay arrangement (within the meaning of section

3(2)(B)(i) of ERISA) that satisfies the

conditions in 29 CFR 2510.3–2(b)(1)(i)

11

through (iii) are considered severance pay

for purposes of this paragraph (b)(4)(iv).

If benefits are provided under a severance

pay arrangement (within the meaning of

section 3(2)(B)(i) of ERISA), but do not

satisfy one or more of the conditions in 29

CFR 2510.3–2(b)(1)(i) through (iii), then

whether those benefits are severance pay

within the meaning of this paragraph

(b)(4)(iv) depends upon the relevant facts

and circumstances. For this purpose, relevant facts and circumstances include

whether the benefits are provided over a

short period of time commencing immediately after (or shortly after) termination

of employment or for a substantial period

of time following termination of employment and whether the benefits are provided after any termination or only after

retirement (or another specified type of

termination). Benefits provided under a

severance pay arrangement (within the

meaning of section 3(2)(B)(i) of ERISA)

are in all cases severance pay within the

meaning of this paragraph (b)(4)(iv) if the

benefits payable under the plan upon an

employee’s termination of employment

are payable only if that termination is involuntary.

(C) Death benefits and disability

pay—(1) General definition. Payments

made under a nonqualified deferred compensation plan in the event of death are

death benefits within the meaning of this

paragraph (b)(4)(iv), but only to the extent the total benefits payable under the

plan exceed the lifetime benefits payable

under the plan. Similarly, payments made

under a nonqualified deferred compensation plan in the event of disability are disability pay within the meaning of this

paragraph (b)(4)(iv), but only to the extent the disability benefits payable under

the plan exceed the lifetime benefits

payable under the plan. Accordingly, any

benefits that a nonqualified deferred compensation plan provides in the event of

death or disability that are associated with

an amount deferred under this section are

disregarded in applying this section to the

extent the benefits payable under the plan

in the event of death or in the event of disability have a value in excess of the lifetime benefits payable under the plan.

(2) Total benefits payable defined. For

purposes of paragraph (b)(4)(iv)(C)(1) of

this section, the term total benefits

payable under a plan means the present

March 1, 1999

value of the total benefits payable to or on

behalf of the employee (including benefits payable in the event of the employee’s

death) under the plan, disregarding any

benefits that are payable only in the event

of disability and determined separately

with respect to each form of distribution

or other election that may apply with respect to the employee.

(3) Disability benefits payable defined.

For purposes of paragraph (b)(4)(iv)(C)(1) of this section, the term disability

benefits payable under a plan means the

present value of the benefits payable to or

on behalf of the employee under the plan,

including benefits payable in the event of

the employee’s disability but excluding

death benefits within the meaning of this

paragraph (b)(4)(iv).

(4) Lifetime benefits payable defined.

For purposes of paragraph (b)(4)(iv)(C)(1) of this section, the term lifetime

benefits payable under a plan means the

present value of the benefits that could be

payable to the employee under the plan

during the employee’s lifetime, determined under the plan’s optional form of

distribution or other election that is or was

available to the employee at any time with

respect to the amount deferred and that

provides the largest present value to the

employee during the employee’s lifetime

of any such form or election so available.

(5) Rules of application. For purposes

of determining present value under this

paragraph (b)(4)(iv)(C), present value is

determined as of the time immediately

preceding the time the amount deferred

under a nonqualified deferred compensation plan is required to be taken into account under paragraph (e) of this section,

using actuarial assumptions that are reasonable as of that date but taking into consideration only benefits that result from

the deferral of compensation, as determined under this paragraph (b), and benefits payable in the event of death or disability. In addition, for purposes of

paragraph (b)(4)(iv)(C)(4) of this section,

present value must be determined without

any discount for the probability that the

employee may die before benefit payments commence and without regard to

any benefits payable solely in the event of

disability.

(v) Certain benefits provided in connection with impending termination—(A)

In general. Benefits provided in connec-

March 1, 1999

tion with impending termination of employment under paragraph (b)(4)(v)(B) or

(C) of this section do not result from the

deferral of compensation within the

meaning of section 3121(v)(2).

(B) Window benefits—(1) In general.

For purposes of this paragraph (b)(4)(v),

except as provided in paragraph

(b)(4)(v)(B)(3) of this section, a window

benefit is provided in connection with impending termination of employment. For

this purpose, a window benefit is an early

retirement benefit, retirement-type subsidy, social security supplement, or other

form of benefit made available by an employer for a limited period of time (no

greater than one year) to employees who

terminate employment during that period

or to employees who terminate employment during that period under specified

circumstances.

(2) Special rule for recurring window

benefits. A benefit will not be considered

a window benefit if an employer establishes a pattern of repeatedly providing

for similar benefits in similar situations

for substantially consecutive, limited periods of time. Whether the recurrence of

these benefits constitutes a pattern of

amendments is determined based on the

facts and circumstances. Although no one

factor is determinative, relevant factors

include whether the benefits are on account of a specific business event or condition, the degree to which the benefits relate to the event or condition, and whether

the event or condition is temporary or discrete or is a permanent aspect of the employer’s business.

(3) Transition rule for window benefits. In the case of a window benefit that

is made available for a period of time that

begins before January 1, 2000, an employer may choose to treat the window

benefit as a benefit that results from the

deferral of compensation if the sole reason the window benefit would otherwise

fail to be provided pursuant to a nonqualified deferred compensation plan is the application of paragraph (b)(4)(v)(B)(1) of

this section.

(C) Termination within 12 months of

establishment of a benefit or plan. For

purposes of this paragraph (b)(4)(v), a

benefit is provided in connection with impending termination of employment,

without regard to whether it constitutes a

window benefit, if—

12

(1) An employee’s termination of employment occurs within 12 months of the

establishment of the plan (or amendment)

providing the benefit; and

(2) The facts and circumstances indicate that the plan (or amendment) is established in contemplation of the employee’s impending termination of

employment.

(vi) Benefits established after termination. Benefits established with respect to

an employee after the employee’s termination of employment do not result from a

deferral of compensation within the meaning of section 3121(v)(2). However, costof-living adjustments on benefit payments

under a nonqualified deferred compensation plan (within the meaning of paragraph

(b) of this section) shall not be considered

benefits established after the employee’s

termination of employment for purposes of

this paragraph (b)(4)(vi) merely because

the employee does not obtain the right to

the adjustment until after the employee’s

termination of employment. For purposes

of the preceding sentence, cost-of-living

adjustments are payments that satisfy conditions similar to those of 29 CFR

2510.3–2(g)(1)(ii) and (iii).

(vii) Excess parachute payments. An

excess parachute payment (as defined in

section 280G(b)) under an agreement entered into or renewed after June 14, 1984,

in taxable years ending after such date,

does not result from the deferral of compensation within the meaning of section

3121(v)(2). For this purpose, any contract entered into before June 15, 1984,

that is amended after June 14, 1984, in

any relevant significant aspect, is treated

as a contract entered into after June 14,

1984.

(viii) Compensation for current services. A plan does not provide for the deferral of compensation within the meaning of section 3121(v)(2) if, based on the

relevant facts and circumstances, the

compensation is paid for current services.

(5) Examples. This paragraph (b) is illustrated by the following examples:

Example 1. (i) In December of 2001, Employer

L tells Employee A that, if specified goals are satisfied for 2002, Employee A will receive a bonus on

July 1, 2003, equal to a specified percentage of 2002

compensation. Because Employee A meets the

specified goals, Employer L pays the bonus to Employee A on July 1, 2003, consistent with its oral

commitment.

(ii) This arrangement is not a nonqualified de-

1999–9 I.R.B.

ferred compensation plan under this section because

its terms were not set forth in writing and, therefore,

it was not established in accordance with paragraph

(b)(2) of this section.

Example 2. (i) In 2004, Employer M establishes

a compensation arrangement for Employee B under

which Employer M agrees to pay Employee B a

specified amount based on a percentage of his salary

for 2004. The amount due is to be paid out of the

general assets of Employer M and is payable in 2008.

(ii) Employee B has a legally binding right during 2004 to an amount of compensation that has not

been actually or constructively received and that,

pursuant to the terms of the arrangement, is payable

in a later year. Therefore, the arrangement provides

for the deferral of compensation.

Example 3. (i) Employer N establishes a nonqualified deferred compensation plan (within the

meaning of paragraph (b)(1) of this section) for Employee C in 1984. The plan is amended on January

1, 2001, to increase benefits, and the amendment

provides that the increase in benefits is on account

of Employee C’s performance of services for Employer N from 1985 through 2000.

(ii) The additional benefits that resulted from the

plan amendment cannot be taken into account as

amounts deferred for 1985 through 2000, even

though the plan was established before then. Pursuant to paragraphs (b)(2)(ii) and (e)(1) of this section, the additional benefits cannot be taken into account before the latest of the date on which the

amendment is adopted, the date on which the

amendment is effective, or the date on which the

material terms of the plan, as amended, are set forth

in writing.

Example 4. (i) In 2002, Employer O, a state or

local government, establishes a plan for certain employees that provides for the deferral of compensation and that is subject to section 457(a).

(ii) Paragraph (b)(1) of this section provides that

nonqualified deferred compensation plan means

any plan that is established by an employer and that

provides for the deferral of compensation, other

than a plan described in section 3121(a)(5). Section

3121(a)(5) lists, among other plans, an exempt governmental deferred compensation plan as defined in

section 3121(v)(3). Under section 3121(v)(3)(A),

this definition does not include any plan to which

section 457(a) applies. Thus, the plan established

by Employer O is not an exempt governmental deferred compensation plan described in section

3121(v)(3) and, consequently, is not a plan described in section 3121(a)(5). Accordingly, the plan

is a nonqualified deferred compensation plan within

the meaning of section 3121(v)(2) and paragraph

(b)(1) of this section.

(iii) However, the general timing rule of paragraph (a)(1) of this section and the special timing

rule of paragraph (a)(2) of this section apply only to

remuneration for employment that constitutes

wages. Under section 3121(b)(7), certain service

performed in the employ of a state, or any political

subdivision of a state, is not employment. Thus,

even though the plan is a nonqualified deferred compensation plan, the extent to which section

3121(v)(2) applies to a participating employee will

depend on whether or not the service performed for

Employer O is excluded from the definition of employment under section 3121(b)(7).

1999–9 I.R.B.

Example 5. (i) In 2000, Employer P establishes

a plan that provides for bonuses to be paid to employees based on an objective formula that takes

into account the employees’ performance for the

year. Employer P does not have the discretion to reduce the amount of any employee’s bonus after the

end of the year. The bonus is not actually calculated

until March 1 of the following year, and is paid on

March 15 of that following year.

