Td 8814

4542

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 31 and 602
[TD 8814]
RIN 1545–AT27

Federal Insurance Contributions Act
(FICA) Taxation of Amounts Under
Employee Benefit Plans
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

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).
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 for-profit 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 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 FR 2194), providing
guidance related to the Federal
Insurance Contributions Act (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
FR 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

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
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 constitute 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.
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.

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 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 bases benefits
on an account balance but permits

4543

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 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

4544

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

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 rate 2 (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 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.
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.

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
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 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

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
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 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 true-up 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 annuity 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

4545

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.
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

4546

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

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
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
appreciation 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 periods 3 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.
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
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 open.

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.
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.
List of Subjects
26 CFR Part 31
Employment taxes, Income taxes,
Penalties, Pensions, Railroad retirement,

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
Reporting and recordkeeping
requirements, Social security,
Unemployment compensation.
26 CFR Part 602
Reporting and recordkeeping
requirements.
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 compensation 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 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

4547

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 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

4548

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

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
determined 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 addition, 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) 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

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
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
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 connection 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—
(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

4549

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, cost-ofliving 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
deferred 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

4550

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

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).
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.
(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

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
value of the annuity benefit commencing at
age 65, and the present value of the full
reserve death benefit, with both determined
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 retirement 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.

4551

(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 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

4552

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

balance 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 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—
(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
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

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
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 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 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

4553

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:

4554

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

Annual gross
amount

Year

2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

..............................................................................................................................................
..............................................................................................................................................
..............................................................................................................................................
..............................................................................................................................................
..............................................................................................................................................
..............................................................................................................................................
..............................................................................................................................................
..............................................................................................................................................
..............................................................................................................................................
..............................................................................................................................................
..............................................................................................................................................
and thereafter ......................................................................................................................

(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 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 example, 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 amount that was taken into
account (plus income attributable to that

$200,000
200,000
200,000
200,000
200,000
200,000
200,000
200,000
200,000
200,000
200,000
200,000

Assumed
qualified plan
annual payment (based
on cost of
living)
$145,000
150,000
155,000
160,000
165,000
170,000
175,000
180,000
185,000
190,000
195,000
205,000 or
greater

Net annual
payment
under nonqualified plan
$55,000
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0

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

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
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 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
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

4555

predetermined actual investment,
within the 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 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

4556

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

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 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 plan, before the beginning of each year,
the board of directors of Employer N
designates a specific investment on which
the following year’s annual increase or
decrease will be based. The board is
authorized to switch investments more
frequently on a prospective basis. Before the
beginning of 2004, the board designates
Company A stock as the investment for 2004.
Before the beginning of 2005, the board
designates Company B stock as the
investment for 2005. At the end of 2005, the
board determines that the return on Company
B stock was lower than expected and changes
its designation for 2005 to the rate of return
on Company C stock, which had a higher
return during 2005. Employer N fails to take
into account an additional amount for the
excess of the income credited under the plan
over a reasonable rate of interest.
(ii) The annual increase or decrease for
2004 is based on the return of a
predetermined actual investment. Although
the annual increase or decrease for 2005 is
based on an actual investment, the actual
investment is not predetermined since it was
not designated before the beginning of 2005.
Pursuant to paragraph (d)(2)(iii)(A) of this
section, the excess of the income credited
under the plan over the income determined
using AFR is an additional amount deferred
for 2005.
Example 9. (i) Employer O establishes a
nonqualified deferred compensation plan for
Employee B. Under the plan, if Employee B
survives until age 65, he has a fully vested
right to receive a lump sum payment at that
age, equal to the product of 10 percent per
year of service and Employee B’s highest
average annual compensation for any 3-year
period, but no benefits are payable in the
event Employee B dies prior to age 65. As
permitted under paragraph (e)(5) of this
section, any amount deferred under the plan
for the calendar year is taken into account as
wages as of the last day of the year. As of
December 31, 2002, Employee B has 25 years
of service and Employee B’s high 3-year
average compensation is $100,000 (the
average for the years 2000 through 2002). As
of December 31, 2002, Employee B has a
legally binding right to receive a payment at
age 65 of $250,000 (10 percent × 25 years ×
$100,000). As of December 31, 2003,
Employee B is age 63, has 26 years of service,
and has high 3-year average compensation of
$104,000. As of December 31, 2003,
Employee B has a legally binding right to
receive a payment at age 65 of $270,400 (10
percent × 26 years × $104,000). Thus, during
2003, Employee B has earned a legally
binding right to an additional payment at age
65 of $20,400 ($270,400¥$250,000). The
assumptions that Employer O uses to
determine the amount deferred for 2003 are
a 7 percent interest rate and the GAM 83
(male) mortality table, which, solely for
purposes of this example, are assumed to be
reasonable actuarial assumptions. The
amount deferred for 2003 is the present
value, as of December 31, 2003, of the
$20,400 payment, which is $17,353.
Employer O takes this amount into account
by including it in Employee B’s FICA wages
for 2003 and paying the additional FICA tax.

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
(ii) Under paragraph (d)(2)(ii) of this
section, the income attributable to the
amount that was taken into account is the
increase in the present value of the future
payment due solely to the passage of time,
because the amount deferred was determined
using reasonable actuarial assumptions and
methods. As of the payment date at age 65,
the present value of the future payment
earned during 2003 is $20,400. The entire
difference between the $20,400 and the
$17,353 amount deferred ($3,047) is the
increase in the present value of the future
payment due solely to the passage of time,
and thus constitutes income attributable to
the amount taken into account. Because the
amount deferred was taken into account, the
entire payment of $20,400 represents either
an amount deferred that was previously
taken into account ($17,353) or income
attributable to that amount ($3,047).
Accordingly, pursuant to the nonduplication
rule of paragraph (a)(2)(iii) of this section,
none of the payment is included in wages.
Example 10. (i) The facts are the same as
in Example 9, except that, instead of
providing a lump sum equal to 10 percent of
average compensation per year of service, the
plan provides Employee B with a fully vested
right to receive a life annuity, payable
monthly beginning at age 65, equal to the
product of 2 percent for each year of service
and Employee B’s highest average annual
compensation for any 3-year period. The plan
also provides that, if Employee B dies before
age 65, the present value of the future
payments will be paid to his or her
beneficiary. As of December 31, 2002,
Employee B has a legally binding right to
receive lifetime payments of $50,000 (2
percent × 25 years × $100,000) per year. As
of December 31, 2003, Employee B has a
legally binding right to receive lifetime
payments of $54,080 (2 percent × 26 years ×
$104,000) per year. Thus, during 2003,
Employee B has earned a legally binding
right to additional lifetime payments of
$4,080 ($54,080¥$50,000) per year
beginning at age 65. The amount deferred for
2003 is $32,935, which is the present value,
as of December 31, 2003, of these additional
payments, determined using the same
actuarial assumptions and methods used in
Example 9, except that there is no discount
for the probability of death prior to age 65.
Employer O takes this amount into account
by including it in Employee B’s FICA wages
for 2003 and paying the additional FICA tax.
(ii) Under paragraph (d)(2)(ii) of this
section, the income attributable to the
amount that was taken into account is the
increase in the present value of the future
payments due solely to the passage of time,
because the amount deferred was determined
using reasonable actuarial assumptions and
methods. Because the amount deferred was
taken into account, each annual payment of
$4,080 attributable to the amount deferred in
2003 represents either an amount deferred
that was previously taken into account or
income attributable to that amount.
Accordingly, pursuant to the nonduplication
rule of paragraph (a)(2)(iii) of this section,
none of the payments are included in wages.
Example 11. (i) The facts are the same as
in Example 10, except that no amount is

taken into account for 2003 because
Employer O fails to pay the additional FICA
tax.
(ii) Under paragraph (d)(1)(ii)(A) of this
section, if an amount deferred for a period is
not taken into account, then the benefit
payments attributable to that amount
deferred are included as wages in accordance
with the general timing rule of paragraph
(a)(1) of this section. In this case, assuming
that the amounts deferred in other periods
were taken into account, $4,080 of each
year’s total benefit payments will be included
in wages when actually or constructively
paid, in accordance with the general timing
rule.
Example 12. (i) Employer P establishes an
account balance plan on January 1, 2002,
under which all benefits are 100 percent
vested. The plan provides that amounts
deferred will be credited annually with
interest beginning in 2002 at a rate that is
greater than a reasonable rate of interest.
Employer P treats the excess over the
applicable interest rate in section 417(e) as an
additional amount deferred for 2002 and in
each year thereafter, and takes the additional
amount into account by including it in FICA
wages and paying the additional FICA tax for
the year.
(ii) Under the nonduplication rule in
paragraph (a)(2)(iii) of this section, the
benefits paid under the plan will be excluded
from wages for FICA tax purposes.
Example 13. (i) The facts are the same as
in Example 9, except that, in determining the
amount deferred, Employer O uses a 15
percent interest rate, which, solely for
purposes of this example, is assumed not to
be a reasonable interest rate. Employer O
determines that the amount deferred for 2003
is the present value, as of December 31, 2003,
of the $20,400 payment, which is $15,023.
Employer O includes $15,023 in wages and
pays any resulting FICA tax. Solely for
purposes of this example, it is assumed that
the AFR as of January 1, 2003, is 7 percent.
(ii) Under paragraph (d)(2)(iii)(B) of this
section, if any actuarial assumption or
method is not reasonable, then the income
attributable to the amount taken into account
is limited to the income that would result
from application of the AFR and, if
applicable, the 417(e) mortality table.
Because the 15 percent interest rate is
unreasonable, the income attributable to the
amount taken into account is limited to the
income that would result from using a 7
percent interest rate and, in this case, an
increase for survivorship using the 417(e)
mortality table. Under these assumptions, the
income attributable to the $15,023 amount
taken into account for 2003 is $1,199 in 2004
and $1,313 in 2005. Under paragraph
(d)(1)(ii) of this section, the sum of these
amounts ($17,535) is excluded from
Employee B’s wages pursuant to the
nonduplication rule of paragraph (a)(2)(iii) of
this section, and the balance of the payment
($2,865) is subject to the general timing rule
of paragraph (a)(1) of this section and, thus,
is included in Employee B’s wages when
actually or constructively paid.
(iii) The same result can be reached by
multiplying the attributable benefit payments
by a fraction, the numerator of which is the

