Today, the IRS issued proposed rules on section 409A nonqualified deferred compensation plans (REG-123854-12) and section 457 state and local government or other tax exempt organization deferred compensation plans (REG-147196-07). The proposed rules for nonqualified deferred compensation plans “clarify or modify” final rules issued under the same section. The IRS also withdrew a specific provision from proposed rules issued in 2008 that dealt with calculating amounts includible in income under section 409A and will propose a revised version of the provision.

The proposed rules under section 457 set out how to determine when amounts deferred under these plans are includible in income and the amounts that should be included. The proposed regulations would affect participants, beneficiaries, sponsors, and administrators of certain plans sponsored by tax-exempt organizations that provide for a deferral of compensation. Generally, the proposed regulations apply to compensation deferred under a plan for calendar years beginning after the date the final regulations are adopted, including deferred amounts to which the legally binding right arose during prior calendar years.

The IRS has requested comments on all aspects of the proposed rules, including whether special transition rules are needed for plans established before the applicability dates of the regulations. A public hearing is scheduled for October 18.