(ii) The plan provides for the deferral of compensation because the employees have a legally

binding right, as of the last day of a calendar year, to

an amount of compensation that has not been actually or constructively received and, pursuant to the

terms of the plan, that compensation is payable in a

later year. However, because the bonuses under the

plan are paid within a brief period of time after the

end of the calendar year from which they are deferred, Employer P may choose, pursuant to paragraph (b)(3)(iii) of this section, to treat all the

bonuses as if they are not subject to the special timing rule of paragraph (a)(2) of this section.

(iii) If the employer uses the special timing rule,

the amount deferred would be taken into account as

wages on December 31, 2000. If the employer

chooses not to use the special timing rule, the

amount of the bonus is wages on the date it is actually or constructively paid, March 15, 2000.

Example 6. (i) Employer Q establishes a plan

under which bonuses based on performance in one

year may be paid on February 1 of the following

year at the discretion of the board of directors. The

board of directors meets in January of each year to

determine the amount, if any, of the bonuses to be

paid based on performance in the prior year.

(ii) Because an employee does not have a legally

binding right to any bonus until January of the year

in which the bonus is paid, any bonus paid under the

plan in that year is not deferred from the preceding

calendar year, and the plan does not provide for the

deferral of compensation within the meaning of

paragraph (b)(3)(i) of this section.

Example 7. (i) Employer R maintains a plan for

employees that provides nonqualified stock options

described in §1.83-7(a) of this chapter. Under the

plan, employees are granted in 2001 the option to

acquire shares of employer stock at the fair market

value of the shares on the date of grant ($50 per

share). The options can be exercised at any time

from the date of grant through 2010. The options do

not have a readily ascertainable fair market value for

purposes of section 83 at the date of grant, and

shares are issued upon the exercise of the options

without being subject to a substantial risk of forfeiture within the meaning of section 83. In 2005,

when the fair market value of a share of employer

stock is $80, Employee D exercises an option to acquire 1,000 shares.

(ii) Under paragraph (b)(4)(ii) of this section,

neither the grant of a stock option nor amounts received currently as a result of the exercise of a stock

option result from the deferral of compensation for

purposes of section 3121(v)(2). Thus, under the

general timing rule of paragraph (a)(1) of this section, the $30,000 spread between the amount paid

for the shares ($50,000) and the fair market value of

the shares on the date of exercise ($80,000) is taken

into account as wages for FICA tax purposes in the

year of exercise.

13

(iii) If the options had been granted at $45 per

share, $5 per share below the fair market value on

date of grant, the $35,000 spread between the

amount paid for the shares ($45,000) and the fair

market value of the shares on the date of exercise

($80,000) would similarly be taken into account as

wages for FICA tax purposes in the year of exercise.

Example 8. (i) Employer T establishes a phantom stock plan for certain employees. Under the

plan, an employee is credited on the last day of each

calendar year with a dollar amount equal to the fair

market value of 1,000 shares of employer stock.

Upon termination of employment for any reason,

each employee is entitled to receive the value on the

date of termination, in cash or employer stock, of the

shares with which he or she has been credited.

(ii) Because compensation to which the employee has a legally binding right as of the last day

of one year is paid in a subsequent year, the phantom

stock plan provides for the deferral of compensation.

The phantom stock plan does not provide stock

value rights within the meaning of paragraph

(b)(4)(ii) of this section because it provides for

awards equal in value to the full fair market value of

a specified number of shares of Employer T stock,

rather than the excess of that fair market value over

a specified price.

Example 9. (i) Employer U establishes a severance pay arrangement (within the meaning of section 3(2)(b)(i) of ERISA) which provides for payments solely upon an employee’s death, disability,

or dismissal from employment. The amount of the

payments to an employee is based on the length of

continuous active service with Employer U at the

time of dismissal, and is paid in monthly installments over a period of three years.

(ii) Because benefits payable under the plan

upon termination of employment are payable only

upon an employee’s involuntary termination, the

plan is a severance pay plan within the meaning of

paragraph (b)(4)(iv)(B) of this section. Thus, the

benefits are not treated as resulting from the deferral

of compensation for purposes of section 3121(v)(2).

Example 10. (i) Employer V establishes a nonqualified deferred compensation plan under which

employees will receive benefit payments commencing at age 65 as a life annuity or in one of several actuarially equivalent annuity forms. If an employee

dies before benefit payments commence under the

plan, a benefit is payable to the employee’s designated beneficiary in a single sum payment equal to

the present value of the employee’s annuity benefit.

This benefit (sometimes called a full reserve death

benefit) is calculated using the applicable interest

rate specified in section 417(e) and, for the period

after age 65, the applicable mortality table specified

in section 417(e), both of which are reasonable actuarial assumptions. During 2002, Employee E obtains a legally binding right to an annuity benefit

under the plan, payable at age 65. This annuity benefit has a present value of $10,000 at the end of

2002, determined using the same assumptions as are

used under the plan to calculate the full reserve

death benefit.

(ii) The present value, at the end of 2002, of the

total benefits payable to or on behalf of Employee E

(i.e., the sum of the present value of the annuity benefit commencing at age 65, and the present value of

the full reserve death benefit, with both determined

March 1, 1999

using the actuarial assumptions described in paragraph (i) of this Example 10, except also taking into

account the probability of death prior to age 65) is

$10,000. This present value does not exceed the

present value of the annuity benefits that could be

payable to Employee E under the plan during Employee E’s lifetime determined without a discount

for the possibility that Employee E might die before

age 65 (also $10,000). Thus, the benefit payable in

the event of the Employee E’s death is not a death

benefit for purposes of paragraph (b)(4)(iv) of this

section.

(iii) The same result would apply in the case of a

plan that bases benefits on an interest bearing account balance and pays the account balance at termination of employment or death (because the sum of

the deferred benefits payable in the future if the employee terminates employment before death with a

discount for the probability of death before that date

plus the present value of the benefit payable in the

event of death necessarily equals the present value

of the deferred benefits payable with no discount for

the probability of death).

Example 11. (i) The facts are the same as in Example 10, except that, in lieu of the full reserve

death benefit, the plan provides a monthly life annuity benefit to an employee’s spouse in the event of

the employee’s death before benefit payments commence equal to 100 percent of the monthly annuity

that would be payable to the employee at age 65

under the life annuity form. Employee E is age 63

and has a spouse who is age 51. The sum of the present value of Employee E’s annuity benefit commencing at age 65 determined with a discount for

the possibility that Employee E might die before age

65 and the present value of the 100 percent annuity

death benefit for Employee E’s spouse exceeds

$10,000.

(ii) The amount deferred for 2002 is $10,000

(because the 100 percent annuity death benefit for

Employee E’s spouse is disregarded to the extent

that the total benefits payable to or on behalf of Employee E exceeds the present value of the annuity

benefits that could be payable to Employee E under

the plan during the Employee E’s lifetime without a

discount for the probability of Employee E’s death

before benefit payments commence).

Example 12. (i) On January 1, 2001, Employer

W establishes a plan that covers only Employee F,

who owns a significant portion of the business and

who has 30 years of service as of that date. The plan

provides that, upon Employee F’s termination of

employment at any time, he will receive $200,000

per year for each of the immediately succeeding five

years. Employee F terminates employment on

March 1, 2001.

(ii) Because Employee F terminates employment

within 12 months of the establishment of the plan

and the facts and circumstances set forth above indicate that the plan was established in contemplation

of impending termination of employment, the plan is

considered to be established in connection with impending termination within the meaning of paragraph (b)(4)(v) of this section. Therefore, the benefits provided under the plan are not treated as

resulting from the deferral of compensation for purposes of section 3121(v)(2).

Example 13. (i) Employer X establishes a plan

on January 1, 2004, to supplement the qualified re-

March 1, 1999

tirement benefits of recently hired 55-year old Employee G, who forfeited retirement benefits with her

former employer in order to accept employment

with Employer X. The plan provides that Employee

G will receive $50,000 per year for life beginning at

age 65, regardless of when she terminates employment. On April 15, 2004, Employee G unexpectedly

terminates employment.

(ii) The facts and circumstances indicate that the

plan was not established in contemplation of impending termination. Thus, even though Employee

G terminated employment within 12 months of the

establishment of the plan, the plan is not considered

to be established in connection with impending termination within the meaning of paragraph (b)(4)(v)

of this section. Benefits provided under the plan are

treated as resulting from the deferral of compensation for purposes of section 3121(v)(2).

Example 14. (i) Employer Y establishes a plan

to provide supplemental retirement benefits to a

group of management employees who are at various

stages of their careers. All employees covered by

the plan are subject to the same benefit formula.

Employee H is planning to (and actually does) retire

within six months of the date on which the plan is

established.

(ii) Even though Employee H terminated employment within 12 months of the establishment of

the plan, the plan is not considered to have been established in connection with Employee H’s impending termination within the meaning of paragraph

(b)(4)(v) of this section because the facts and circumstances indicate otherwise.

Example 15. (i) Employee J owns 100 percent

of Employer Z, a corporation that provides consulting services. Substantially all of Employer Z’s revenue is derived as a result of the services performed

by Employee J. In each of 2001, 2002, and 2003,

Employer Z has gross receipts of $180,000 and expenses (other than salary) of $80,000. In each of

2001 and 2002, Employer Z pays Employee J a

salary of $100,000 for services performed in each of

those years. On December 31, 2002, Employer Z

establishes a plan to pay Employee J $80,000 in

2003. The plan recites that the payment is in recognition of prior services. In 2003, Employer Z pays

Employee J a salary of $20,000 and the $80,000 due

under the plan.

(ii) The facts and circumstances described above

indicate that the $80,000 paid pursuant to the plan is

based on services performed by Employee J in 2003

and, thus, is paid for current services within the

meaning of paragraph (b)(4)(viii) of this section.

Accordingly, the plan does not provide for the deferral of compensation within the meaning of section

3121(v)(2), and the $80,000 payment is included as

wages in 2003 under the general timing rule of paragraph (a)(1) of this section.

(c) Determination of the amount deferred—(1) Account balance plans—(i)

General rule. For purposes of this section, if benefits for an employee are provided under a nonqualified deferred compensation plan that is an account balance

plan, the amount deferred for a period

equals the principal amount credited to

14

the employee’s account for the period, increased or decreased by any income attributable to the principal amount through

the date the principal amount is required

to be taken into account as wages under

paragraph (e) of this section.

(ii) Definitions—(A) Account balance

plan. For purposes of this section, an account balance plan is a nonqualified deferred compensation plan under the terms

of which a principal amount (or amounts)

is credited to an individual account for an

employee, the income attributable to each

principal amount is credited (or debited)

to the individual account, and the benefits

payable to the employee are based solely

on the balance credited to the individual

account.