4557

amount taken into account, and the
denominator of which is the amount deferred
that would have been taken into account at
the same time had the amount deferred been
calculated using the AFR and the 417(e)
mortality table. These assumptions are
determined as of January 1 of the calendar
year in which the amount was taken into
account. In this Example 13, the fraction
would be $15,023 divided by $17,478, which
equals .85954. The $20,400 payment is
multiplied by this fraction to determine the
amount of the payment that is excluded from
wages pursuant to the nonduplication rule of
paragraph (a)(2)(iii) of this section. Thus,
$17,535 ($20,400 x .85954) is excluded from
wages and the balance ($2,865) is subject to
FICA tax when actually or constructively
paid.
Example 14. (i) The facts are the same as
Example 10, except that Employer O
calculates the amount deferred for 2003 as
$18,252 and takes that amount into account
by including that amount in wages and
paying any resulting FICA tax. The
assumptions that Employer O uses to
determine the amount deferred are a 15
percent interest rate and, for the period after
commencement of benefit payments, the
GAM 83 (male) mortality table. The 15
percent interest rate is assumed, solely for
purposes of this example, not to be a
reasonable actuarial assumption. Solely for
purposes of this example, it is assumed that
the AFR as of January 1, 2003, is 7 percent.
(ii) Under paragraph (d)(2)(iii)(B) of this
section, if any actuarial assumption or
method used is not reasonable, then the
income attributable to the amount taken into
account is limited to the income that would
result from application of the AFR and, if
applicable, the 417(e) mortality table.
Because the 15 percent interest rate is not
reasonable, the income attributable to the
amount taken into account is equal to the
income that would result from using a 7
percent interest rate and the amount taken
into account is treated as if it represented a
portion of the amount deferred for purposes
of applying paragraph (d)(1)(ii)(B) of this
section. Under these assumptions, the
income attributable to the $18,252 amount
taken into account for 2003 is $1,278 in 2004
and $1,367 in 2005. Under paragraph
(d)(1)(ii)(B) of this section, the portion of
each benefit payment attributable to the
amount deferred that is excluded from wages
pursuant to the nonduplication rule of
paragraph (a)(2)(iii) of this section is
determined at benefit commencement by
multiplying each benefit payment by a
fraction, the numerator of which is the
amount taken into account (plus income
attributable to that amount) and the
denominator of which is the present value of
future benefit payments attributable to the
amount deferred. Because the interest rate
assumption is not reasonable, not only is the
income limited to the application of the AFR,
but the present value in the denominator
must be determined using the AFR and (if
applicable) the 417(e) mortality table. In this
case, the present value is $40,283 and thus
the fraction is $20,897 divided by $40,283, or
.51875. Thus, $2,116 (.51875 × $4,080) of
each year’s benefit payment is excluded from

4558

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

wages and the balance of each year’s
payment ($1,964) is subject to the general
timing rule of paragraph (a)(1) of this section
and is included in wages when actually or
constructively paid.
(iii) The same result can be reached by
multiplying the attributable benefit payments
by a fraction the numerator of which is the
amount taken into account, and the
denominator of which is the amount deferred
that would have been taken into account at
the same time had the amount deferred been
calculated using the AFR and the 417(e)
mortality table. These assumptions are
determined as of January 1 of the calendar
year in which the amount was taken into
account. In this Example 14, the fraction
would be $18,252 divided by $35,185, which
equals .51875. The $4,080 annual payment is
multiplied by this fraction to determine the
amount of the payment that is excluded from
wages pursuant to the nonduplication rule of
paragraph (a)(2)(iii) of this section. Thus,
$2,116 ($4,080 × .51875) is excluded from
wages and the balance ($1,964) is subject to
FICA tax when actually or constructively
paid.

(e) Time amounts deferred are
required to be taken into account—(1) In
general. Except as otherwise provided
in this paragraph (e), an amount
deferred under a nonqualified deferred
compensation plan must be taken into
account as wages for FICA tax purposes
as of the later of the date on which
services creating the right to the amount
deferred are performed (within the
meaning of paragraph (e)(2) of this
section) or the date on which the right
to the amount deferred is no longer
subject to a substantial risk of forfeiture
(within the meaning of paragraph (e)(3)
of this section). However, in no event
may any amount deferred under a
nonqualified deferred compensation
plan be taken into account as wages for
FICA tax purposes prior to the
establishment of the plan providing for
the amount deferred (or, if later, the
plan amendment providing for the
amount deferred). Therefore, if an
amount is deferred pursuant to the
terms of a legally binding agreement
that is not put in writing until after the
amount would otherwise be taken into
account under this paragraph (e)(1), the
amount deferred (including any
attributable income) must be taken into
account as wages for FICA tax purposes
as of the date the material terms of the
plan are put in writing.
(2) Services creating the right to an
amount deferred. For purposes of this
section, services creating the right to an
amount deferred under a nonqualified
deferred compensation plan are
considered to be performed as of the
date on which, under the terms of the
plan and all the facts and
circumstances, the employee has
performed all of the services necessary

to obtain a legally binding right (as
described in paragraph (b)(3)(i) of this
section) to the amount deferred.
(3) Substantial risk of forfeiture. For
purposes of this section, the
determination of whether a substantial
risk of forfeiture exists must be made in
accordance with the principles of
section 83 and the regulations
thereunder.
(4) Amount deferred that is not
reasonably ascertainable under a
nonaccount balance plan—(i) In
general—(A) Date required to be taken
into account. Notwithstanding any other
provision of this paragraph (e), an
amount deferred under a nonaccount
balance plan is not required to be taken
into account as wages under the special
timing rule of paragraph (a)(2) of this
section until the first date on which all
of the amount deferred is reasonably
ascertainable (the resolution date). In
this case, the amount required to be
taken into account as of the resolution
date is determined in accordance with
paragraph (c)(2) of this section.
(B) Definition of reasonably
ascertainable. For purposes of this
paragraph (e)(4), an amount deferred is
considered reasonably ascertainable on
the first date on which the amount,
form, and commencement date of the
benefit payments attributable to the
amount deferred are known, and the
only actuarial or other assumptions
regarding future events or circumstances
needed to determine the amount
deferred are interest and mortality. For
this purpose, the form and
commencement date of the benefit
payments attributable to the amount
deferred are treated as known if the
requirements of paragraph (c)(2)(iii)(B)
of this section (under which payments
are treated as being made in the normal
form of benefit commencing at normal
commencement date) are satisfied. In
addition, an amount deferred does not
fail to be reasonably ascertainable on a
date merely because the exact amount of
the benefit payable cannot readily be
calculated on that date or merely
because the exact amount of the benefit
payable depends on future changes in
the cost of living. If the exact amount of
the benefit payable depends on future
changes in the cost of living, the amount
deferred must be determined using a
reasonable assumption as to the future
changes in the cost of living. For
example, the amount of a benefit is
treated as known even if the exact
amount of the benefit payable cannot be
determined until future changes in the
cost of living are reflected in the section
415 limitation on benefits payable under
a qualified retirement plan.

(ii) Earlier inclusion permitted—(A) In
general. With respect to an amount
deferred that is not reasonably
ascertainable, an employer may choose
to take an amount into account at any
date or dates (an early inclusion date or
dates) before the resolution date (but not
before the date described in paragraph
(e)(1) of this section with respect to the
amount deferred). Thus, for example,
with respect to an amount deferred
under a nonaccount balance plan that is
not reasonably ascertainable because the
plan permits employees to receive their
benefits in more than one form or
commencing at more than one date (and
the requirements of paragraph (c)(2)(iii)
of this section are not satisfied), an
employer may choose to take an amount
into account on the date otherwise
described in paragraph (e)(1) of this
section before the form and
commencement date are selected (based
on assumptions as to the form and
commencement date for the benefit
payments) or may choose to wait until
the form and commencement date of the
benefit payments are selected. An
employer that chooses to take an
amount into account at an early
inclusion date under this paragraph
(e)(4)(ii) for an employee under a plan
is not required until the resolution date
to identify the period to which the
amount taken into account relates.
(B) True-up at resolution date. If, with
respect to an amount deferred for a
period, an employer chooses to take an
amount into account as of an early
inclusion date in accordance with this
paragraph (e)(4)(ii) and the benefit
payments attributable to the amount
deferred exceed the benefit payments
that are actuarially equivalent to the
amount taken into account at the early
inclusion date (payable in the same
form and using the same
commencement date as the benefit
payments attributable to the amount
deferred), then the present value of the
difference in the benefits, determined in
accordance with paragraph (c)(2) of this
section, must be taken into account as
of the resolution date.
(C) Actuarial assumptions. For
purposes of determining the benefits
that are actuarially equivalent to the
amount taken into account as of an early
inclusion date, the amount taken into
account is converted to an actuarially
equivalent benefit payable in the same
form and commencing on the same date
as the actual benefit payments
attributable to the amount deferred
using an interest rate, and, if applicable,
mortality and cost-of-living
assumptions, that were reasonable as of
the early inclusion date. Thus, with
respect to an amount deferred for a

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
period, the amount required to be taken
into account as of the resolution date is
the present value (determined using an
interest rate, and, if applicable,
mortality and cost-of-living
assumptions, that are reasonable as of
the resolution date) of the excess, if any,
of the future benefit payments
attributable to the amount deferred over
the future benefits payable in the same
form and commencing on the same date
that are actuarially equivalent to the
portion of the amount deferred that was
taken into account as of the early
inclusion date (where actuarial
equivalence is determined using an
interest rate, and, if applicable,
mortality and cost-of-living
assumptions, that were reasonable as of
the early inclusion date).
(D) Allocation rules for amounts
deferred over more than one period—(1)
General rule. The rules of this paragraph
(e)(4)(ii)(D) apply for purposes of
determining whether an amount has
been included under this paragraph
(e)(4) before the earliest date permitted
under paragraph (e)(1) of this section.
(2) Future compensation increases.
Increases in an employee’s
compensation after the early inclusion
date must be disregarded.
(3) Early retirement subsidies. An
early retirement subsidy that the
employee ultimately receives may be
taken into account at an early inclusion
date if the employee would have a
legally binding right to the subsidy at
the early inclusion date but for any
condition that the employee continue to
render services. Accordingly, an
employer may take into account at an
early inclusion date any early retirement
subsidy that the employee ultimately
receives to the extent that elimination or
reduction of that subsidy would violate
section 411(d)(6)(B)(i) if that section
applied to the plan.
(4) Allocation with respect to offsets.
In any case in which a series of amounts
are deferred over more than one period,
the amounts deferred are not reasonably
ascertainable until a single resolution
date and the benefit payments
attributable to the entire series are
determined under a formula that
provides a gross benefit that in the
aggregate is subject to an objective
reduction for future events under the
terms of the plan, such as an offset for
the aggregate benefits payable under a
plan qualified under section 401(a), the
attribution of benefit payments to the
amount deferred in each period is
determined under the rules of this
paragraph (e)(4)(ii)(D)(4). In a case
described in the preceding sentence, the
benefit payments made as a result of the
series of amounts deferred may be

treated as attributable to the amount
deferred as of the earliest period in
which the employee obtained a legally
binding right to a benefit under the plan
equal to the excess, if any, of the
amount of the gross benefit attributable
to that period (determined at the
resolution date), over the amount of the
reduction determined as of the end of
that period. Thus, for example, if an
employee obtains a legally binding right
in each of several years to benefit
payments from a nonqualified deferred
compensation plan that provides for a
specified gross benefit for the years to be
offset by the benefits payable under a
qualified plan, the amount deferred in
the first year may be treated as equal to
the gross benefit for the year, reduced by
the offset applicable at the end of the
year (even if the offset increases after
the end of the year).
(E) Treatment of benefits paid before
the resolution date. If a benefit payment
is attributable to an amount deferred
that is not reasonably ascertainable at
the time of payment (or is paid before
the date selected under paragraph (e)(5)
of this section), and the employer has
previously taken an amount into
account with respect to the amount
deferred under the early inclusion rule
of this paragraph (e)(4), then, in lieu of
the pro rata rule provided in paragraph
(d)(1)(ii)(B) of this section, a first-infirst-out rule applies in determining the
portion of the benefit payment
attributable to the amount taken into
account. Under this first-in-first-out
rule, the benefit payment is compared to
the sum of the amount taken into
account at the early inclusion date and
the income attributable to that amount.
If the benefit payment equals or exceeds
the amount taken into account at the
early inclusion date and the income
attributable to that amount as of the date
of the benefit payment, the benefit
payment is included as wages under the
general timing rule of paragraph (a)(1) of
this section to the extent of any excess,
and the amount taken into account at
the early inclusion date (and income
attributable to that amount) is
disregarded thereafter with respect to
the amount deferred. If the amount
taken into account at the early inclusion
date and the income attributable to that
amount as of the date of the benefit
payment exceeds the benefit payment,
the benefit payment is not included as
wages under the general timing rule of
paragraph (a)(1) of this section and, in
determining the amount that must be
taken into account thereafter with
respect to the amount deferred, the
amount taken into account at the early
inclusion date, plus attributable income

