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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 begi

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A3279d75790128b29. Public record. Not legal advice.