(B) Income. For purposes of this section, income means any increase or decrease in the amount credited to an employee’s account that is attributable to

amounts previously credited to the employee’s account, regardless of whether

the plan denominates that increase or decrease as income.

(iii) Additional rules—(A) Commingled accounts. A plan does not fail to be

an account balance plan merely because,

under the terms of the plan, benefits

payable to an employee are based solely

on a specified percentage of an account

maintained for all (or a portion of) plan

participants under which principal

amounts and income are credited (or debited) to such account.

(B) Bifurcation permitted. An employer may treat a portion of a nonqualified deferred compensation plan as a separate account balance plan if that portion

satisfies the requirements of this paragraph (c)(1) and the amount payable to

employees under that portion is determined independently of the amount

payable under the other portion of the

plan.

(C) Actuarial equivalents. A plan does

not fail to be an account balance plan

merely because the plan permits employees to elect to receive their benefits under

the plan in a form of benefit other than

payment of the account balance, provided

the amount of benefit payable in that

other form is actuarially equivalent to

payment of the account balance using actuarial assumptions that are reasonable.

Conversely, a plan is not an account bal-

1999–9 I.R.B.

ance plan if it provides an optional form

of benefit that is not actuarially equivalent

to the account balance using actuarial assumptions that are reasonable. For this

purpose, the determination of whether

forms are actuarially equivalent using actuarial assumptions that are reasonable is

determined under the rules applicable to

nonaccount balance plans under paragraph (c)(2)(iii) of this section.

(2) Nonaccount balance plans—(i)

General rule. For purposes of this section, if benefits for an employee are provided under a nonqualified deferred compensation plan that is not an account

balance plan (a nonaccount balance plan),

the amount deferred for a period equals

the present value of the additional future

payment or payments to which the employee has obtained a legally binding

right (as described in paragraph (b)(3)(i)

of this section) under the plan during that

period.

(ii) Present value defined. For purposes of this section, present value means

the value as of a specified date of an

amount or series of amounts due thereafter, where each amount is multiplied by

the probability that the condition or conditions on which payment of the amount

is contingent will be satisfied, and is discounted according to an assumed rate of

interest to reflect the time value of money.

For purposes of this section, the present

value must be determined as of the date

the amount deferred is required to be

taken into account as wages under paragraph (e) of this section using actuarial

assumptions and methods that are reasonable as of that date. For this purpose, a

discount for the probability that an employee will die before commencement of

benefit payments is permitted, but only to

the extent that benefits will be forfeited

upon death. In addition, the present value

cannot be discounted for the probability

that payments will not be made (or will be

reduced) because of the unfunded status

of the plan, the risk associated with any

deemed or actual investment of amounts

deferred under the plan, the risk that the

employer, the trustee, or another party

will be unwilling or unable to pay, the

possibility of future plan amendments, the

possibility of a future change in the law,

or similar risks or contingencies. Nor is

the present value affected by the possibility that some of the payments due under

1999–9 I.R.B.

the plan will be eligible for one of the exclusions from wages in section 3121(a).

(iii) Treatment of actuarially equivalent benefits—(A) In general. In the case

of a nonaccount balance plan that permits

employees to receive their benefits in

more than one form or commencing at

more than one date, the amount deferred

is determined by assuming that payments

are made in the normal form of benefit

commencing at normal commencement

date if the requirements of paragraph

(c)(2)(iii)(B) of this section are satisfied.

Accordingly, in the case of a nonaccount

balance plan that permits employees to receive their benefits in more than one form

or commencing at more than one date, unless the requirements of paragraph

(c)(2)(iii)(B) of this section are satisfied,

the amount deferred is treated as not reasonably ascertainable under the rules of

paragraph (e)(4)(i)(B) of this section until

a form of benefit and a time of commencement are selected.

(B) Use of normal form commencing

at normal commencement date. The requirements of this paragraph (c)(2)(iii)(B)

are satisfied by a nonaccount balance plan

if the plan has a single normal form of

benefit commencing at normal commencement date for the amount deferred

and each other optional form is actuarially

equivalent to the normal form of benefit

commencing at normal commencement

date using actuarial assumptions that are

reasonable. For this purpose, each form

of benefit for payment of the amount deferred commencing at a date is a separate

optional form. For purposes of this paragraph (c)(2)(iii)(B), each optional form is

actuarially equivalent to the normal form

of benefit commencing at normal commencement date only if the terms of the

plan in effect when the amount is deferred

provide for every optional form to be actuarially equivalent and further provide

for actuarial assumptions to determine actuarial equivalency that will be reasonable

at the time the optional form is selected,

without regard to whether market interest

rates are higher or lower at the time the

optional form is selected than at the time

the amount is deferred. Thus, a plan that

provides for every optional form to be actuarially equivalent satisfies this paragraph (c)(2)(iii)(B) if it provides for actuarial equivalence to be determined—

15

(1) When an optional form is selected

or when benefit payments under the optional form commence, based on assumptions that are reasonable then;

(2) Based on an index that reflects

market rates of interest from time to time

(for example, the plan specifies that all

benefits will be actuarially equivalent

using the applicable interest rate and applicable mortality table specified in section 417(e)); or

(3) Based on actuarial assumptions

specified in the plan and provides for

those assumptions to be revised to be reasonable assumptions if they cease to be

reasonable assumptions.

(C) Fixed mortality assumptions permitted. A plan does not fail to satisfy

paragraph (c)(2)(iii)(B) of this section

merely because the plan specifies a fixed

mortality assumption that is reasonable at

the time the amount is deferred, even if

that assumption is not reasonable at the

time the optional form is selected. (But

see paragraph (c)(2)(iii)(E) of this section

for additional rules that apply if the mortality assumption is not reasonable at the

time the optional form is selected.)

(D) Normal form of benefit commencing at normal commencement date defined. For purposes of this paragraph

(c)(2)(iii), the normal form of benefit

commencing at normal commencement

date under the plan is the form, and date

of commencement, under which the payments due to the employee under the plan

are expressed, prior to adjustments for

form or timing of commencement of payments.

(E) Rule applicable if actuarial assumptions cease to be reasonable. If the

terms of the plan in effect when an

amount is deferred provide for actuarial

assumptions to determine actuarial equivalency that will be reasonable at the time

the optional form is selected or payments

commence as provided in paragraph

(c)(2)(iii)(B) of this section, but, at that

time, the actuarial assumptions used

under the plan are not reasonable, the employee will be treated as obtaining a

legally binding right at that time (or, if

earlier, at the date on which the plan is

amended to provide actuarial assumptions

that are not reasonable) to any additional

benefits that result from the use of an unreasonable actuarial assumption. This

might occur, for example, if the plan

March 1, 1999

specifies that the actuarial assumptions

will be reasonable assumptions to be set

at the time the optional form is selected

and the assumptions used are in fact not

reasonable at that time.

(3) Separate determination for each

period. The amount deferred under this

paragraph (c) is determined separately for

each period for which there is an amount

deferred under the plan. In addition, paragraphs (d) and (e) of this section are applied separately with respect to the

amount deferred for each such period.

Thus, for example, the fraction described

in paragraph (d)(1)(ii)(B) of this section

and the amount of the true-up at the resolution date described in paragraph

(e)(4)(ii)(B) of this section are determined

separately with respect to each amount

deferred. See paragraph (e)(4)(ii)(D) of

this section for special rules for allocating

amounts deferred over more than one

year.

(4) Examples. This paragraph (c) is illustrated by the following examples.

(The examples illustrate the rules in this

paragraph (c) and include various interest

rate and mortality table assumptions, including the applicable section 417(e)

mortality table, the GAM 83 (male) mortality table, and UP-84 mortality table.

These tables can be obtained from the Society of Actuaries at its internet site at

http://www.soa.org.) The examples are as

follows:

Example 1. (i) Employer M establishes a nonqualified deferred compensation plan for Employee

A. Under the plan, 10 percent of annual compensation is credited on behalf of Employee A on December 31 of each year. In addition, a reasonable rate of

interest is credited quarterly on the balance credited

to Employee A as of the last day of the preceding

quarter. All amounts credited under the plan are 100

percent vested and the benefits payable to Employee

A are based solely on the balance credited to Employee A’s account.

(ii) The plan is an account balance plan. Thus,

pursuant to paragraph (c)(1) of this section, the

amount deferred for a calendar year is equal to 10

percent of annual compensation.

Example 2. (i) Employer N establishes a nonqualified deferred compensation plan for Employee

B. Under the plan, 2.5 percent of annual compensation is credited quarterly on behalf of Employee B.

In addition, a reasonable rate of interest is credited

quarterly on the balance credited to Employee B’s

account as of the last day of the preceding quarter.

All amounts credited under the plan are 100 percent

vested, and the benefits payable to Employee B are

March 1, 1999

based solely on the balance credited to Employee

B’s account. As permitted by paragraph (e)(5) of

this section, any amount deferred under the plan for

the calendar year is taken into account as wages on

the last day of the year.

(ii) The plan is an account balance plan. Thus,

pursuant to paragraph (c)(1) of this section, the

amount deferred for a calendar year equals 10 percent of annual compensation (i.e., the sum of the

principal amounts credited to Employee B’s account

for the year) plus the interest credited with respect to

that 10 percent principal amount through the last day

of the calendar year. If Employer N had not chosen

to apply paragraph (e)(5) of this section and, thus,

had taken into account 2.5 percent of compensation

quarterly, the interest credited with respect to those

quarterly amounts would not have been treated as

part of the amount deferred for the year.

Example 3. (i) Employer O establishes a nonqualified deferred compensation plan for a group of

five employees. Under the plan, a specified sum is

credited to an account for the benefit of the group of

employees on July 31 of each year. Income on the

balance of the account is credited annually at a rate

that is reasonable for each year. The benefit payable

to an employee is equal to one-fifth of the account

balance and is payable, at the employee’s option, in

a lump sum or in 10 annual installments that reflect

income on the balance.

(ii) The plan is an account balance plan notwithstanding the fact that the employee’s benefit is equal

to a specified percentage of an account maintained

for a group of employees.

Example 4. (i) The facts are the same as in Example 3, except that the plan also permits an employee to elect a life annuity that is actuarially

equivalent to the account balance based on the applicable interest rate and applicable mortality table

specified in section 417(e) at the time the benefit is

elected by the employee.

(ii) Under paragraphs (c)(1)(iii)(C) and

(c)(2)(iii) of this section, the plan does not fail to be

an account balance plan merely because the plan

permits employees to elect to receive their benefits

under the plan in a form that is actuarially equivalent

to payment of the account balance using actuarial

assumptions that are reasonable at the time the form

is selected.

