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CCH® PENSION AND BENEFITS — 9/18/08

IRS provides examples excluding recurring part-year compensation in 457 and 409A deferred comp rules

In anticipation of forthcoming Code Sec. 457 regulations, the IRS has provided examples of recurring part-year compensation that would be excluded from consideration as deferred compensation under Code Sec. 457 and Code Sec. 409A . In July 2008, the IRS released Notice 2008-62 (see CCH Pension Plan Guide ¶17,139X ), which provided relief to schools providing part-year recurring compensation from consideration as 457 and 409A compensation. The possibility of exceeding the 457 and 409A compensation limits occurs when nine or ten months of compensation is paid over a 12-month period and extends into another tax year.

One example is based on a salary of $186,000 earned in a 10-month period but paid over a 12-month period. It provides for five months of income in one year and five months of income in the following year. The example demonstrates that the amount of the deferred compensation does not exceed the applicable deferred compensation limit ($15,500 for 2008). Therefore, if payments are made to the employee by the end of the 13th month after payments begin, the $186,000 salary is not deferred compensation under Code Sec. 457 and Code Sec. 409A . Notice 2008-62 provides that such an arrangement would not result in deferred compensation as long as the employee did not earn more than $186,000 for the school year.

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