4559

as of the date of the benefit payment, is
reduced by the amount of the benefit
payment, and only the excess plus
future income attributable to the excess
(credited using assumptions that were
reasonable on the early inclusion date)
is taken into consideration. If amounts
have been taken into account at more
than one early inclusion date, this
paragraph (e)(4)(ii)(E) applies on a firstin-first-out basis, beginning with the
amount taken into account at the
earliest early inclusion date (including
income attributable thereto).
(5) Rule of administrative
convenience. For purposes of this
section, an employer may treat an
amount deferred as required to be taken
into account under this paragraph (e) on
any date that is later than, but within
the same calendar year as, the actual
date on which the amount deferred is
otherwise required to be taken into
account under this paragraph (e). For
example, if services creating the right to
an amount deferred are considered
performed under paragraph (e)(2) of this
section periodically throughout a year,
the employer may nevertheless treat the
services creating the right to that
amount deferred as performed on
December 31 of that year. If an employer
uses the rule of administrative
convenience described in this paragraph
(e)(5), any determination of whether the
income attributable to an amount
deferred under an account balance plan
is based on a reasonable rate of interest
or whether the actuarial assumptions
used to determine the present value of
an amount deferred in a nonaccount
balance plan are reasonable will be
made as of the date the employer selects
to take the amount into account.
(6) Portions of an amount deferred
required to be taken into account on
more than one date. If different portions
of an amount deferred are required to be
taken into account under paragraph
(e)(1) of this section on more than one
date (e.g., on account of a graded vesting
schedule), then each such portion is
considered a separate amount deferred
for purposes of this section.
(7) Examples. This paragraph (e) is
illustrated by the following examples:
Example 1. (i) Employer M establishes a
nonqualified deferred compensation plan for
Employee A on November 1, 2005. Under the
plan, which is an account balance plan,
Employee A obtains a legally binding right
on the last day of each calendar year (if
Employee A is employed on that date) to be
credited with a principal amount equal to 5
percent of compensation for the year. In
addition, a reasonable rate of interest is
credited quarterly. Employee A’s account
balance is nonforfeitable and is payable upon
Employee A’s termination of employment.
For 2006, the principal amount credited to

4560

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

Employee A under the plan (which, in this
case, is also the amount deferred within the
meaning of paragraph (c) of this section) is
$25,000.
(ii) Under paragraph (e)(2) of this section,
the services creating the right to the $25,000
amount deferred are considered performed as
of December 31, 2006, the date on which
Employee A has performed all of the services
necessary to obtain a legally binding right to
the amount deferred. Thus, in accordance
with paragraph (e)(1) of this section, the
$25,000 amount deferred must be taken into
account as of December 31, 2006, which is
the later of the date on which services
creating the right to the amount deferred are
performed or the date on which the right to
the amount deferred is no longer subject to
a substantial risk of forfeiture.
Example 2. (i) The facts are the same as in
Example 1, except that the principal amount
credited under the plan on the last day of
each year (and attributable interest) is
forfeited if the employee terminates
employment within five years of that date.
(ii) Under paragraph (e)(3) of this section,
the determination of whether the right to an
amount deferred is subject to a substantial
risk of forfeiture is made in accordance with
the principles of section 83. Under § 1.83–
3(c) of this chapter, a substantial risk of
forfeiture generally exists where rights in
property that are transferred are conditioned,
directly or indirectly, upon the future
performance of substantial services. Because
Employee A’s right to receive the $25,000
principal amount (and attributable interest) is
conditioned on the performance of services
for five years, a substantial risk of forfeiture
exists with respect to that amount deferred
until December 31, 2011.
(iii) December 31, 2011, is the later of the
date on which services creating the right to
the amount deferred are performed or the
date on which the right to the amount
deferred is no longer subject to a substantial
risk of forfeiture. Thus, in accordance with
paragraph (e)(1) of this section, the amount
deferred (which, pursuant to paragraph (c)(1)
of this section, is equal to the $25,000
principal amount credited to Employee A’s
account on December 31, 2006, plus the
interest credited with respect to that
principal amount through December 31,
2011) must be taken into account as of
December 31, 2011.
Example 3. (i) The facts are the same as in
Example 2, except that the principal amount
credited under the plan on the last day of
each year (and attributable interest) becomes
nonforfeitable according to a graded vesting
schedule under which 20 percent is vested as
of December 31, 2007; 40 percent is vested
as of December 31, 2008; 60 percent is vested
as of December 31, 2009; 80 percent is vested
as of December 31, 2010; and 100 percent is
vested as of December 31, 2011. Because
these dates are later than the date on which
the services creating the right to the amount
deferred are considered performed
(December 31, 2006), the amount deferred is
required to be taken into account as of these
dates that fall in five different years.
(ii) Paragraph (e)(6) of this section provides
that, if different portions of an amount
deferred are required to be taken into account

under paragraph (e)(1) of this section on
more than one date, then each such portion
is considered a separate amount deferred for
purposes of this section. Thus, $5,000 of the
principal amount, plus interest credited
through December 31, 2007, is taken into
account as an amount deferred on December
31, 2007; $5,000 of the principal amount,
plus interest credited through December 31,
2008, is taken into account as a separate
amount deferred on December 31, 2008; etc.
Example 4. (i) On November 21, 2001,
Employer N establishes a nonqualified
deferred compensation plan under which all
benefits are 100 percent vested. The plan
provides for Employee B (who is age 45) to
receive a lump sum benefit of $500,000 at age
65. This benefit will be forfeited if Employee
B dies before age 65.
(ii) Because the amount, form, and
commencement date of the benefit are
known, and the only assumptions needed to
determine the amount deferred are interest
and mortality, the amount deferred is
reasonably ascertainable within the meaning
of paragraph (e)(4)(i) of this section on
November 21, 2001.
Example 5. (i) The facts are the same as in
Example 4, except that plan provides that the
lump sum will be paid at the later of age 65
or termination of employment and provides
that the $500,000 payable to Employee B is
increased by 5 percent per year for each year
that payment is deferred beyond age 65.
(ii) Because the commencement date of the
benefit payment is contingent on when
Employee B terminates employment, the
commencement date of the benefit payment
is not known. Thus, the amount deferred is
not reasonably ascertainable within the
meaning of paragraph (e)(4)(i) of this section,
unless the plan satisfies the requirements of
paragraph (c)(2)(iii)(B) of this section.
Because the fixed 5 percent factor may not
be reasonable at the time benefit payments
commence (i.e., 5 percent might be higher or
lower than a reasonable interest rate when
payments commence), the plan fails to satisfy
paragraph (c)(2)(iii)(B) of this section and
accordingly the amount deferred is not
reasonably ascertainable until termination of
employment.
Example 6. (i) The facts are the same as in
Example 4, except that the $500,000 is
payable to Employee B at the later of age 55
or termination of employment.
(ii) Because the commencement date of the
benefit payment is contingent on when
Employee B terminates employment, the
commencement date of the benefit payment
is not known. Thus, the amount deferred is
not reasonably ascertainable until
termination of employment.
Example 7. (i) The facts are the same as in
Example 4, except that Employee B may elect
to take the benefit in the form of a life
annuity of $50,000 per year (commencing at
age 65).
(ii) Because the plan permits employees to
elect to receive benefits in more than one
form and the alternative forms may not have
the same value when Employee B makes his
election, the plan fails to satisfy the
requirements of paragraph (c)(2)(iii)(B) of this
section until a form of benefit is selected.
Thus, the amount deferred is not reasonably
ascertainable until then.

Example 8. (i) Employer O establishes a
nonqualified deferred compensation plan.
The plan is a supplemental executive
retirement plan (SERP) that provides
Employee C with a fully vested right to
receive a pension, in the form of a life
annuity payable monthly, beginning at age
65, equal to the excess of 3 percent of
Employee C’s final 3-year average pay for
each year of participation up to 15 years, over
the amount payable to Employee C from
Employer O’s qualified pension plan. The
amount payable under the qualified pension
plan is a life annuity payable monthly,
beginning at age 65, equal to 1.5 percent of
final 3-year average pay for each year of
employment, excluding pay in excess of the
section 401(a)(17) compensation limit. No
benefits are payable under the SERP if
Employee C dies before age 65. Employee C
becomes a participant in the SERP on January
1, 2001, at age 44. The amount deferred
under the SERP for any year is not reasonably
ascertainable prior to termination of
employment because the amount of the
benefit is not known and the determination
of the amount deferred requires assumptions
other than interest and mortality (e.g., an
assumption as to Employee C’s average pay
for the final three years of employment). As
permitted by paragraph (e)(4)(i) of this
section, Employer O chooses not to take any
amount into account for any year before the
resolution date. Employee C terminates
employment on December 31, 2018 when he
is age 62.
(ii) As of the date Employee C terminates
employment, the amount of the benefit is
known and the only actuarial or other
assumptions needed to determine the amount
deferred are an interest rate assumption and
a mortality assumption. At that time, the
amount deferred in each past year becomes
reasonably ascertainable, and Employer O is
able to determine that during 2001 Employee
C earned a legally binding right to a life
annuity of $4,000 per year beginning in 2021
when Employee C is age 65. Employer O
determines the present value of Employee C’s
future benefit payments under the SERP as of
this resolution date (December 31, 2018),
using a 7 percent interest rate and the UP–
84 mortality table, which, solely for purposes
of this example, are assumed to be reasonable
actuarial assumptions for December 31, 2018.
The special timing rule will be satisfied if the
resulting present value, $26,950, is taken into
account on that date in accordance with
paragraph (d)(1) of this section.
Example 9. (i) The facts are the same as in
Example 8, except that the plan provides that
Employee C may choose to receive early
retirement benefits on an unreduced basis at
any time after age 60 if Employee C has
completed 15 years of service by that date.
(ii) As of the date Employee C terminates
employment, the amount of the benefit is
known and the only actuarial or other
assumptions needed to determine the amount
deferred are an interest rate assumption and
a mortality assumption. At that time, the
amount deferred in each past year becomes
reasonably ascertainable, and Employer O is
able to determine that during 2001 Employee
C earned a legally binding right to a life
annuity of $4,000 per year beginning on