Example 5. (i) Employer P establishes a nonqualified deferred compensation plan for a group of

employees. Under the plan, each participating employee has a fully vested right to receive a life annuity, payable monthly beginning at age 65, equal to

the product of 2 percent for each year of service and

the employee’s highest average annual compensation for any 3-year period. The plan also provides

that, if an employee dies before age 65, the present

value of the future payments will be paid to his or

her beneficiary. As permitted under paragraph (e)(5)

of this section, any amount deferred under the plan

for a calendar year is taken into account as FICA

wages as of the last day of the year. As of December

31, 2002, Employee C is age 60, has 25 years of service, and high 3-year average compensation of

$100,000 (the average for the years 2000 through

2002). As of December 31, 2003, Employee C is

age 61, has 26 years of service, and has high 3-year

16

average compensation of $104,000. As of December 31, 2004, Employee C is age 62, has 27 years of

service, and has high 3-year average compensation

of $105,000. The assumptions that Employer P uses

to determine the amount deferred for 2003 (a 7 percent interest rate and, for the period after commencement of benefit payments, the GAM 83

(male) mortality table) and for 2004 (a 7.5 percent

interest rate and, for the period after commencement

of benefit payments, the GAM 83 (male) mortality

table) are assumed, solely for purposes of this example, to be reasonable actuarial assumptions.

(ii) As of December 31, 2002, Employee C has a

legally binding right to receive lifetime payments of

$50,000 (2 percent ⫻ 25 years ⫻ $100,000) per

year. As of December 31, 2003, Employee C has a

legally binding right to receive lifetime payments of

$54,080 (2 percent ⫻ 26 years ⫻ $104,000) per

year. Thus, during 2003, Employee C has earned a

legally binding right to additional lifetime payments

of $4,080 ($54,080 – $50,000) per year beginning at

age 65. The amount deferred for 2003 is the present

value, as of December 31, 2003, of these additional

payments, which is $28,767 ($4,080 ⫻ the present

value factor for a deferred annuity payable at age 65,

using the specified actuarial assumptions for 2003).

Similarly, during 2004, Employee C has earned a

legally binding right to additional lifetime payments

of $2,620 (2 percent ⫻ 27 years ⫻ $105,000, minus

$54,080) per year beginning at age 65. The amount

deferred for 2004 is the present value, as of December 31, 2004, of these additional payments, which is

$18,845 ($2,620 ⫻ the present value factor for a deferred annuity payable at age 65, using the specified

actuarial assumptions for 2004).

Example 6. (i) Employer Q establishes a nonqualified deferred compensation plan for Employee

D on January 1, 2001, when Employee D is age 63.

During 2001, Employee D obtains a fully vested

right to receive a life annuity under the nonqualified

deferred compensation plan equal to the excess of

$200,000 over the life annuity benefits payable to

Employee D under a qualified defined benefit pension plan sponsored by Employer Q. The life annuity benefit payable annually under the qualified plan

is the lesser of $200,000 and the section

415(b)(1)(A) limitation in effect for the year, where

the section 415(b)(1)(A) limitation is automatically

adjusted to reflect changes in the cost of living.

Benefits under both the qualified and nonqualified

plan are payable monthly beginning at age 65. For

purposes of this example, the section 415(b)(1)(A)

limit for 2001 is assumed to be $140,000. The nonqualified plan provides no benefits in the event Employee D dies prior to commencement of benefit

payments. As permitted under paragraph (e)(5) of

this section, any amount deferred under the plan for

a calendar year is taken into account as FICA wages

as of the last day of the year. The assumptions that

Employer Q uses to determine the amount deferred

for 2001 (a 7 percent interest rate, a 3 percent increase in the cost of living and the GAM 83 (male)

mortality table) are assumed, solely for purposes of

this example, to be reasonable actuarial assumptions. As of December 31, 2001, Employee D has a

legally binding right to receive lifetime payments as

set forth in the following table:

1999–9 I.R.B.

Year

Annual Gross

Amount

2003

$200,000

$145,000

$55,000

2004

$200,000

$150,000

$50,000

2005

$200,000

$155,000

$45,000

2006

$200,000

$160,000

$40,000

2007

$200,000

$165,000

$35,000

2008

$200,000

$170,000

$30,000

2009

$200,000

$175,000

$25,000

2010

$200,000

$180,000

$20,000

2011

$200,000

$185,000

$15,000

2012

$200,000

$190,000

$10,000

2013

$200,000

$195,000

$5,000

2014 and thereafter

$200,000

$205,000 or greater

$0

(ii) The amount deferred for 2001 is the present

value, as of December 31, 2001, of the net lifetime

payments under the nonqualified plan, or $223,753.

(d) Amounts taken into account and income attributable thereto—(1) Amounts

taken into account—(i) In general. For

purposes of this section, an amount deferred under a nonqualified deferred compensation plan is taken into account as of

the date it is included in computing the

amount of wages as defined in section

3121(a), but only to the extent that any

additional FICA tax that results from such

inclusion (including any interest and

penalties for late payment) is actually

paid before the expiration of the applicable period of limitations for the period in

which the amount deferred was required

to be taken into account under paragraph

(e) of this section. Because an amount

deferred for a calendar year is combined

with the employee’s other wages for the

year for purposes of computing FICA

taxes with respect to the employee for the

year, if the employee has other wages that

equal or exceed the wage base limitations

for the Old-Age, Survivors, and Disability

Insurance (OASDI) portion (or, in the

case of years before 1994, the Hospital

1999–9 I.R.B.

Assumed Qualified

Plan Annual

Payment (based on

cost of living)

Insurance (HI) portion) of FICA for the

year, no portion of the amount deferred

will actually result in additional OASDI

(or HI) tax. However, because there is no

wage base limitation for the HI portion of

FICA for years after 1993, the entire

amount deferred (in addition to all other

wages) is subject to the HI tax for the year

and, thus, will not be considered taken

into account for purposes of this section

unless the HI tax relating to the amount

deferred is actually paid. In determining

whether any additional FICA tax relating

to the amount deferred is actually paid,

any FICA tax paid in a year is treated as

paid with respect to an amount deferred

only after FICA tax is paid on all other

wages for the year.

(ii) Amounts not taken into account—

(A) Failure to take an amount deferred

into account under the special timing

rule. If an amount deferred for a period

(as determined under paragraph (c) of this

section) is not taken into account, then the

nonduplication rule of paragraph

(a)(2)(iii) of this section does not apply,

and benefit payments attributable to that

amount deferred are included as wages in

accordance with the general timing rule of

paragraph (a)(1) of this section. For ex-

17

Net Annual

Payment under

Nonqualified Plan

ample, if an amount deferred is required

to be taken into account in a particular

year under paragraph (e) of this section,

but the employer fails to pay the additional FICA tax resulting from that

amount, then the amount deferred and the

income attributable to that amount must

be included as wages when actually or

constructively paid.

(B) Failure to take a portion of an

amount deferred into account under the

special timing rule. If, as of the date an

amount deferred is required to be taken

into account, only a portion of the amount

deferred (as determined under paragraph

(c) of this section) has been taken into account, then a portion of each subsequent

benefit payment that is attributable to that

amount is excluded from wages pursuant

to the nonduplication rule of paragraph

(a)(2)(iii) of this section and the balance

is subject to the general timing rule of

paragraph (a)(1) of this section. The portion that is excluded from wages is fixed

immediately before the attributable benefit payments commence (or, if later, the

date the amount deferred is required to be

taken into account) and is determined by

multiplying each such payment by a fraction, the numerator of which is the

March 1, 1999

amount that was taken into account (plus

income attributable to that amount determined under paragraph (d)(2) of this section through the date the portion is fixed)

and the denominator of which is the present value of the future benefit payments

attributable to the amount deferred, determined as of the date the portion is fixed.

For this purpose, if the requirements of

paragraph (c)(2)(iii)(B) of this section are

satisfied, the present value is determined

by assuming that payments are made in

the normal form of benefit commencing

at normal commencement date. In addition, if the employer demonstrates that the

amount deferred was determined using

reasonable actuarial assumptions as determined by the Commissioner, the present

value of the future benefit payments attributable to the amount deferred is determined using those assumptions. In any

other case, see paragraph (d)(2)(iii) of this

section.

(2) Income attributable to the amount

taken into account—(i) Account balance

plans—(A) In general. For purposes of

the nonduplication rule of paragraph

(a)(2)(iii) of this section, in the case of an

account balance plan, the income attributable to the amount taken into account

means any amount credited on behalf of

an employee under the terms of the plan

that is income (within the meaning of

paragraph (c)(1)(ii)(B) of this section) attributable to an amount previously taken

into account (within the meaning of paragraph (d)(1) of this section), but only if

the income reflects a rate of return that

does not exceed either the rate of return

on a predetermined actual investment (as

determined in accordance with paragraph

(d)(2)(i)(B) of this section) or, if the income does not reflect the rate of return on

a predetermined actual investment (as so

determined), a reasonable rate of interest

(as determined in accordance with paragraph (d)(2)(i)(C) of this section).

(B) Rules relating to actual investment—(1) In general. For purposes of

this paragraph (d)(2)(i), the rate of return

on a predetermined actual investment for

any period means the rate of total return

(including increases or decreases in fair

market value) that would apply if the account balance were, during the applicable

period, actually invested in one or more

investments that are identified in accordance with the plan before the beginning

March 1, 1999

of the period. For this purpose, an account balance plan can determine income

based on the rate of return of a predetermined actual investment regardless of

whether assets associated with the plan or

the employer are actually invested therein

and regardless of whether that investment

is generally available to the public. For

example, an account balance plan could

provide that income on the account balance is determined based on an employee’s prospective election among various investment alternatives that are

available under the employer’s section

401(k) plan, even if one of those investment alternatives is not generally available to the public. In addition, an actual

investment includes an investment identified by reference to any stock index with

respect to which there are positions traded

on a national securities exchange described in section 1256(g)(7)(A).

(2) Certain rates of return not based

on predetermined actual investment. A

rate of return will not be treated as the rate

of return on a predetermined actual investment within the meaning of this paragraph (d)(2)(i)(B) if the rate of return (to

any extent or under any conditions) is

based on the greater of the rate of return

of two or more actual investments, is

based on the greater of the rate of return

on an actual investment and a rate of interest (whether or not the rate of interest

would otherwise be reasonable under

paragraph (d)(2)(i)(C) of this section), or

is based on the rate of return on an actual

investment that is not predetermined. For

example, if a plan bases the rate of return

on the greater of the rate of return on a

predetermined actual investment (such as

the value of the employer’s stock), and a

0 percent interest rate (i.e., without regard

to decreases in the value of that investment), the plan is using a rate of return

that is not a rate of return on a predetermined actual investment within the meaning of this paragraph (d)(2)(i)(B).