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
December 31, 2018 when Employee C is age
62. Employer O determines the present value
of Employee C’s future benefit payments
under the SERP as of this resolution date
(December 31, 2018), using a 7 percent
interest rate and the UP–84 mortality table,
which, solely for purposes of this example,
are assumed to be reasonable actuarial
assumptions for December 31, 2018. The
special timing rule will be satisfied if the
resulting present value, $37,576, is taken into
account on that date in accordance with
paragraph (d)(1) of this section.
Example 10. (i) The facts are the same as
in Example 9, except that, as permitted under
paragraph (e)(4)(ii) of this section, Employer
O chooses to take an amount into account
before the amount deferred for 2001 is
reasonably ascertainable. The amount that
Employer O takes into account on December
31, 2001, is $13,043 (the present value of a
life annuity of $4,000 per year, payable at age
62, using a 6 percent interest rate and the
UP–84 mortality table). Employer O does not
take any other amount into account before
the resolution date.
(ii) In accordance with paragraph
(e)(4)(ii)(B) of this section, Employer O must
determine any additional amount required to
be taken into account in 2018. If the $4,000
payable in the form of a life annuity
beginning at age 62 exceeds the life annuity
which is actuarially equivalent to the $13,043
previously taken into account, the present
value of the excess must be taken into
account. In this Example 10, the $13,043
previously taken into account is actuarially
equivalent to a $4,000 annuity commencing
at age 62 using a 6 percent interest rate and
the UP–84 mortality table ( which, solely for
purposes of this example, are assumed to be
reasonable actuarial assumptions for
December 31, 2001). Accordingly, no
additional amount need be taken into
account in 2018, regardless of any changes in
market rates of interest between 2001 and
2018.
Example 11. (i) The facts are the same as
in Example 9, except that, as permitted under
paragraph (e)(4)(ii) of this section, Employer
O chooses to take an amount into account
before the amount deferred for 2001 is
reasonably ascertainable. The amount that
Employer O takes into account on December
31, 2001, is $9,569 (the present value of a life
annuity of $4,000 per year, payable at age 65,
using a 6 percent interest rate and the UP–
84 mortality table). Employer O does not take
any other amount into account before the
resolution date.
(ii) In accordance with paragraph
(e)(4)(ii)(B) of this section, Employer O must
determine any additional amount required to
be taken into account in 2018. If the $4,000
payable in the form of a life annuity
beginning in 2018 at age 62 exceeds the life
annuity which is actuarially equivalent to the
$9,569 previously taken into account, the
present value of the excess must be taken
into account. In this case, the $9,569
previously taken into account is actuarially
equivalent to a $2,935 annuity commencing
at age 62 using a 6 percent interest rate and
the UP–84 mortality table (which, solely for
purposes of this example, are assumed to be
reasonable actuarial assumptions for

December 31, 2001). Accordingly, an
additional amount needs to be taken into
account in 2018 equal to the present value of
the excess of the $4,000 annual stream of
benefit payments to which Employee C
obtained a legally binding right during 2001
over the $2,935 annual stream of benefit
payments which is actuarially equivalent to
the amount previously taken into account.
This present value (i.e., the present value of
a life annuity equal to $4,000 minus $2,935,
or $1,065 annually) is determined by
Employer O to be $10,005 as of the resolution
date using a 7 percent interest rate and the
UP–84 mortality table (which, solely for
purposes of this example, are assumed to be
reasonable actuarial assumptions for
December 31, 2018).
Example 12. (i) The facts are the same as
in Example 9, except that the amount that
Employer O takes into account on December
31, 2001, is $15,834 (the present value of
$4,000, payable at age 60, using a 6 percent
interest rate and the UP–84 mortality table).
Employer O does not take any other amount
into account before the resolution date.
(ii) In accordance with paragraph
(e)(4)(ii)(B) of this section, Employer O must
determine any additional amount required to
be taken into account in 2018. If the $4,000
payable in the form of a life annuity
beginning at age 62 exceeds the life annuity
which is actuarially equivalent to the $15,834
previously taken into account, the present
value of the excess must be taken into
account. In this case, the $15,834 previously
taken into account is actuarially equivalent to
a $4,856 annuity commencing at age 62 using
a 6 percent interest rate and the UP–84
mortality table (which, solely for purposes of
this example, are assumed to be reasonable
actuarial assumptions for December 31,
2001). Because the life annuity of $4,856 per
year (which is equivalent to the amount
taken into account at the early inclusion
date) exceeds the $4,000 annuity attributable
to the amount deferred in 2001, no additional
amount is required to be taken into account
for that amount deferred as of the resolution
date. Employer O may claim a refund or
credit for the overpayment of FICA tax with
respect to amounts taken into account prior
to the resolution date to the extent permitted
by sections 6402, 6413, and 6511.
Example 13. (i) The facts are the same as
in Example 12, except that Employee C
became a participant in the SERP on January
1, 2000. In addition, Employer O determines
in 2018 that during 2000 Employee C earned
a legally binding right to a life annuity of
$1,500 per year beginning on December 31,
2018.
(ii) Employer O may allocate the $15,834
previously taken into account among any
amounts deferred on or before the early
inclusion date. At the resolution date,
Employer O will have to take into account
the present value of an annuity equal to the
excess of the life annuity attributable to the
amounts deferred for 2000 and 2001 over a
life annuity of $4,856 per year.
Example 14. (i) In 2003, Employer P
establishes a nonqualified deferred
compensation plan for Employee D. The plan
provides that, in consideration of Employee
D’s services to be performed on Project X in

4561

2004, Employee D will have a nonforfeitable
right to receive 1 percent per year of
Employer P’s net profits associated with
Project X for each of the immediately
succeeding three years. No services beyond
2004 are required. The 1 percent of net
profits payable each year will be paid on
March 31 of the immediately succeeding
year. One percent of net profits associated
with Project X is $750,000 in 2005, $400,000
in 2006, and $90,000 in 2007. Employee D
receives $750,000 on March 31, 2006,
$400,000 on March 31, 2007, and $90,000 on
March 31, 2008.
(ii) Because the services creating the right
to all of the amount deferred are performed
in 2004, the benefit payments based on the
2005, 2006, and 2007 net profits are all
attributable to the amount deferred in 2004.
However, because the present value of
Employee D’s future benefit is contingent on
future profits, the determination of the
amount deferred requires the use of
assumptions other than interest, mortality,
and cost of living. Thus, all of the amount
deferred in 2004 will not be reasonably
ascertainable within the meaning of
paragraph (e)(4)(i) of this section until
December 31, 2007 (which is the resolution
date). Employer P does not choose to take
any amount into account prior to the amount
deferred becoming reasonably ascertainable.
(iii) However, paragraph (d)(1)(ii)(A) of this
section provides that a benefit payment
attributable to an amount deferred under a
nonqualified deferred compensation plan
must be included as wages when actually or
constructively paid if the amount deferred
has not been taken into account as wages
under the special timing rule of paragraph
(a)(2) of this section. Thus, the benefit
payments in 2006 and 2007 must be included
as wages when paid.
(iv) As of December 31, 2007, all of the
amount deferred under the plan becomes
reasonably ascertainable because the amount
of the benefit payable attributable to the
amount deferred is treated as known under
paragraph (e)(4)(i)(B) of this section, and the
only assumption needed to determine the
present value of the future benefits is
interest. However, since Employer P was
required to treat the payments in 2006 and
2007 as wages when paid under the general
timing rule of paragraph (a)(1) of this section,
only the present value of the payment to be
made in 2008 is required to be taken into
account as of the resolution date (December
31, 2007) under the special timing rule of
paragraph (a)(2) of this section. Using an
interest rate of 10 percent per year (which,
solely for purposes of this Example 14, is
assumed to be reasonable), Employer P
determines that on December 31, 2007, the
present value of the future benefits is
$87,881, and Employer P includes that
additional amount in wages for 2007. (Note
that Employer P can choose to use the lag
method of withholding described in
paragraph (f)(3) of this section, which allows
the resolution date amount to be taken into
account no later than March 31, 2008,
provided that the amount deferred is
increased by interest using the AFR for
January of 2008.)
Example 15. (i) The facts are the same as
in Example 14, except that Employer P

4562

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

chooses the early inclusion option permitted
by paragraph (e)(4)(ii) of this section to take
$1,000,000 into account on December 31,
2004, before the amount deferred for 2004 is
reasonably ascertainable.
(ii) Pursuant to paragraph (e)(4)(ii)(E) of
this section, in applying the nonduplication
rule of paragraph (a)(2)(iii) of this section, a
first-in-first-out rule applies in determining
the benefit payments that are attributable to
amounts previously taken into account.
Using the 10 percent interest rate, Employer
P determines that the $750,000 benefit
payment on March 31, 2006, and the March
31, 2007, benefit payment of $400,000 are
less than the $1,000,000 taken into account
at the early inclusion date, plus attributable
income, and, therefore, are not included in
wages when paid.
(iii) Under paragraph (e)(4)(ii)(E) of this
section, if an employer chooses to take an
amount into account before the resolution
date, the amount taken into account (plus
income attributable to that amount) is
disregarded to the extent the amount is
attributed to benefit payments made before
the resolution date. Thus, Employer P must
reduce the $1,000,000 taken into account in
2004 (plus income attributable to that
amount) based upon the two benefit
payments ($750,000 and $400,000) that were
excluded from wages. Using an interest rate
of 10 percent, Employer P determines that
the amount taken into account in 2004 plus
interest to the resolution date and reduced
based upon the two benefit payments is
$15,228 and the additional amount that is
required to be taken into account as of
December 31, 2007, is $72,653 ($87,881–
$15,228).
Example 16. (i) Employee E obtains a fully
vested, legally binding right during 2002,
2003, and 2004 to payments from a
nonqualified deferred compensation plan of
Employer Q under which the benefits are
based on a formula that includes an actuarial
offset by the account balance under a
qualified defined contribution plan of
Employer Q as of December 31, 2004. The
payments from the nonqualified deferred
compensation plan are to commence on
December 31, 2005. At the resolution date for
the amounts earned during 2002, 2003, and
2004, which is December 31, 2004, Employee
E has a legally binding right to a net annual
benefit of $100,000 payable for life to
commence on December 31, 2005. On the
resolution date, Employer Q determines that
on December 31, 2002, Employee E had a
legally binding right to receive $100,000
annually for life beginning on December 31,
2005 (as a result of the gross benefit under
the nonqualified plan being $120,000
annually for life, and the offset being $20,000
annually for life, as of December 31, 2002).
On December 31, 2003, Employee E had a
legally binding right to receive $95,000
annually for life beginning on December 31,
2005 (as a result of the gross benefit under
the nonqualified plan being $135,000
annually for life, and the offset being $40,000
annually for life, as of December 31, 2003).
On December 31, 2004, Employee E had a
legally binding right to receive $100,000
annually for life beginning on December 31,
2005 (as a result of the gross benefit under

the nonqualified plan being $145,000
annually for life, and the offset being $45,000
annually for life, as of December 31, 2004).
(ii) In this case, pursuant to paragraph
(e)(4)(ii)(D)(4) of this section, Employer Q can
attribute the entire $100,000 life annuity to
the amount deferred for 2002, even though
Employee E’s benefit under the nonqualified
deferred compensation plan is reduced to
$95,000 in 2003.
Example 17. (i) In 2010, Employee F
performs services for which she earns a right
to 10 percent of the proceeds from the sale
of a motion picture. In 2011, Employee F
performs services for which she earns a right
to 10 percent of the proceeds from the sale
of another motion picture. These proceeds
are calculated by subtracting the total
advertising expenses for both movies.
Payment is to be made in the year following
the date on which both pictures have been
sold, but not later than 2018. At the end of
2010, the advertising expenses for both
pictures totaled $300,000. The first motion
picture is sold for $10,000,000 in 2014. The
second motion picture is sold for $17,000,000
in 2017. At the end of 2017, the advertising
expenses totaled $1,700,000. In 2018,
Employee F is paid $2,530,000 (10 percent of
the sum of $10,000,000 and $17,000,000
minus $1,700,000).
(ii) Pursuant to paragraph (e)(4)(ii)(D)(4) of
this section, $970,000 (10 percent of the
excess of the gross proceeds from the sale of
the first motion picture at the resolution date
in 2017 over the advertising expenses
incurred at the end of 2010) of the payment
made in 2018 can be attributed to the amount
deferred in 2010 (and with the remaining
payment of $1,560,000 to be attributed to the
amount deferred in 2011).

(f) Withholding—(1) In general.
Unless an employer applies an
alternative method described in
paragraph (f)(2) or (3) of this section, an
amount deferred under a nonqualified
deferred compensation plan for any
employee is treated, for purposes of
withholding and depositing FICA tax, as
wages paid by the employer and
received by the employee at the time it
is taken into account in accordance with
paragraph (e) of this section. However,
paragraphs (f)(2) and (3) of this section
provide alternative methods which may
be used with respect to an amount
deferred for an employee. An employer
is not required to be consistent in
applying the alternatives described in
this paragraph (f) with respect to
different employees or amounts
deferred.
(2) Estimated method—(i) In general.
Under the alternative method provided
in this paragraph (f)(2), the employer
may make a reasonable estimate of the
amount deferred on the date on which
the amount is taken into account in
accordance with paragraph (e) of this
section and take that estimated amount
into account as wages paid by the
employer and received by the employee

on that date (the estimate date), for
purposes of withholding and depositing
FICA tax.
(ii) Underestimate of the amount
deferred—(A) General rule. If the
employer underestimates the amount
deferred (as determined after calculating
the actual amount deferred that should
have been taken into account as of the
date on which the amount was taken
into account in accordance with
paragraph (e) of this section, using an
interest rate and other actuarial
assumptions that are reasonable as of
that date), the employer may treat the
shortfall as wages paid as of the estimate
date or as of any date that is no later
than three months after the estimate
date. In either case, the shortfall does
not include the income credited to the
amount deferred after the amount is
taken into account in accordance with
paragraph (e) of this section.
(B) Shortfall is treated as wages paid
on a date after the estimate date. If the
employer chooses to treat the shortfall
as wages paid on a date that is no later
than three months after the estimate
date, the employer must take that
shortfall into account as wages paid by
the employer and received by the
employee on that date, for purposes of
withholding and depositing FICA tax.
(C) Shortfall is treated as wages paid
on the estimate date. If the employer
chooses to treat the shortfall as wages
paid as of the estimate date, the shortfall
is treated as an error for purposes of
withholding and depositing FICA tax.
Appropriate adjustments may be made
in accordance with section 6205(a) and
the regulations thereunder; however, for
purposes of § 31.6205–1(b), the error
need not be treated as ascertained before
the date that is three months after the
estimate date.
(D) Reporting. The employer must
report the shortfall as wages on Form
941, Employer’s Quarterly Federal Tax
Return (and, if applicable, Form 941c,
Supporting Statement to Correct
Information) and Form W–2, Wage and
Tax Statement (or, if applicable, Form
W–2c, Corrected Wage and Tax
Statement) in accordance with its
treatment of the shortfall under
paragraph (f)(2)(ii) (B) or (C) of this
section.
(iii) Overestimate of the amount
deferred. If the employer overestimates
the amount deferred (as determined
after calculating the actual amount
deferred that should have been taken
into account as of the date on which the
amount was taken into account in
accordance with paragraph (e) of this
section, using an interest rate and
actuarial assumptions that are
reasonable as of that date) and deposits

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
more than the amount required, the
employer may claim a refund or credit
in accordance with sections 6402, 6413,
and 6511. A Form 941c, or an
equivalent statement, must accompany
each claim for refund. In addition, Form
W–2 or, if applicable, Form W–2c must
also reflect the actual amount deferred
that should have been taken into
account.
(3) Lag method. Under the alternative
method provided in this paragraph
(f)(3), an amount deferred, plus interest,
may be treated as wages paid by the
employer and received by the employee,
for purposes of withholding and
depositing FICA tax, on any date that is
no later than three months after the date
the amount is required to be taken into
account in accordance with paragraph
(e) of this section. For purposes of this
paragraph (f)(3), the amount deferred
must be increased by interest through
the date on which the wages are treated
as paid, at a rate that is not less than
AFR. If the employer withholds and
deposits FICA tax in accordance with
this paragraph (f)(3), the employer will
be treated as having taken into account
the amount deferred plus income to the
date on which the wages are treated as
paid.
(4) Examples. This paragraph (f) is
illustrated by the following examples:
Example 1. (i) Employer M maintains a
nonqualified deferred compensation plan
that is an account balance plan. The plan
provides for annual bonuses based on current
year profits to be deferred until termination
of employment. Employer M’s profits for
2003, and thus the amount deferred, is
reasonably ascertainable, but Employer M
calculates the amount deferred on March 3,
2004, when the relevant data is available.
(ii) In accordance with the alternative
method described in paragraph (f)(2) of this
section, Employer M makes a reasonable
estimate that the amount deferred that must
be taken into account as of December 31,
2003, for Employee A is $20,000, and
withholds and deposits FICA tax on that
amount as if it were wages paid by Employer
M and received by Employee A on that date.
In January of 2004, Employer M files and
furnishes Form W–2 for Employee A
including the $20,000 in FICA wages. On
March 3, 2004, Employer M determines that
the actual amount deferred that should have
been taken into account on December 31,
2003, was $22,000.
(iii) In accordance with the alternative
method described in paragraph (f)(2)(ii) of
this section, Employer M may treat the
additional $2,000 as wages paid to and
received by Employee A on December 31,
2003, the estimate date. Employer M may
treat the $2,000 shortfall as an error
ascertained on March 3, 2004, and withhold
and deposit FICA tax on that amount. Form
W–2c for Employee A for 2003 must include
the $2,000 shortfall in FICA wages. Employer
M must also correct the information on Form

941 for the last quarter of 2003, reporting the
adjustment on Form 941 for the first quarter
of 2004, accompanied by Form 941c for the
last quarter of 2003.
(iv) Instead, Employer M may treat the
$2,000 shortfall as wages paid on March 31,
2004, and withhold and deposit FICA tax on
that amount as if it were wages paid by
Employer M and received by Employee A on
that date. Form W–2 for Employee A for 2004
and Form 941 for the first quarter of 2004
must include the $2,000 shortfall in FICA
wages.
Example 2. (i) The facts are the same as in
Example 1, except that on March 3, 2004,
Employer M determines that the actual
amount deferred that should have been taken
into account on December 31, 2003, was
$19,000.
(ii) Under paragraph (f)(2)(iii) of this
section, Employer M may, in accordance
with sections 6402, 6413, and 6511, claim a
refund or credit for the overpayment of tax
resulting from the overestimate. In addition,
Employer M must file and furnish a Form W–
2c for Employee A and must correct the
information on Form 941 for the last quarter
of 2003.
Example 3. (i) The facts are the same as in
Example 1, except that Employer M does not
make a reasonable estimate of the amount
deferred that must be taken into account as
of December 31, 2003. Instead, Employer M
withholds and deposits FICA tax on the
amount deferred plus interest on that amount
using AFR (for January 2004) as if it were
wages paid by Employer M and received by
Employee A on March 15, 2004.
(ii) Under the alternative method described
in paragraph (f)(3) of this section, the amount
taken into account on March 15, 2004
(including the interest), will be treated as
FICA wages paid to and received by
Employee A on March 15, 2004.
Example 4. (i) The facts are the same as in
Example 1, except that an amount is also
deferred for Employee B which is required to
be taken into account on October 15, 2003,
and Employer M chooses to use the lag
method in paragraph (f)(3) of this section in
order to provide time to calculate the amount
deferred.
(ii) Employer M may use any date not later
than January 15, 2004, to take the amount
deferred into account (provided that the
amount deferred includes interest, at AFR for
January 1, 2003, through December 31, 2003,
and at AFR for January 1, 2004, through
January 15, 2004).

(g) Effective date and transition
rules—(1) General effective date. Except
for paragraphs (g)(2) through (4) of this
section, this section is applicable on and
after January 1, 2000. Thus, paragraphs
(a) through (f) of this section apply to
amounts deferred on or after January 1,
2000; to amounts deferred before
January 1, 2000, which cease to be
subject to a substantial risk of forfeiture
on or after January 1, 2000, or for which
a resolution date occurs on or after
January 1, 2000; and to benefits actually
or constructively paid on or after
January 1, 2000.

4563

(2) Reasonable, good faith
interpretation for amounts deferred and
benefits paid before January 1, 2000—(i)
In general. For periods before January 1,
2000 (including amounts deferred
before January 1, 2000, and any benefits
actually or constructively paid before
January 1, 2000, that are attributable to
those amounts deferred), an employer
may rely on a reasonable, good faith
interpretation of section 3121(v)(2),
taking into account pre-existing
guidance. An employer will be deemed
to have determined FICA tax liability
and satisfied FICA withholding
requirements in accordance with a
reasonable, good faith interpretation of
section 3121(v)(2) if the employer has
complied with paragraphs (a) through (f)
of this section. For purposes of
paragraphs (g)(2) through (4) of this
section, and subject to paragraphs
(g)(2)(ii) and (iii) of this section,
whether an employer that has not
complied with paragraphs (a) through (f)
of this section has determined FICA tax
liability and satisfied FICA withholding
requirements in accordance with 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.
(ii) Plan must be established or
adopted. If an amount is deferred under
a plan before January 1, 2000, and
benefit payments attributable to that
amount are actually or constructively
paid on or after January 1, 2000, then in
no event will an employer’s treatment of
the amount deferred be considered to be
in accordance with a reasonable, good
faith interpretation of section 3121(v)(2)
if the employer treats that amount as
taken into account as wages for FICA tax
purposes prior to the establishment of
the plan (within the meaning of
paragraph (b)(2) of this section)
providing for the deferred compensation
(or, if later, the establishment of the
plan as amended to provide for the
deferred compensation, as provided in
paragraph (b)(2)(ii) of this section). If an
amount is deferred under a plan before
January 1, 2000, and benefit payments
attributable to that amount are actually
or constructively paid before January 1,
2000, then in no event will the
employer’s treatment of that amount
deferred be considered to be in
accordance with a reasonable, good faith
interpretation of section 3121(v)(2) if the
employer treats that amount as taken
into account as wages for FICA tax
purposes prior to the adoption of the
plan providing for the deferred