(C) Rules relating to reasonable interest rates—(1) In general. If income for a

period is credited to an account balance

plan on a basis other than the rate of return on a predetermined actual investment

(as determined in accordance with paragraph (d)(2)(i)(B) of this section), then,

except as otherwise provided in this paragraph (d)(2)(i)(C), the determination of

whether the income for the period is

18

based on a reasonable rate of interest will

be made at the time the amount deferred

is required to be taken into account and

annually thereafter.

(2) Fixed rates permitted. If, with respect to an amount deferred for a period,

an account balance plan provides for a

fixed rate of interest to be credited, and

the rate is to be reset under the plan at a

specified future date that is not later than

the end of the fifth calendar year that begins after the beginning of the period, the

rate is reasonable at the beginning of the

period, and the rate is not changed before

the reset date, then the rate will be treated

as reasonable in all future periods before

the reset date.

(ii) Nonaccount balance plans. For

purposes of the nonduplication rule of

paragraph (a)(2)(iii) of this section, in the

case of a nonaccount balance plan, the income attributable to the amount taken

into account means the increase, due

solely to the passage of time, in the present value of the future payments to

which the employee has obtained a

legally binding right, the present value of

which constituted the amount taken into

account (determined as of the date such

amount was taken into account), but only

if the amount taken into account was determined using reasonable actuarial assumptions and methods. Thus, for each

year, there will be an increase (determined using the same interest rate used to

determine the amount taken into account)

resulting from the shortening of the discount period before the future payments

are made, plus, if applicable, an increase

in the present value resulting from the

employee’s survivorship during the year.

As a result, if the amount deferred for a

period is determined using a reasonable

interest rate and other reasonable actuarial

assumptions and methods, and the

amount is taken into account when required under paragraph (e) of this section,

then, under the nonduplication rule of

paragraph (a)(2)(iii) of this section, none

of the future payments attributable to that

amount will be subject to FICA tax when

paid.

(iii) Unreasonable rates of return—

(A) Account balance plans. This paragraph (d)(2)(iii)(A) applies to an account

balance plan under which the income

credited is based on neither a predetermined actual investment, within the

1999–9 I.R.B.

meaning of paragraph (d)(2)(i)(B) of this

section, nor a rate of interest that is reasonable, within the meaning of paragraph

(d)(2)(i)(C) of this section, as determined

by the Commissioner. In that event, the

employer must calculate the amount that

would be credited as income under a reasonable rate of interest, determine the excess (if any) of the amount credited under

the plan over the income that would be

credited using the reasonable rate of interest, and take that excess into account as

an additional amount deferred in the year

the income is credited. If the employer

fails to calculate the amount that would be

credited as income under a reasonable

rate of interest and to take the excess into

account as an additional amount deferred

in the year the income is credited, or the

employer otherwise fails to take the full

amount deferred into account, then the

excess of the income credited under the

plan over the income that would be credited using AFR will be treated as an

amount deferred in the year the income is

credited. For purposes of this section,

AFR means the mid-term applicable federal rate (as defined pursuant to section

1274(d)) for January 1 of the calendar

year, compounded annually. In addition,

pursuant to paragraph (d)(1)(ii) of this

section, the excess over the income that

would result from the application of AFR

and any income attributable to that excess

are subject to the general timing rule of

paragraph (a)(1) of this section.

(B) Nonaccount balance plans. If any

actuarial assumption or method used to

determine the amount taken into account

under a nonaccount balance plan is not

reasonable, as determined by the Commissioner, then the income attributable to

the amount taken into account is limited

to the income that would result from the

application of the AFR and, if applicable,

the applicable mortality table under section 417(e)(3)(A)(ii)(I) (the 417(e) mortality table), both determined as of the

January 1 of the calendar year in which

the amount was taken into account. In addition, paragraph (d)(1)(ii)(B) of this section applies and, in calculating the fraction described in paragraph (d)(1)(ii)(B)

of this section (at the date specified in

paragraph (d)(1)(ii)(B) of this section),

the numerator is the amount taken into account plus income (as limited under this

1999–9 I.R.B.

paragraph (d)(2)(iii)(B)), and the present

value in the denominator is determined

using the AFR, the 417(e) mortality table,

and reasonable assumptions as to cost of

living, each determined as of the time the

amount deferred was required to be taken

into account.

(3) Examples. This paragraph (d) is illustrated by the following examples:

Example 1. (i) In 2001, Employer M establishes

a nonqualified deferred compensation plan for Employee A under which all benefits are 100 percent

vested. In 2002, Employee A has $200,000 of current annual compensation from Employer M that is

subject to FICA tax. The amount deferred under the

plan on behalf of Employee A for 2002 is $20,000.

Thus, Employee A has total wages for FICA tax purposes of $220,000. Because Employee A has other

wages that exceed the OASDI wage base for 2002,

no additional OASDI tax is due as a result of the

$20,000 amount deferred. Because there is no wage

base limitation for the HI portion of FICA, additional HI tax liability results from the $20,000

amount deferred. However, Employer M fails to

pay the additional HI tax.

(ii) Under paragraph (d)(1)(i) of this section, an

amount deferred is considered taken into account as

wages for FICA tax purposes as of the date it is included in computing FICA wages, but only if any

additional FICA tax liability that results from inclusion of the amount deferred is actually paid. Because the HI tax resulting from the $20,000 amount

deferred was not paid, that amount deferred was not

taken into account within the meaning of paragraph

(d)(1) of this section. Thus, pursuant to paragraph

(d)(1)(ii) of this section, benefit payments attributable to the $20,000 amount deferred will be included

as wages in accordance with the general timing rule

of paragraph (a)(1) of this section and will be subject to the HI portion of FICA tax when actually or

constructively paid (and the OASDI portion of

FICA tax to the extent Employee A’s wages do not

exceed the OASDI wage base limitation).

Example 2. (i) The facts are the same as in Example 1, except that Employer M takes all actions

necessary to correct its failure to pay the additional

tax before the applicable period of limitations expires for 2002 (including payment of any applicable

interest and penalties).

(ii) Because the HI tax resulting from the

$20,000 amount deferred is paid, that amount deferred is considered taken into account for 2002.

Thus, in accordance with paragraph (a)(2)(iii) of this

section, neither the amount deferred nor the income

attributable to the amount taken into account will be

treated as wages for FICA tax purposes at any time

thereafter.

Example 3. (i) Employer N establishes a nonqualified deferred compensation plan under which

all benefits are 100 percent vested. Under the plan,

an employee’s account is credited with a contribution equal to 10 percent of salary on December 31 of

each year. The employee’s account balance also is

increased each December 31 by interest on the total

amounts credited to the employee’s account as of the

preceding December 31. The interest rate specified

19

in the plan results in income credits that are not

based on the rate of return on a predetermined actual

investment within the meaning of paragraph

(d)(2)(i)(B) of this section, and that are greater than

the income that would result from application of a

reasonable rate of interest within the meaning of

paragraph (d)(2)(i)(C) of this section. Employer N

fails to take into account an additional amount for

the excess of the income credited under the plan

over a reasonable rate of interest.

(ii) Pursuant to paragraph (d)(2)(iii)(A) of this

section, the income credits in excess of the income

that would be credited using the AFR are considered

additional amounts deferred in the year credited.

Example 4. (i) The facts are the same as in Example 3, except that the annual increase is based on

Moody’s Average Corporate Bond Yield.

(ii) Because this index reflects a reasonable rate

of interest, the income credited under the plan is

considered income attributable to the amount taken

into account within the meaning of paragraph

(d)(2)(i) of this section.

Example 5. (i) The facts are the same as in Example 3, except that the annual increase (or decrease) is based on the rate of total return on Employer N’s publicly traded common stock.

(ii) Because the income credited under the plan

does not exceed the actual rate of return on a predetermined actual investment, the income credited is

considered income attributable to the amount taken

into account within the meaning of paragraph

(d)(2)(i) of this section.

Example 6. (i) The facts are the same as in Example 3, except that the annual rate of increase or

decrease is equal to the greater of the rate of total return on a specified aggressive growth mutual fund or

the rate of return on a specified income-oriented mutual fund. Employer N fails to take into account an

additional amount for the excess of the income credited under the plan over a reasonable rate of interest.

(ii) Because the rate of increase or decrease is

based on the greater of two rates of returns, the increase is not based on the return on a predetermined

actual investment within the meaning of paragraph

(d)(2)(i)(B) of this section. Thus, if the rate of return

credited under the plan (i.e., the greater of the rates

of return of the two mutual funds) exceeds the income that would be credited using the AFR, the excess is not considered income attributable to the

amount taken into account within the meaning of

paragraph (d)(2)(i) of this section and, pursuant to

paragraph (d)(2)(iii)(A) of this section, is considered

an additional amount deferred.

Example 7. (i) The facts are the same as in Example 6, except that the annual increase or decrease

with respect to 50 percent of the employee’s account

is equal to the rate of total return on the specified aggressive growth mutual fund and the annual increase

or decrease with respect to the other 50 percent of

the employee’s account is equal to the increase or

decrease in the Standard & Poor’s 500 Index.

(ii) Because the increase or decrease attributable

to any portion of the employee’s account is based on

the return on a predetermined actual investment, the

entire increase or decrease is considered income attributable to the amount taken into account within

the meaning of paragraph (d)(2)(i) of this section.

Example 8. (i) The facts are the same as in Example 3, except that, pursuant to the terms of the

March 1, 1999

plan, before the beginning of each year, the board of

directors of Employer N designates a specific investment on which the following year’s annual increase or decrease will be based. The board is authorized to switch investments more frequently on a

prospective basis. Before the beginning of 2004, the

board designates Company A stock as the investment for 2004. Before the beginning of 2005, the

board designates Company B stock as the investment for 2005. At the end of 2005, the board determines that the return on Company B stock was

lower than expected and changes its designation for

2005 to the rate of return on Company C stock,

which had a higher return during 2005. Employer N

fails to take into account an additional amount for

the excess of the income credited under the plan

over a reasonable rate of interest.

(ii) The annual increase or decrease for 2004 is

based on the return of a predetermined actual investment. Although the annual increase or decrease for

2005 is based on an actual investment, the actual investment is not predetermined since it was not designated before the beginning of 2005. Pursuant to

paragraph (d)(2)(iii)(A) of this section, the excess of

the income credited under the plan over the income

determined using AFR is an additional amount deferred for 2005.