4564

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

compensation (or, if later, the adoption
of the plan amendment providing the
deferred compensation). For example,
awards, bonuses, raises, incentive
payments, and other similar amounts
granted under a plan as compensation
for past services may not be taken into
account under section 3121(v)(2) prior
to the establishment (or, if applicable,
the adoption) of the plan.
(iii) Certain changes in position for
stock options, stock appreciation rights,
and other stock value rights not
reasonable, good faith interpretation. In
the case of a stock option, stock
appreciation right, or other stock value
right (as defined in paragraph (b)(4)(ii)
of this section) that is exercised before
January 1, 2000, an employer that treats
the exercise as not subject to FICA tax
as a result of the nonduplication rule of
section 3121(v)(2)(B) is not acting 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) by reporting the current value
of such options and rights as FICA
wages on Form 941 filed for the quarter
during which each grant was made (or,
if later, for the quarter during which
each grant ceased to be subject to a
substantial risk of forfeiture).
(3) Optional adjustments to conform
with this section for pre-effective-date
open periods—(i) General rule. If an
employer determined FICA tax liability
with respect to section 3121(v)(2) in any
period ending before January 1, 2000,
for which the applicable period of
limitations has not expired on January
1, 2000 (pre-effective-date open
periods), in a manner that was not in
accordance with this section, the
employer may adjust its FICA tax
determination for that period to conform
to this section. Thus, if an amount
deferred was taken into account in a
pre-effective-date open period when it
was not required to be taken into
account (e.g., an amount taken into
account before it became reasonably
ascertainable), the employer may claim
a refund or credit for any FICA tax paid
on that amount to the extent permitted
by sections 6402, 6413, and 6511.
(ii) Consistency required. In the case
of a plan that is not a nonqualified
deferred compensation plan (within the
meaning of paragraph (b)(1) of this
section), if any payment was actually or
constructively paid to an employee
under the plan in a pre-effective-date
open period and that payment was not
included in FICA wages by reason of the
employer’s treatment of the plan as a
nonqualified deferred compensation
plan, then the employer may claim a
refund or credit for FICA tax paid on

amounts treated as amounts deferred
under the plan (in accordance with the
employer’s treatment of the plan as a
nonqualified deferred compensation
plan) for that employee for pre-effectivedate open periods only to the extent that
the FICA tax paid on all amounts treated
as amounts deferred for the employee in
all pre-effective-date open periods
under the plan exceeds the FICA tax
that would have been due on the
benefits actually or constructively paid
to the employee in those periods under
the plan if those benefits were included
in FICA wages when paid. If any benefit
payments attributable to amounts
deferred after December 31, 1993, were
actually or constructively paid to an
employee under a nonqualified deferred
compensation plan (within the meaning
of paragraph (b)(1) of this section) in a
pre-effective-date open period, but these
payments were treated as subject to
FICA tax because the employer treated
the plan as not being a nonqualified
deferred compensation plan, then the
employer may claim a refund or credit
for the FICA tax paid on those benefit
payments only to the extent that the
FICA tax paid on those benefit
payments exceeds the FICA tax that
would have been due on the amounts
deferred to which those benefit
payments are attributable if those
amounts deferred had been taken into
account when they would have been
required to have been taken into
account under this section (if this
section had been in effect then).
(iii) Reporting. Any employer that
adjusts its FICA tax determination in
accordance with paragraphs (g)(3)(i) and
(ii) of this section must make
appropriate adjustments on Form 941
and Form 941c for the affected periods,
and, in addition, must file and furnish
Form W–2, or, if applicable, Form W–
2c, for any affected employee so that the
Social Security Administration may
correctly post the amount deferred to
the employee’s earnings record. The
adjustments may be made in accordance
with section 6205(a) and the regulations
thereunder; however, for purposes of
§ 31.6205–1(b), the error is not required
to be treated as ascertained before
March 31, 2000.
(4) Application of reasonable, good
faith standard—(i) Plans that are not
subject to section 3121(v)(2). If a plan is
not a nonqualified deferred
compensation plan within the meaning
of paragraph (b)(1) of this section, but,
for a period ending prior to January 1,
2000, and, pursuant to a reasonable,
good faith interpretation of section
3121(v)(2), an amount under the plan
was taken into account (within the
meaning of paragraph (d)(1) of this

section) as an amount deferred under a
nonqualified deferred compensation
plan, then, pursuant to paragraph (g)(2)
of this section, the following rules shall
apply—
(A) With respect to benefit payments
actually or constructively paid before
January 1, 2000, that are attributable to
amounts previously taken into account
under the plan, no additional FICA tax
will be due;
(B) On or after January 1, 2000, benefit
payments under the plan must be taken
into account as wages when actually or
constructively paid in accordance with
paragraph (a)(1) of this section; and
(C) To the extent permitted by
paragraph (g)(3) of this section, the
employer may claim a refund or credit
for FICA tax actually paid on amounts
taken into account prior to January 1,
2000.
(ii) Plans that are subject to section
3121(v)(2) for which the amount
deferred has not been fully taken into
account—(A) In general. The rules of
paragraphs (g)(4)(ii)(B) through (E) of
this section apply if a plan is a
nonqualified deferred compensation
plan (within the meaning of paragraph
(b)(1) of this section) and, with respect
to an amount deferred under the plan
for an employee prior to January 1,
2000, the employer, in accordance with
a reasonable, good faith interpretation of
section 3121(v)(2), either took into
account an amount that is less than the
amount that would have been required
to be taken into account if paragraphs
(a) through (f) of this section had been
in effect for that period or took no
amount into account. Thus, paragraphs
(g)(4)(ii)(B) through (E) of this section
apply both to an employer that treated
the plan as if it were not a nonqualified
deferred compensation plan within the
meaning of section 3121(v)(2) (by
withholding and paying FICA tax due
on benefits actually or constructively
paid under the plan during that period,
if any) and to an employer that treated
the plan as a nonqualified deferred
compensation plan within the meaning
of section 3121(v)(2).
(B) No additional tax required.
Pursuant to paragraph (g)(2) of this
section, no additional FICA tax will be
due for any period ending prior to
January 1, 2000.
(C) General timing rule applicable. In
accordance with paragraph (d)(1)(ii) of
this section, except as provided in
paragraphs (g)(4)(ii) (D) and (E), the
general timing rule described in
paragraph (a)(1) of this section applies
to benefits actually or constructively
paid on or after January 1, 2000,
attributable to an amount deferred in a
period before January 1, 2000, to the

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
extent the amount taken into account
was less than the amount that would
have been required to be taken into
account if paragraphs (a) through (f) of
this section had been in effect before
January 1, 2000.
(D) Special rule for amounts deferred
before 1994. The difference between the
amount that was taken into account in
any period ending prior to January 1,
1994, and the amount that would have
been required or permitted to be taken
into account in that period if paragraphs
(a) through (f) of this section had been
in effect is treated as if it had been taken
into account within the meaning of
paragraph (d)(1) of this section. For
example, in the case of an amount
deferred before 1994 that was not
reasonably ascertainable (and which
was not subject to a substantial risk of
forfeiture), the employer is treated as if
it had anticipated the actual amount,
form, and commencement date for the
benefit payments attributable to the
amount deferred and had taken the
amount deferred into account at an early
inclusion date before 1994 using a
method permitted under this section.
Thus, with respect to such an amount
deferred, the employer is not required to
take any additional amount into account
when the amount deferred becomes
reasonably ascertainable, and no
additional FICA tax will be due when
the benefit payments attributable to the
amount deferred are actually or
constructively paid.
(E) Special rule for amounts required
to be taken into account in 1994 or
1995. In the case of an amount deferred
that would have been required to be
taken into account in 1994 or 1995 if
paragraphs (a) through (f) of this section
had been in effect, an employer will be
treated as taking the amount deferred
into account under paragraph (d)(1) of
this section 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.
(iii) Plans that are subject to section
3121(v)(2) for which more than the
amount deferred has been taken into
account. If a plan is a nonqualified
deferred compensation plan (within the
meaning of paragraph (b)(1) of this
section) and an amount was taken into
account under the plan for an employee
before January 1, 2000, in accordance
with a reasonable, good faith
interpretation of section 3121(v)(2), but
that amount could not have been taken
into account before January 1, 2000, if
paragraphs (a) through (f) of this section
had been in effect then, the following
rules apply—

(A) The determination of the amount
deferred for any period beginning on or
after January 1, 2000, must be made in
accordance with paragraph (c) of this
section, and the time when amounts
deferred under the plan are required to
be taken into account must be
determined in accordance with
paragraph (e) of this section, without
regard to any such amount that was
taken into account for any period
ending before January 1, 2000; and
(B) To the extent permitted by
sections 6402, 6413, and 6511, the
employer may claim a refund or credit
for an overpayment of tax caused by the
overinclusion of wages that occurred
before January 1, 2000.
(5) Examples. This paragraph (g) is
illustrated by the following examples:
Example 1. (i) In 1996, Employer M
establishes a nonqualified deferred
compensation plan that is a nonaccount
balance plan for Employee A. All benefits
under the plan are 100 percent vested. In
order to determine the amount deferred on
behalf of Employee A under the plan for 1996
and 1997, Employer M must make
assumptions as to the date on which
Employee A will retire and the form of
benefit Employee A will elect, in addition to
interest, mortality, and cost-of-living
assumptions. Based on assumptions made
with respect to all of these contingencies,
Employer M determines that the amount
deferred for 1996 is $50,000 and the amount
deferred for 1997 is $55,000. In 1996 and
1997, Employee A’s total wages (without
regard to the amounts deferred) exceed the
OASDI wage bases. Employer M withholds
and deposits HI tax on the $50,000 and
$55,000 amounts. Employee A does not retire
before January 1, 2000. Employer M chooses
under paragraph (g)(3) of this section to
apply this section to 1996 and 1997 before
the January 1, 2000, general effective date.
(ii) Under this section, the amounts
deferred in 1996 and 1997 are not reasonably
ascertainable (within the meaning of
paragraph (e)(4)(i) of this section) before
January 1, 2000. Thus, as long as the
applicable period of limitations has not
expired for the periods in 1996 and 1997,
Employer M may, to the extent permitted
under paragraph (g)(3) of this section, apply
for a refund or credit for the HI tax paid on
the amounts deferred for 1996 and 1997 and,
in accordance with paragraph (e)(4) of this
section, take into account the amounts
deferred when they become reasonably
ascertainable.
Example 2. (i) Employer N adopts a plan
on January 1, 1994, that covers Employee B,
who has 10 years of service as of that date.
The plan provides that, in consideration of
Employee B’s outstanding services over the
past 10 years, Employee B will be paid a
$500,000 lump sum distribution upon
termination of employment at any time. On
January 15, 1996, Employee B terminates
employment with Employer N. Employer N
determines, based on a reasonable, good faith
interpretation of section 3121(v)(2), that the
plan is a nonqualified deferred compensation