Example 9. (i) Employer O establishes a nonqualified deferred compensation plan for Employee

B. Under the plan, if Employee B survives until age

65, he has a fully vested right to receive a lump sum

payment at that age, equal to the product of 10 percent per year of service and Employee B’s highest

average annual compensation for any 3-year period,

but no benefits are payable in the event Employee B

dies prior to age 65. As permitted under paragraph

(e)(5) of this section, any amount deferred under the

plan for the calendar year is taken into account as

wages as of the last day of the year. As of December

31, 2002, Employee B has 25 years of service and

Employee B’s high 3-year average compensation is

$100,000 (the average for the years 2000 through

2002). As of December 31, 2002, Employee B has a

legally binding right to receive a payment at age 65

of $250,000 (10 percent x 25 years x $100,000). As

of December 31, 2003, Employee B is age 63, has

26 years of service, and has high 3-year average

compensation of $104,000. As of December 31,

2003, Employee B has a legally binding right to receive a payment at age 65 of $270,400 (10 percent x

26 years x $104,000). Thus, during 2003, Employee

B has earned a legally binding right to an additional

payment at age 65 of $20,400 ($270,400 $250,000). The assumptions that Employer O uses

to determine the amount deferred for 2003 are a 7

percent interest rate and the GAM 83 (male) mortality table, which, solely for purposes of this example,

are assumed to be reasonable actuarial assumptions.

The amount deferred for 2003 is the present value,

as of December 31, 2003, of the $20,400 payment,

which is $17,353. Employer O takes this amount

into account by including it in Employee B’s FICA

wages for 2003 and paying the additional FICA tax.

(ii) Under paragraph (d)(2)(ii) of this section, the

income attributable to the amount that was taken

into account is the increase in the present value of

the future payment due solely to the passage of time,

because the amount deferred was determined using

reasonable actuarial assumptions and methods. As

March 1, 1999

of the payment date at age 65, the present value of

the future payment earned during 2003 is $20,400.

The entire difference between the $20,400 and the

$17,353 amount deferred ($3,047) is the increase in

the present value of the future payment due solely to

the passage of time, and thus constitutes income attributable to the amount taken into account. Because the amount deferred was taken into account,

the entire payment of $20,400 represents either an

amount deferred that was previously taken into account ($17,353) or income attributable to that

amount ($3,047). Accordingly, pursuant to the

nonduplication rule of paragraph (a)(2)(iii) of this

section, none of the payment is included in wages.

Example 10. (i) The facts are the same as in Example 9, except that, instead of providing a lump

sum equal to 10 percent of average compensation

per year of service, the plan provides Employee B

with a fully vested right to receive a life annuity,

payable monthly beginning at age 65, equal to the

product of 2 percent for each year of service and

Employee B’s highest average annual compensation

for any 3-year period. The plan also provides that, if

Employee B dies before age 65, the present value of

the future payments will be paid to his or her beneficiary. As of December 31, 2002, Employee B has a

legally binding right to receive lifetime payments of

$50,000 (2 percent ⫻ 25 years ⫻ $100,000) per

year. As of December 31, 2003, Employee B has a

legally binding right to receive lifetime payments of

$54,080 (2 percent ⫻ 26 years ⫻ $104,000) per

year. Thus, during 2003, Employee B has earned a

legally binding right to additional lifetime payments

of $4,080 ($54,080 – $50,000) per year beginning at

age 65. The amount deferred for 2003 is $32,935,

which is the present value, as of December 31, 2003,

of these additional payments, determined using the

same actuarial assumptions and methods used in Example 9, except that there is no discount for the

probability of death prior to age 65. Employer O

takes this amount into account by including it in

Employee B’s FICA wages for 2003 and paying the

additional FICA tax.

(ii) Under paragraph (d)(2)(ii) of this section, the

income attributable to the amount that was taken

into account is the increase in the present value of

the future payments due solely to the passage of

time, because the amount deferred was determined

using reasonable actuarial assumptions and methods. Because the amount deferred was taken into

account, each annual payment of $4,080 attributable

to the amount deferred in 2003 represents either an

amount deferred that was previously taken into account or income attributable to that amount. Accordingly, pursuant to the nonduplication rule of

paragraph (a)(2)(iii) of this section, none of the payments are included in wages.

Example 11. (i) The facts are the same as in Example 10, except that no amount is taken into account for 2003 because Employer O fails to pay the

additional FICA tax.

(ii) Under paragraph (d)(1)(ii)(A) of this section,

if an amount deferred for a period is not taken into

account, then the benefit payments attributable to

that amount deferred are included as wages in accordance with the general timing rule of paragraph

(a)(1) of this section. In this case, assuming that the

amounts deferred in other periods were taken into

account, $4,080 of each year’s total benefit pay-

20

ments will be included in wages when actually or

constructively paid, in accordance with the general

timing rule.

Example 12. (i) Employer P establishes an account balance plan on January 1, 2002, under which

all benefits are 100 percent vested. The plan provides that amounts deferred will be credited annually with interest beginning in 2002 at a rate that is

greater than a reasonable rate of interest. Employer

P treats the excess over the applicable interest rate in

section 417(e) as an additional amount deferred for

2002 and in each year thereafter, and takes the additional amount into account by including it in FICA

wages and paying the additional FICA tax for the

year.

(ii) Under the nonduplication rule in paragraph

(a)(2)(iii) of this section, the benefits paid under the

plan will be excluded from wages for FICA tax purposes.

Example 13. (i) The facts are the same as in Example 9, except that, in determining the amount deferred, Employer O uses a 15 percent interest rate,

which, solely for purposes of this example, is assumed not to be a reasonable interest rate. Employer

O determines that the amount deferred for 2003 is

the present value, as of December 31, 2003, of the

$20,400 payment, which is $15,023. Employer O

includes $15,023 in wages and pays any resulting

FICA tax. Solely for purposes of this example, it is

assumed that the AFR as of January 1, 2003, is 7

percent.

(ii) Under paragraph (d)(2)(iii)(B) of this section, if any actuarial assumption or method is not

reasonable, then the income attributable to the

amount taken into account is limited to the income

that would result from application of the AFR and, if

applicable, the 417(e) mortality table. Because the

15 percent interest rate is unreasonable, the income

attributable to the amount taken into account is limited to the income that would result from using a 7

percent interest rate and, in this case, an increase for

survivorship using the 417(e) mortality table. Under

these assumptions, the income attributable to the

$15,023 amount taken into account for 2003 is

$1,199 in 2004 and $1,313 in 2005. Under paragraph (d)(1)(ii) of this section, the sum of these

amounts ($17,535) is excluded from Employee B’s

wages pursuant to the nonduplication rule of paragraph (a)(2)(iii) of this section, and the balance of

the payment ($2,865) is subject to the general timing

rule of paragraph (a)(1) of this section and, thus, is

included in Employee B’s wages when actually or

constructively paid.

(iii) The same result can be reached by multiplying the attributable benefit payments by a fraction,

the numerator of which is the amount taken into account, and the denominator of which is the amount

deferred that would have been taken into account at

the same time had the amount deferred been calculated using the AFR and the 417(e) mortality table.

These assumptions are determined as of January 1 of

the calendar year in which the amount was taken

into account. In this Example 13, the fraction would

be $15,023 divided by $17,478, which equals

.85954. The $20,400 payment is multiplied by this

fraction to determine the amount of the payment that

is excluded from wages pursuant to the nonduplication rule of paragraph (a)(2)(iii) of this section.

Thus, $17,535 ($20,400 ⫻ .85954) is excluded from

1999–9 I.R.B.

wages and the balance ($2,865) is subject to FICA

tax when actually or constructively paid.

Example 14. (i) The facts are the same as Example 10, except that Employer O calculates the

amount deferred for 2003 as $18,252 and takes that

amount into account by including that amount in

wages and paying any resulting FICA tax. The assumptions that Employer O uses to determine the

amount deferred are a 15 percent interest rate and,

for the period after commencement of benefit payments, the GAM 83 (male) mortality table. The 15

percent interest rate is assumed, solely for purposes

of this example, not to be a reasonable actuarial assumption. Solely for purposes of this example, it is

assumed that the AFR as of January 1, 2003, is 7

percent.

(ii) Under paragraph (d)(2)(iii)(B) of this section, if any actuarial assumption or method used is

not reasonable, then the income attributable to the

amount taken into account is limited to the income

that would result from application of the AFR and, if

applicable, the 417(e) mortality table. Because the

15 percent interest rate is not reasonable, the income

attributable to the amount taken into account is

equal to the income that would result from using a 7

percent interest rate and the amount taken into account is treated as if it represented a portion of the

amount deferred for purposes of applying paragraph

(d)(1)(ii)(B) of this section. Under these assumptions, the income attributable to the $18,252 amount

taken into account for 2003 is $1,278 in 2004 and

$1,367 in 2005. Under paragraph (d)(1)(ii)(B) of

this section, the portion of each benefit payment attributable to the amount deferred that is excluded

from wages pursuant to the nonduplication rule of

paragraph (a)(2)(iii) of this section is determined at

benefit commencement by multiplying each benefit

payment by a fraction, the numerator of which is the

amount taken into account (plus income attributable

to that amount) and the denominator of which is the

present value of future benefit payments attributable

to the amount deferred. Because the interest rate assumption is not reasonable, not only is the income

limited to the application of the AFR, but the present

value in the denominator must be determined using

the AFR and (if applicable) the 417(e) mortality

table. In this case, the present value is $40,283 and

thus the fraction is $20,897 divided by $40,283, or

.51875. Thus, $2,116 (.51875 ⫻ $4,080) of each

year’s benefit payment is excluded from wages and

the balance of each year’s payment ($1,964) is subject to the general timing rule of paragraph (a)(1) of

this section and is included in wages when actually

or constructively paid.

(iii) The same result can be reached by multiplying the attributable benefit payments by a fraction

the numerator of which is the amount taken into account, and the denominator of which is the amount

deferred that would have been taken into account at

the same time had the amount deferred been calculated using the AFR and the 417(e) mortality table.

These assumptions are determined as of January 1 of

the calendar year in which the amount was taken

into account. In this Example 14, the fraction would

be $18,252 divided by $35,185, which equals

.51875. The $4,080 annual payment is multiplied by

this fraction to determine the amount of the payment

that is excluded from wages pursuant to the nonduplication rule of paragraph (a)(2)(iii) of this section.

Thus, $2,116 ($4,080 ⫻ .51875) is excluded from

1999–9 I.R.B.

wages and the balance ($1,964) is subject to FICA

tax when actually or constructively paid.

(e) Time amounts deferred are required to be taken into account—(1) In

general. Except as otherwise provided in

this paragraph (e), an amount deferred

under a nonqualified deferred compensation plan must be taken into account as

wages for FICA tax purposes as of the

later of the date on which services creating the right to the amount deferred are

performed (within the meaning of paragraph (e)(2) of this section) or the date on

which the right to the amount deferred is

no longer subject to a substantial risk of

forfeiture (within the meaning of paragraph (e)(3) of this section). However, in

no event may any amount deferred under

a nonqualified deferred compensation

plan be taken into account as wages for

FICA tax purposes prior to the establishment of the plan providing for the amount

deferred (or, if later, the plan amendment

providing for the amount deferred).

Therefore, if an amount is deferred pursuant to the terms of a legally binding

agreement that is not put in writing until

after the amount would otherwise be

taken into account under this paragraph

(e)(1), the amount deferred (including any

attributable income) must be taken into

account as wages for FICA tax purposes

as of the date the material terms of the

plan are put in writing.

(2) Services creating the right to an

amount deferred. For purposes of this

section, services creating the right to an

amount deferred under a nonqualified deferred compensation plan are considered

to be performed as of the date on which,

under the terms of the plan and all the

facts and circumstances, the employee

has performed all of the services necessary to obtain a legally binding right (as

described in paragraph (b)(3)(i) of this

section) to the amount deferred.

(3) Substantial risk of forfeiture. For

purposes of this section, the determination of whether a substantial risk of forfeiture exists must be made in accordance

with the principles of section 83 and the

regulations thereunder.

(4) Amount deferred that is not reasonably ascertainable under a nonaccount

balance plan—(i) In general—(A) Date

required to be taken into account.

Notwithstanding any other provision of

this paragraph (e), an amount deferred

21

under a nonaccount balance plan is not required to be taken into account as wages

under the special timing rule of paragraph

(a)(2) of this section until the first date on

which all of the amount deferred is reasonably ascertainable (the resolution

date). In this case, the amount required to

be taken into account as of the resolution

date is determined in accordance with

paragraph (c)(2) of this section.

(B) Definition of reasonably ascertainable. For purposes of this paragraph

(e)(4), an amount deferred is considered

reasonably ascertainable on the first date

on which the amount, form, and commencement date of the benefit payments

attributable to the amount deferred are

known, and the only actuarial or other assumptions regarding future events or circumstances needed to determine the

amount deferred are interest and mortality. For this purpose, the form and commencement date of the benefit payments

attributable to the amount deferred are

treated as known if the requirements of

paragraph (c)(2)(iii)(B) of this section

(under which payments are treated as

being made in the normal form of benefit

commencing at normal commencement

date) are satisfied. In addition, an amount

deferred does not fail to be reasonably ascertainable on a date merely because the

exact amount of the benefit payable cannot readily be calculated on that date or

merely because the exact amount of the

benefit payable depends on future

changes in the cost of living. If the exact

amount of the benefit payable depends on

future changes in the cost of living, the

amount deferred must be determined

using a reasonable assumption as to the

future changes in the cost of living. For

example, the amount of a benefit is

treated as known even if the exact amount

of the benefit payable cannot be determined until future changes in the cost of

living are reflected in the section 415 limitation on benefits payable under a qualified retirement plan.

(ii) Earlier inclusion permitted—(A)

In general. With respect to an amount deferred that is not reasonably ascertainable,

an employer may choose to take an

amount into account at any date or dates

(an early inclusion date or dates) before

the resolution date (but not before the date

described in paragraph (e)(1) of this section with respect to the amount deferred).

March 1, 1999

Thus, for example, with respect to an

amount deferred under a nonaccount balance plan that is not reasonably ascertainable because the plan permits employees

to receive their benefits in more than one

form or commencing at more than one

date (and the requirements of paragraph

(c)(2)(iii) of this section are not satisfied),

an employer may choose to take an

amount into account on the date otherwise

described in paragraph (e)(1) of this section before the form and commencement

date are selected (based on assumptions

as to the form and commencement date

for the benefit payments) or may choose

to wait until the form and commencement

date of the benefit payments are selected.

An employer that chooses to take an

amount into account at an early inclusion

date under this paragraph (e)(4)(ii) for an

employee under a plan is not required

until the resolution date to identify the period to which the amount taken into account relates.

(B) True-up at resolution date. If, with

respect to an amount deferred for a period, an employer chooses to take an

amount into account as of an early inclusion date in accordance with this paragraph (e)(4)(ii) and the benefit payments

attributable to the amount deferred exceed

the benefit payments that are actuarially

equivalent to the amount taken into account at the early inclusion date (payable

in the same form and using the same commencement date as the benefit payments

attributable to the amount deferred), then

the present value of the difference in the

benefits, determined in accordance with

paragraph (c)(2) of this section, must be

taken into account as of the resolution

date.

(C) Actuarial assumptions. For purposes of determining the benefits that are

actuarially equivalent to the amount taken

into account as of an early inclusion date,

the amount taken into account is converted to an actuarially equivalent benefit

payable in the same form and commencing on the same date as the actual benefit

payments attributable to the amount deferred using an interest rate, and, if applicable, mortality and cost-of-living assumptions, that were reasonable as of the

early inclusion date. Thus, with respect to

an amount deferred for a period, the

amount required to be taken into account

as of the resolution date is the present

March 1, 1999

value (determined using an interest rate,

and, if applicable, mortality and cost-ofliving assumptions, that are reasonable as

of the resolution date) of the excess, if

any, of the future benefit payments attributable to the amount deferred over the future benefits payable in the same form

and commencing on the same date that

are actuarially equivalent to the portion of

the amount deferred that was taken into

account as of the early inclusion date

(where actuarial equivalence is determined using an interest rate, and, if applicable, mortality and cost-of-living assumptions, that were reasonable as of the

early inclusion date).

(D) Allocation rules for amounts deferred over more than one period—(1)

General rule. The rules of this paragraph

(e)(4)(ii)(D) apply for purposes of determining whether an amount has been included under this paragraph (e)(4) before

the earliest date permitted under paragraph (e)(1) of this section.

(2) Future compensation increases.

Increases in an employee’s compensation

after the early inclusion date must be disregarded.

(3) Early retirement subsidies. An

early retirement subsidy that the employee ultimately receives may be taken

into account at an early inclusion date if

the employee would have a legally binding right to the subsidy at the early inclusion date but for any condition that the

employee continue to render services.

Accordingly, an employer may take into

account at an early inclusion date any

early retirement subsidy that the employee ultimately receives to the extent

that elimination or reduction of that subsidy would violate section 411(d)(6)(B)(i)

if that section applied to the plan.

(4) Allocation with respect to offsets.

In any case in which a series of amounts

are deferred over more than one period,

the amounts deferred are not reasonably

ascertainable until a single resolution date

and the benefit payments attributable to

the entire series are determined under a

formula that provides a gross benefit that

in the aggregate is subject to an objective

reduction for future events under the

terms of the plan, such as an offset for the

aggregate benefits payable under a plan

qualified under section 401(a), the attribution of benefit payments to the amount

deferred in each period is determined

22

under the rules of this paragraph (e)(4)ii)(D)(4). In a case described in the preceding sentence, the benefit payments made

as a result of the series of amounts deferred may be treated as attributable to the

amount deferred as of the earliest period

in which the employee obtained a legally

binding right to a benefit under the plan

equal to the excess, if any, of the amount

of the gross benefit attributable to that period (determined at the resolution date),

over the amount of the reduction determined as of the end of that period. Thus,

for example, if an employee obtains a

legally binding right in each of several

years to benefit payments from a nonqualified deferred compensation plan that provides for a specified gross benefit for the

years to be offset by the benefits payable

under a qualified plan, the amount deferred in the first year may be treated as

equal to the gross benefit for the year, reduced by the offset applicable at the end

of the year (even if the offset increases

after the end of the year).

(E) Treatment of benefits paid before

the resolution date. If a benefit payment

is attributable to an amount deferred that

is not reasonably ascertainable at the time

of payment (or is paid before the date selected under paragraph (e)(5) of this section), and the employer has previously

taken an amount into account with respect

to the amount deferred under the early inclusion rule of this paragraph (e)(4), then,

in lieu of the pro rata rule provided in

paragraph (d)(1)(ii)(B) of this section, a

first-in-first-out rule applies in determining the portion of the benefit payment attributable to the amount taken into account. Under this first-in-first-out rule,

the benefit payment is compared to the

sum of the amount taken into account at

the early inclusion date and the income attributable to that amount. If the benefit

payment equals or exceeds the amount

taken into account at the early inclusion

date and the income attributable to that

amount as of the date of the benefit payment, the benefit payment is included as

wages under the general timing rule of

paragraph (a)(1) of this section to the extent of any excess, and the amount taken

into account at the early inclusion date

(and income attributable to that amount)

is disregarded thereafter with respect to

the amount deferred. If the amount taken

into account at the early inclusion date

1999–9 I.R.B.

and the income attributable to that amount

as of the date of the benefit payment exceeds the benefit payment, the benefit

payment is not included as wages under

the general timing rule of paragraph (a)(1)

of this section and, in determining the

amount that must be taken into account

thereafter with respect to the amount deferred, the amount taken into account at

the early inclusion date, plus attributable

income as of the date of the benefit payment, is reduced by the amount of the

benefit payment, and only the excess plus

future income attributable to the excess

(credited using assumptions that were reasonable on the early inclusion date) is

taken into consideration. If amounts have

been taken into account at more than one

early inclusion date, this paragraph

(e)(4)(ii)(E) applies on a first-in-first-out

basis, beginning with the amount taken

into account at the earliest early inclusion

date (including income attributable

thereto).

(5) Rule of administrative convenience. For purposes of this section, an

employer may treat an amount deferred as

required to be taken into account under

this paragraph (e) on any date that is later

than, but within the same calendar year

as, the actual date on which the amount

deferred is otherwise required to be taken

into account under this paragraph (e). For

example, if services creating the right to

an amount deferred are considered performed under paragraph (e)(2) of this section periodically throughout a year, the

employer may nevertheless treat the services creating the right to that amount deferred as performed on December 31 of

that year. If an employer uses the rule of

administrative convenience described in

this paragraph (e)(5), any determination

of whether the income attributable to an

amount deferred under an account balance plan is based on a reasonable rate of

interest or whether the actuarial assumptions used to determine the present value

of an amount deferred in a nonaccount

balance plan are reasonable will be made

as of the date the employer selects to take

the amount into account.