4565

plan under that section. Employer N treats
the $500,000 as having been taken into
account as an amount deferred in 1993 and
earlier years.
(ii) Under paragraph (g)(2)(ii) of this
section, if all amounts are deferred and all
benefits are paid under a plan before January
1, 2000, then in no event will an employer’s
treatment of amounts deferred under the plan
be considered to be in accordance with a
reasonable, good faith interpretation of
section 3121(v)(2) if the employer treats these
amounts as taken into account as wages for
FICA tax purposes prior to the adoption of
the plan. Accordingly, Employer N’s
treatment is not in accordance with a
reasonable, good faith interpretation of
section 3121(v)(2) because Employer N
treated amounts as taken into account in
years before the adoption of the plan. As a
result, the payment made to Employee B in
1996 was subject to both the OASDI and HI
portions of FICA tax when paid.
Example 3. (i) Employer O adopts a bonus
plan on December 1, 1993, that becomes
effective and legally binding on January 1,
1994. Under the plan, which is not set forth
in writing, a specified bonus amount (which
is 100 percent vested) is credited to
Employee C’s account each December 31. A
reasonable rate of interest on Employee C’s
account balance is credited quarterly.
Employee C’s account balance will begin to
be paid in equal annual installments over 10
years beginning on January 1, 2000.
Employer O determines, based on a
reasonable, good faith interpretation of
section 3121(v)(2), that the bonus plan is a
nonqualified deferred compensation plan
under that section and, therefore, treats the
amounts credited from January 1, 1994,
through December 31, 1999, as amounts
deferred and, in accordance with a
reasonable, good faith interpretation of
section 3121(v)(2), takes those amounts
deferred into account as wages for FICA tax
purposes as of those dates. The bonus plan
is set forth in writing on May 1, 1999, and,
thus, is treated as established as of January
1, 1994.
(ii) Under paragraph (g)(2)(ii) of this
section, if an amount is deferred before
January 1, 2000, and the attributable benefit
is paid on or after January 1, 2000, then in
no event will an employer’s treatment of the
amount deferred under a plan be considered
to be in accordance with a reasonable, good
faith interpretation of section 3121(v)(2) if
the employer treats the amount deferred as
taken into account as wages for FICA tax
purposes prior to the establishment of the
plan (within the meaning of paragraph (b)(2)
of this section). Because the bonus plan is
treated as established on January 1, 1994
(pursuant to the transition rule for unwritten
plans in paragraph (b)(2)(iii) of this section),
and because Employer O, in accordance with
a reasonable, good faith interpretation of
section 3121(v)(2), took amounts deferred
into account in 1994 through 1999, the
amounts paid to Employee C attributable to
those amounts deferred will not be subject to
FICA tax when paid.
Example 4. (i) In 1985, Employer P
establishes a compensation arrangement for
Employee D that provides for a lump sum

4566

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

payment to be made after termination of
employment but the arrangement is not a
nonqualified deferred compensation plan
(within the meaning of paragraph (b)(1) of
this section). However, prior to January 1,
2000, and in accordance with a reasonable,
good faith interpretation of section
3121(v)(2), Employer P treats the
arrangement as a nonqualified deferred
compensation plan under section 3121(v)(2).
Employer P determines that Employee D’s
total wages (without regard to the amount
deferred) for each year from 1985 through
1993 exceed the applicable OASDI and HI
wage bases for each of those years and,
consequently, there is no FICA tax liability
with respect to the amounts deferred for
those years. In 1994, Employee D’s total
wages (without regard to the amount
deferred) exceed the OASDI wage base.
However, because there is no limit on the HI
wage base, the amount deferred for 1994
results in additional HI tax liability of $290,
which is timely paid by Employer P.
(ii) Employee D terminates employment
with Employer P in 1995 and receives a plan
payment of $50,000. In that year, Employee
D also receives wages of $60,000 from
Employer P. In accordance with its treatment
of the plan as a nonqualified deferred
compensation plan under section 3121(v)(2),
Employer P does not treat the $50,000
payment in 1995 as wages for FICA tax
purposes in that year.
(iii) Because amounts under a plan were
taken into account (within the meaning of
paragraph (d)(1) of this section) as amounts
deferred under a nonqualified deferred
compensation plan pursuant to a reasonable,
good faith interpretation of section
3121(v)(2)(A), but that plan is not a
nonqualified deferred compensation plan
within the meaning of paragraph (b)(1) of this
section, the transition rules provided in
paragraph (g)(4)(i) of this section apply.
Thus, no additional FICA tax will be due on
the benefits paid in 1995.
(iv) Because $290 of HI tax was paid on the
amount deferred in 1994, Employer P is
entitled to a refund or credit for that amount
to the extent permitted under sections 6402,
6413, and 6511—but only to the extent that
$290 exceeds the FICA tax that would have
been due on the $50,000 payment in 1995 if
that payment had been subject to FICA tax
when paid (i.e., if paragraphs (a) through (f)
of this section had been effective for those
years). In 1995, Employee D had other wages
of $60,000. Thus, only $1,200 (the $61,200
OASDI wage base, less the $60,000 of other
wages) of the $50,000 payment would have
been subject to OASDI; the full $50,000
would have been subject to HI. This would
have resulted in $148.80 of OASDI tax
($1,200 x 12.4 percent) and $1,450 of HI tax
($50,000 x 2.9 percent). Employer P is not
entitled to a refund or credit under the
consistency rule of paragraph (g)(3)(ii)
because the $290 of HI tax paid in 1994 is
less than the total $1,598.80 of FICA tax
liability that would have resulted if this
section had applied for 1995.
(v) However, if the benefit payment is
instead actually or constructively paid on or
after January 1, 2000, the benefit payment
must be taken into account as wages when

actually or constructively paid in accordance
with the general timing rule of paragraph
(a)(1) of this section (and paragraph
(g)(4)(i)(B) of this section).
Example 5. (i) In 1985, Employer Q
establishes a compensation arrangement for
Employee E that is a nonqualified deferred
compensation plan within the meaning of
paragraph (b)(1) of this section. However,
prior to January 1, 2000, Employer Q
determines, based on a reasonable, good faith
interpretation of section 3121(v)(2), that the
arrangement is not a nonqualified deferred
compensation plan within the meaning of
that section. Thus, when Employee E retires
at the end of 1996 and benefit payments
under the arrangement begin in 1997,
Employer Q withholds and deposits FICA tax
on the amounts paid to Employee E.
Payments under the arrangement continue on
or after January 1, 2000. Employer Q does not
choose (under paragraph (g)(3) of this
section) to adjust its FICA tax determination
for a pre-effective-date open period by
treating this section as in effect for all
amounts deferred and benefits actually or
constructively paid for any such period. The
periods in 1994 and 1995 are not preeffective-date open periods for Employer Q.
(ii) Under paragraph (g)(4)(ii) of this
section, for purposes of determining whether
benefits actually or constructively paid on or
after January 1, 2000, were previously taken
into account for purposes of applying the
nonduplication rule of section 3121(v)(2)(B),
any amount that would have been required
to have been taken into account before 1994
will be treated as if it had been taken into
account within the meaning of paragraph
(d)(1) of this section. Under the
nonduplication rule, benefit payments
attributable to an amount that has been so
treated as taken into account is not treated as
wages for FICA tax purposes at any later time
(such as upon payment).
(iii) Because Employer Q does not adjust
its FICA tax determination by treating this
section as in effect for all amounts deferred
for periods ending after December 31, 1993,
any benefit payments attributable to amounts
deferred in periods ending after December
31, 1993, will be included in wages when
actually or constructively paid in accordance
with the general timing rule of paragraph
(a)(1) of this section.
Example 6. (i) The facts are the same as in
Example 5, except that Employer Q chooses
(in accordance with paragraph (g)(3) of this
section) to adjust its FICA tax determination
for all pre-effective-date open periods by
treating this section as in effect for all
amounts deferred for those periods. In
addition, Employer Q chooses (in accordance
with paragraph (g)(4)(ii)(E) of this section) to
take the amounts deferred for 1994 and 1995
into account by treating these amounts as
FICA wages paid and received by Employee
E on January 15, 2000.
(ii) In accordance with the nonduplication
rule of paragraph (a)(2)(iii) of this section,
because all amounts deferred for Employee E
under the plan were taken into account (or
treated as taken into account), any benefit
payments made to Employee E under the
plan will not be included as FICA wages
when actually or constructively paid.

Example 7. (i) The facts are the same as in
Example 5, except that Employer Q does not
withhold and deposit the FICA tax due on
benefits actually or constructively paid
before January 1, 2000.
(ii) Because Employer Q did not withhold
and deposit the FICA tax due on benefits
actually or constructively paid before January
1, 2000, Employer Q did not determine FICA
tax liability and satisfy FICA tax withholding
requirements in accordance with a
reasonable, good faith interpretation of
section 3121(v)(2). Thus, the transition rules
provided in paragraphs (g)(3) and (4) of this
section do not apply. As a result, any amount
that would have been required to have been
taken into account under this section before
1994 is not treated as if it had been so taken
into account under paragraph (g)(4)(ii)(D) of
this section, and benefit payments
attributable to amounts deferred before
January 1, 2000, are treated as FICA wages
when actually or constructively paid in
accordance with the general timing rule of
paragraph (a)(1) of this section.
Example 8. (i) In 1993, Employer R
establishes a nonqualified deferred
compensation plan for Employee F under
which Employee F will have a fully vested
right to receive a lump sum payment in 2000
equal to 50 percent of Employee F’s highest
rate of salary. On December 31, 1993,
Employee F’s highest salary is $1 million. In
accordance with a reasonable, good faith
interpretation of section 3121(v)(2), Employer
R determines that, for 1993, there is an
amount deferred that must be taken into
account as wages for FICA tax purposes.
Based Employer R’s estimate that Employee
F’s highest salary will be $3 million in 2000,
Employer R determines that the amount
deferred is equal to the present value in 1993
of $1.5 million payable in 2000. However,
because Employee F has other wages in 1993
that exceed the applicable OASDI and HI
wage bases for that year, no additional FICA
tax is paid as a result of that amount deferred
being taken into account for 1993. In
addition, Employer R takes no amounts into
account under the plan after 1993 for
Employee F. Under paragraphs (e)(1) and
(4)(ii)(D)(2) of this section, the largest amount
that could have been taken into account in
1993 is the present value of a lump sum
payment of $500,000, payable in 2000,
because that is the maximum amount to
which Employee R has a legally binding right
as of December 31, 1993. Employee F’s
highest salary is, in fact, $3 million in 2000
and Employee F receives $1.5 million under
the plan on December 31, 2000.
(ii) In accordance with paragraphs (g)(1)
and (4)(iii)(A) of this section, the
determination of the amount deferred under
the plan for any period beginning on or after
January 1, 2000, and the time when that
amount deferred is required to be taken into
account must be determined in accordance
with this section. In addition, these
determinations must be made without regard
to any amount deferred that was taken into
account for any period ending before January
1, 2000, that could not be taken into account
before January 1, 2000, if paragraphs (a)
through (f) of this section had been in effect.
Because no FICA tax was actually paid on

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations
that $1 million in 1993, no overpayment of
tax was caused by the overinclusion of wages
in 1993 and, thus, Employer R is not entitled
to a refund or credit (even assuming that the
period of limitations has been kept open for
periods in 1993). In addition, because the
difference between the present value of the
$1.5 million payment and the present value
of a $500,000 payment was not taken into
account for periods beginning on or after
January 1, 1994, $1 million must be included
in FICA wages under the general timing rule
when paid.
§ 31.3121(v)(2)–2
transition rules.