(6) Portions of an amount deferred required to be taken into account on more

than one date. If different portions of an

amount deferred are required to be taken

into account under paragraph (e)(1) of

this section on more than one date (e.g.,

1999–9 I.R.B.

on account of a graded vesting schedule),

then each such portion is considered a

separate amount deferred for purposes of

this section.

(7) Examples. This paragraph (e) is illustrated by the following examples:

Example 1. (i) Employer M establishes a nonqualified deferred compensation plan for Employee

A on November 1, 2005. Under the plan, which is

an account balance plan, Employee A obtains a

legally binding right on the last day of each calendar

year (if Employee A is employed on that date) to be

credited with a principal amount equal to 5 percent

of compensation for the year. In addition, a reasonable rate of interest is credited quarterly. Employee

A’s account balance is nonforfeitable and is payable

upon Employee A’s termination of employment. For

2006, the principal amount credited to Employee A

under the plan (which, in this case, is also the

amount deferred within the meaning of paragraph

(c) of this section) is $25,000.

(ii) Under paragraph (e)(2) of this section, the

services creating the right to the $25,000 amount deferred are considered performed as of December 31,

2006, the date on which Employee A has performed

all of the services necessary to obtain a legally binding right to the amount deferred. Thus, in accordance with paragraph (e)(1) of this section, the

$25,000 amount deferred must be taken into account

as of December 31, 2006, which is the later of the

date on which services creating the right to the

amount deferred are performed or the date on which

the right to the amount deferred is no longer subject

to a substantial risk of forfeiture.

Example 2. (i) The facts are the same as in Example 1, except that the principal amount credited

under the plan on the last day of each year (and attributable interest) is forfeited if the employee terminates employment within five years of that date.

(ii) Under paragraph (e)(3) of this section, the

determination of whether the right to an amount deferred is subject to a substantial risk of forfeiture is

made in accordance with the principles of section

83. Under §1.83–3(c) of this chapter, a substantial

risk of forfeiture generally exists where rights in

property that are transferred are conditioned, directly or indirectly, upon the future performance of

substantial services. Because Employee A’s right to

receive the $25,000 principal amount (and attributable interest) is conditioned on the performance of

services for five years, a substantial risk of forfeiture

exists with respect to that amount deferred until December 31, 2011.

(iii) December 31, 2011, is the later of the date

on which services creating the right to the amount

deferred are performed or the date on which the

right to the amount deferred is no longer subject to a

substantial risk of forfeiture. Thus, in accordance

with paragraph (e)(1) of this section, the amount deferred (which, pursuant to paragraph (c)(1) of this

section, is equal to the $25,000 principal amount

credited to Employee A’s account on December 31,

2006, plus the interest credited with respect to that

principal amount through December 31, 2011) must

be taken into account as of December 31, 2011.

Example 3. (i) The facts are the same as in Example 2, except that the principal amount credited

under the plan on the last day of each year (and at-

23

tributable interest) becomes nonforfeitable according to a graded vesting schedule under which 20 percent is vested as of December 31, 2007; 40 percent

is vested as of December 31, 2008; 60 percent is

vested as of December 31, 2009; 80 percent is

vested as of December 31, 2010; and 100 percent is

vested as of December 31, 2011. Because these

dates are later than the date on which the services

creating the right to the amount deferred are considered performed (December 31, 2006), the amount

deferred is required to be taken into account as of

these dates that fall in five different years.

(ii) Paragraph (e)(6) of this section provides that,

if different portions of an amount deferred are required to be taken into account under paragraph

(e)(1) of this section on more than one date, then

each such portion is considered a separate amount

deferred for purposes of this section. Thus, $5,000 of

the principal amount, plus interest credited through

December 31, 2007, is taken into account as an

amount deferred on December 31, 2007; $5,000 of

the principal amount, plus interest credited through

December 31, 2008, is taken into account as a separate amount deferred on December 31, 2008; etc.

Example 4. (i) On November 21, 2001, Employer N establishes a nonqualified deferred compensation plan under which all benefits are 100 percent vested. The plan provides for Employee B

(who is age 45) to receive a lump sum benefit of

$500,000 at age 65. This benefit will be forfeited if

Employee B dies before age 65.

(ii) Because the amount, form, and commencement date of the benefit are known, and the only assumptions needed to determine the amount deferred

are interest and mortality, the amount deferred is

reasonably ascertainable within the meaning of

paragraph (e)(4)(i) of this section on November 21,

2001.

Example 5 (i) The facts are the same as in Example 4, except that plan provides that the lump sum

will be paid at the later of age 65 or termination of

employment and provides that the $500,000 payable

to Employee B is increased by 5 percent per year for

each year that payment is deferred beyond age 65.

(ii) Because the commencement date of the benefit payment is contingent on when Employee B terminates employment, the commencement date of the

benefit payment is not known. Thus, the amount deferred is not reasonably ascertainable within the

meaning of paragraph (e)(4)(i) of this section, unless

the plan satisfies the requirements of paragraph

(c)(2)(iii)(B) of this section. Because the fixed 5

percent factor may not be reasonable at the time

benefit payments commence (i.e., 5 percent might

be higher or lower than a reasonable interest rate

when payments commence), the plan fails to satisfy

paragraph (c)(2)(iii)(B) of this section and accordingly the amount deferred is not reasonably ascertainable until termination of employment,

Example 6. (i) The facts are the same as in Example 4, except that the $500,000 is payable to Employee B at the later of age 55 or termination of employment.

(ii) Because the commencement date of the benefit payment is contingent on when Employee B terminates employment, the commencement date of the

benefit payment is not known. Thus, the amount deferred is not reasonably ascertainable until termination of employment.

March 1, 1999

Example 7. (i) The facts are the same as in Example 4, except that Employee B may elect to take

the benefit in the form of a life annuity of $50,000

per year (commencing at age 65).

(ii) Because the plan permits employees to elect

to receive benefits in more than one form and the alternative forms may not have the same value when

Employee B makes his election, the plan fails to satisfy the requirements of paragraph (c)(2)(iii)(B) of

this section until a form of benefit is selected. Thus,

the amount deferred is not reasonably ascertainable

until then.

Example 8. (i) Employer O establishes a nonqualified deferred compensation plan. The plan is a

supplemental executive retirement plan (SERP) that

provides Employee C with a fully vested right to receive a pension, in the form of a life annuity payable

monthly, beginning at age 65, equal to the excess of

3 percent of Employee C’s final 3-year average pay

for each year of participation up to 15 years, over the

amount payable to Employee C from Employer O’s

qualified pension plan. The amount payable under

the qualified pension plan is a life annuity payable

monthly, beginning at age 65, equal to 1.5 percent of

final 3-year average pay for each year of employment, excluding pay in excess of the section

401(a)(17) compensation limit. No benefits are

payable under the SERP if Employee C dies before

age 65. Employee C becomes a participant in the

SERP on January 1, 2001, at age 44. The amount

deferred under the SERP for any year is not reasonably ascertainable prior to termination of employment because the amount of the benefit is not known

and the determination of the amount deferred requires assumptions other than interest and mortality

(e.g., an assumption as to Employee C’s average pay

for the final three years of employment). As permitted by paragraph (e)(4)(i) of this section, Employer

O chooses not to take any amount into account for

any year before the resolution date. Employee C terminates employment on December 31, 2018 when

he is age 62.

(ii) As of the date Employee C terminates employment, the amount of the benefit is known and

the only actuarial or other assumptions needed to determine the amount deferred are an interest rate assumption and a mortality assumption. At that time,

the amount deferred in each past year becomes reasonably ascertainable, and Employer O is able to determine that during 2001 Employee C earned a

legally binding right to a life annuity of $4,000 per

year beginning in 2021 when Employee C is age 65.

Employer O determines the present value of Employee C’s future benefit payments under the SERP

as of this resolution date (December 31, 2018),

using a 7 percent interest rate and the UP-84 mortality table, which, solely for purposes of this example,

are assumed to be reasonable actuarial assumptions

for December 31, 2018. The special timing rule will

be satisfied if the resulting present value, $26,950, is

taken into account on that date in accordance with

paragraph (d)(1) of this section.

Example 9. (i) The facts are the same as in Example 8, except that the plan provides that Employee C may choose to receive early retirement

benefits on an unreduced basis at any time after age

60 if Employee C has completed 15 years of service

by that date.

March 1, 1999

(ii) As of the date Employee C terminates employment, the amount of the benefit is known and

the only actuarial or other assumptions needed to determine the amount deferred are an interest rate assumption and a mortality assumption. At that time,

the amount deferred in each past year becomes reasonably ascertainable, and Employer O is able to determine that during 2001 Employee C earned a

legally binding right to a life annuity of $4,000 per

year beginning on December 31, 2018 when Employee C is age 62. Employer O determines the present value of Employee C’s future benefit payments

under the SERP as of this resolution date (December

31, 2018), using a 7 percent interest rate and the UP84 mortality table, which, solely for purposes of this

example, are assumed to be reasonable actuarial assumptions for December 31, 2018. The special timing rule will be satisfied if the resulting present

value, $37,576, is taken into account on that date in

accordance with paragraph (d)(1) of this section.

Example 10. (i) The facts are the same as in Example 9, except that, as permitted under paragraph

(e)(4)(ii) of this section, Employer O chooses to take

an amount into account before the amount deferred

for 2001 is reasonably ascertainable. The amount

that Employer O takes into account on December

31, 2001, is $13,043 (the present value of a life annuity of $4,000 per year, payable at age 62, using a 6

percent interest rate and the UP-84 mortality table).

Employer O does not take any other amount into account before the resolution date.

(ii) In accordance with paragraph (e)(4)(ii)(B) of

this section, Employer O must determine any additional amount required to be taken into account in

2018. If the $4,000 payable in the form of a life annuity beginning at age 62 exceeds the life annuity

which is actuarially equivalent to the $13,043 previously taken into account, the present value of the excess must be taken into account. In this Example 10,

the $13,043 previously taken into account is actuarially equivalent to a $4,000 annuity commencing at

age 62 using a 6 percent interest rate and the UP-84

mortality table ( which, solely for purposes of this

example, are assumed to be reasonable actuarial assumptions for December 31, 2001). Accordingly, no

additional amount need be taken into account in

2018, regardless of any changes in market rates of

interest between 2001 and 2018.

Example 11. (i) The facts are the same as in Example 9, except that, as permitted under paragraph

(e)(4)(ii) of this section, Employer O chooses to take

an amount into account before the amount deferred

for 2001 is reasonably ascertainable. The amount

that Employer O takes into account on December

31, 2001, is $9,569 (the present value of a life annuity of $4,000 per year, payable at age 65, using a 6

percent interest rate and the UP-84 mortality table).

Employer O does not take any other amount into account before the resolution date.

(ii) In accordance with pa

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