Effective dates and

(a) General statutory effective date.
Except as otherwise provided in
paragraphs (b) through (e) of this
section, section 3121(v)(2) and the
amendments made to section 3121(a)(2),
(a)(3), and (a)(13) by the Social Security
Amendments of 1983 (Pub. L. 98–21, 97
Stat. 65), as amended by section
2662(f)(2) of the Deficit Reduction Act
of 1984 (Pub. L. 98–369, 98 Stat. 494),
apply to amounts deferred and benefits
paid after December 31, 1983.
(b) Definitions. For purposes of
§ 31.3121(v)(2)–1 and this section, the
following definitions apply:
(1) FICA. FICA means the Federal
Insurance Contributions Act (26 U.S.C.
3101 et seq.).
(2) 457(a) plan. A 457(a) plan means
an eligible deferred compensation plan
of a State or local government or of a
tax-exempt organization to which
section 457(a) applies.
(3) Gap agreement. Gap agreement
means an agreement adopted after
March 24, 1983, and on or before
December 31, 1983, between an
individual and a nonqualified deferred
compensation plan within the meaning
of § 31.3121(v)(2)–1(b). Such an
agreement does not fail to be a gap
agreement merely because the terms of
the plan are changed after December
31,1983.
(4) Individual party to a gap
agreement. Individual party to a gap
agreement means an individual who
was eligible to participate in a gap
agreement on December 31, 1983, under
the terms of the agreement on that date.
An individual will be treated as an
individual party to a gap agreement
even if the individual has not accrued
any benefits under the plan by
December 31, 1983, and regardless of
whether the individual has taken any
specific action to become a party to the
agreement. However, an individual who
becomes eligible to participate in a gap
agreement after December 31, 1983, is
not an individual party to a gap
agreement.
(5) Individual party to a March 24,
1983 agreement. Individual party to a

March 24, 1983 agreement means an
individual who was eligible to
participate in a March 24, 1983
agreement under the terms of the
agreement on March 24, 1983. An
individual will be treated as an
individual party to a March 24, 1983
agreement even if the individual has not
accrued any benefits under the plan by
March 24, 1983, and regardless of
whether the individual has taken any
specific action to become a party to the
agreement. However, an individual who
becomes eligible to participate in a
March 24, 1983 agreement after March
24, 1983, is not an individual party to
a March 24, 1983 agreement.
(6) March 24, 1983 agreement. March
24, 1983 agreement means an agreement
in existence on March 24, 1983,
between an individual and a
nonqualified deferred compensation
plan within the meaning of
§ 31.3121(v)(2)–1(b). Such an agreement
does not fail to be a March 24, 1983
agreement merely because the terms of
the plan are changed after March 24,
1983. In addition, for purposes of this
paragraph (b)(6) only, any plan (or
agreement) that provides for payments
that qualify for one of the retirement
payment exclusions is treated as a
nonqualified deferred compensation
plan. For example, § 31.3121(v)(2)–
1(b)(4)(v) provides that certain benefits
established in connection with
impending termination do not result
from the deferral of compensation and
thus are not considered deferred under
a nonqualified deferred compensation
plan. However, a plan that provides
such benefits and that was in existence
on March 24, 1983, is treated as a
nonqualified deferred compensation
plan for purposes of this paragraph (b)
to the extent it provides benefits that
would have satisfied one of the
retirement payment exclusions.
(7) Retirement payment exclusions.
Retirement payment exclusions are the
exclusions from wages (for FICA tax
purposes) for retirement payments
under section 3121(a)(2)(A), (a)(3), and
(a)(13)(A)(iii), as in effect on April 19,
1983 (the day before enactment of the
Social Security Amendments of 1983).
(8) Transition benefits. Transition
benefits are payments made after
December 31, 1983, attributable to
services rendered before January 1,
1984. For this purpose, transition
benefits are determined without regard
to any changes made in the terms of the
plan after March 24, 1983, in the case
of a March 24, 1983 agreement or after
December 31, 1983, in the case of a gap
agreement.
(c) Transition rules—(1) In general.
Except as provided in paragraph (c)(2)

4567

or (3) of this section, the general
statutory effective date described in
paragraph (a) of this section applies to
benefit payments after December 31,
1983. Thus, except as provided in
paragraph (c)(2) or (3) of this section,
section 3121(v)(2) applies, and the
retirement payment exclusions do not
apply, to benefit payments made after
December 31, 1983, even if the benefit
payments are made under a March 24,
1983 agreement or a gap agreement.
(2) Transition benefits under a March
24, 1983 agreement. With respect to an
individual party to a March 24, 1983
agreement, transition benefits paid
under that March 24, 1983 agreement
(except for those paid under a 457(a)
plan) are not subject to the special
timing rule of section 3121(v)(2) and are
subject to section 3121(a) as in effect on
April 19, 1983. Thus, transition benefits
under a March 24, 1983 agreement
(except for those under a 457(a) plan) to
an individual party to a March 24, 1983
agreement are excluded from wages (for
FICA tax purposes) only if they qualify
for any of the retirement payment
exclusions (or any other exclusion
provided under section 3121(a) as in
effect on April 19, 1983).
(3) Transition benefits under a gap
agreement. With respect to an
individual party to a gap agreement, the
payor of transition benefits under the
gap agreement must choose to either—
(i) Take the transition benefits into
account as wages when paid; or
(ii) Take the amount deferred (within
the meaning of § 31.3121(v)(2)–1(c))
with respect to the transition benefits
into account as wages under section
3121(v)(2) (as if section 3121(v)(2) had
applied before its general statutory
effective date).
(d) Determining transition benefit
portion. For purposes of determining
the portion of total benefits under a
nonqualified deferred compensation
plan that represents transition benefits,
if, under the terms of the plan, benefit
payments are not attributed to specific
years of service, the employer may use
any reasonable method. For example, if
a plan provides that the employee will
receive benefits equal to 2 percent of
high 3-year average compensation
multiplied by years of service, and the
employee retires after 25 years of
service, 9 of which are before 1984, the
employer may determine that 9/25 of
the total benefit payments to be received
beginning in 2000 are transition benefits
attributable to services performed before
1984.
(e) Order of payment. If an employer
determines, in accordance with
paragraph (d) of this section, that a
portion of the total benefits under a

4568

Federal Register / Vol. 64, No. 19 / Friday, January 29, 1999 / Rules and Regulations

nonqualified deferred compensation
plan constitutes transition benefits,
then, for purposes of determining the
portion of each benefit payment that
constitutes transition benefits, the
employer must treat each benefit
payment as consisting of transition
benefits in the same proportion as the
transition benefits that have not been
paid (as of January 1, 2000) bear to total
benefits that have not been paid (as of
January 1, 2000), unless such allocation
is inconsistent with the terms of the
plan. However, for a benefit payment
made before January 1, 2000, the
employer may use any reasonable
allocation method to determine the
portion of a payment that consists of
transition benefits, provided that the
allocation method is consistent with the
terms of the plan.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 4. In § 602.101, paragraph (c) is
amended by adding the following entry
in the table in numerical order to read
as follows:
§ 602.101

*

OMB Control numbers.

*
*
(c) * * *

*

*

CFR part or section where identified and described

Current
OMB
control
No.

*
*
*
*
*
31.3121(v)(2)–1 .......................... 1545–1643
*

*

*

*

*

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: December 23, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 99–1663 Filed 1–28–99; 8:45 am]
BILLING CODE 4830–01–P

ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 52
[GA 34–2–9902a; FRL–6227–7]

Approval and Promulgation of
Implementation Plans Georgia:
Approval of Revisions to Georgia State
Implementation Plan; Vehicle
Inspection/Maintenance Program
Environmental Protection
Agency (EPA).
ACTION: Final interim rule.
AGENCY:

EPA is approving the
enhanced Inspection/Maintenance (I/M)
program for the State of Georgia. The
program had initially been given
conditional interim approval under the
terms of section 110 of the Clean Air Act
(CAA) and section 348 of the National
Highway Systems Designation Act
(NHSDA), as noted in EPA’s final
conditional interim rule action in the
August 11, 1997, Federal Register. Due
to delays in implementing Phase 2 of
the program, the Georgia enhanced I/M
program had been disapproved on
March 11, 1998, which triggered an
eighteen month clock prior to the
imposition of sanctions. This approval
action also serves to stop the sanctions
clock.
DATES: This final interim rule is
effective March 30, 1999 without further
notice, unless EPA receives adverse
comment by March 1, 1999. If adverse
comment is received, EPA will publish
a timely withdrawal of the final interim
rule in the Federal Register and inform
the public that the rule will not take
effect.
ADDRESSES: All comments should be
addressed to: Scott M. Martin at the
EPA, Region 4 Air Planning Branch, 61
Forsyth Street, SW, Atlanta, Georgia
30303.
Copies of the state submittal(s) are
available at the following addresses for
inspection during normal business
hours:
Environmental Protection Agency,
Region 4, Air Planning Branch, 61
Forsyth Street, SW, Atlanta, Georgia
30303–8960. Contact Scott Martin 404–
562–9036. Reference file Georgia 34–2–
9902.
Air Protection Branch, Georgia
Environmental Protection Division,
Georgia Department of Natural
Resources, 4244 International Parkway,
Suite 120, Atlanta, Georgia 30354.
FOR FURTHER INFORMATION CONTACT:
Scott M. Martin at 404–562–9036 or for
information regarding the I/M program
contact Dale Aspy at 404–562–9041.
SUMMARY:

SUPPLEMENTARY INFORMATION:

I. Background
On December 13, 1996 (61 FR 65496),
EPA published a notice of proposed
rulemaking (NPR) for the State of
Georgia. The NPR proposed conditional
interim approval of Georgia’s enhanced
I/M program, for the Atlanta ozone
nonattainment area, submitted to satisfy
the applicable requirements of both the
CAA and the NHSDA. The formal SIP
revision, which was submitted by the
Georgia Environmental Protection
Division (EPD) on March 27, 1996,
contained plans to implement the
program in two phases. The plan for
Phase 1 described how the program
would be expanded from the four
counties in the previous program to the
13 ozone nonattainment counties. Phase
1 also implemented a two speed idle
(TSI) test and a gas cap pressure check
for all vehicles that were subject to an
emissions inspection. The
implementation of Phase 2 requires an
acceleration simulation mode (ASM)
test for vehicles older than six model
years, while newer vehicles continue to
be subject to the TSI test. Phase 2 also
implements minor changes in emission
testing software. It was proposed the
program be conditionally approved
because it lacked ASM test method
specifications and a requirement to
implement the program in a timely
manner. Subsequently, on January 31,
1997, the Georgia EPD submitted the
necessary ASM test method, satisfying
one of the conditions for program
approval. These specifications were
largely based upon EPA’s specifications
for the ASM test. Therefore, on August
11, 1997 (62 FR 42916) EPA noted the
test specifications condition of the
December 13, 1996, proposal was met
and removed, and final conditional
interim approval was given to the
program, contingent upon a timely startup. The Georgia EPD began
implementation of the I/M program as
scheduled and had met all program
milestones at the time the final
conditional interim approval was
published on August 11, 1997.
However, problems were encountered
when mandatory ASM testing began as
scheduled on October 1, 1997. There
were an insufficient number of stations
capable of performing ASM testing due
to a lack of test equipment and also
other hardware and software problems.
Due to the continued inability of
equipment vendors to supply a
sufficient number of stations with
approved ASM equipment and Phase 2
software, the State passed an emergency
rule on November 15, 1997, effective on
the same day, that temporarily