[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.457-11]

[Page 186-188]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.457-11  Tax treatment of participants if plan is not an eligible plan.

    (a) In general. Under section 457(f), if an eligible employer 
provides for a deferral of compensation under any agreement or 
arrangement that is an ineligible plan--
    (1) Compensation deferred under the agreement or arrangement is 
includible in the gross income of the participant or beneficiary for the 
first taxable year in which there is no substantial risk of forfeiture 
(within the meaning of section 457(f)(3)(B)) of the rights to such 
compensation;
    (2) If the compensation deferred is subject to a substantial risk of 
forfeiture, the amount includible in gross income for the first taxable 
year in which there is no substantial risk of forfeiture includes 
earnings thereon to the date on which there is no substantial risk of 
forfeiture;
    (3) Earnings credited on the compensation deferred under the 
agreement or arrangement that are not includible in gross income under 
paragraph (a)(2) of this section are includible in the gross income of 
the participant or beneficiary only when paid or made available to the 
participant or beneficiary, provided that the interest of the 
participant or beneficiary in any assets (including amounts deferred 
under the plan) of the entity sponsoring the agreement or arrangement is 
not senior to the entity's general creditors; and
    (4) Amounts paid or made available to a participant or beneficiary 
under the agreement or arrangement are includible in the gross income of 
the participant or beneficiary under section 72, relating to annuities.
    (b) Exceptions. Paragraph (a) of this section does not apply with 
respect to--
    (1) A plan described in section 401(a) which includes a trust exempt 
from tax under section 501(a);
    (2) An annuity plan or contract described in section 403;
    (3) That portion of any plan which consists of a transfer of 
property described in section 83;
    (4) That portion of any plan which consists of a trust to which 
section 402(b) applies; or
    (5) A qualified governmental excess benefit arrangement described in 
section 415(m).
    (c) Amount included in income. The amount included in gross income 
on the applicable date under paragraphs (a)(1) and (a)(2) of this 
section is equal to the present value of the compensation (including 
earnings to the extent provided in paragraph (a)(2) of this section) on 
that date. For purposes of applying section 72 on the applicable date 
under paragraphs (a)(3) and (4) of this section, the participant is 
treated as having paid investment in the contract (or basis) to the 
extent that the deferred compensation has been taken into account by the 
participant in accordance with paragraphs (a)(1) and (a)(2) of this 
section.

[[Page 187]]

    (d) Coordination of section 457(f) with section 83-- (1) General 
rules. Under paragraph (b)(3) of this section, section 457(f) and 
paragraph (a) of this section do not apply to that portion of any plan 
which consists of a transfer of property described in section 83. For 
this purpose, a transfer of property described in section 83 means a 
transfer of property to which section 83 applies. Section 457(f) and 
paragraph (a) of this section do not apply if the date on which there is 
no substantial risk of forfeiture with respect to compensation deferred 
under an agreement or arrangement that is not an eligible plan is on or 
after the date on which there is a transfer of property to which section 
83 applies. However, section 457(f) and paragraph (a) of this section 
apply if the date on which there is no substantial risk of forfeiture 
with respect to compensation deferred under an agreement or arrangement 
that is not an eligible plan precedes the date on which there is a 
transfer of property to which section 83 applies. If deferred 
compensation payable in property is includible in gross income under 
section 457(f), then, as provided in section 72, the amount includible 
in gross income when that property is later transferred or made 
available to the service provider is the excess of the value of the 
property at that time over the amount previously included in gross 
income under section 457(f).
    (2) Examples. The provisions of this paragraph (d) are illustrated 
in the following examples:

    Example 1. (i) Facts. As part of an arrangement for the deferral of 
compensation, an eligible employer agrees on December 1, 2002 to pay an 
individual rendering services for the eligible employer a specified 
dollar amount on January 15, 2005. The arrangement provides for the 
payment to be made in the form of property having a fair market value 
equal to the specified dollar amount. The individual's rights to the 
payment are not subject to a substantial risk of forfeiture (within the 
meaning of section 457(f)(3)(B)).
    (ii) Conclusion. In this Example 1, because there is no substantial 
risk of forfeiture with respect to the agreement to transfer property in 
2005, the present value (as of December 1, 2002) of the payment is 
includible in the individual's gross income for 2002. Under paragraph 
(a)(4) of this section, when the payment is made on January 15, 2005, 
the amount includible in the individual's gross income is equal to the 
excess of the fair market value of the property when paid, over the 
amount that was includible in gross income for 2002 (which is the basis 
allocable to that payment).
    Example 2. (i) Facts. As part of an arrangement for the deferral of 
compensation, individuals A and B rendering services for a tax-exempt 
entity each receive in 2010 property that is subject to a substantial 
risk of forfeiture (within the meaning of section 457(f)(3)(B) and 
within the meaning of section 83(c)(1)). Individual A makes an election 
to include the fair market value of the property in gross income under 
section 83(b) and individual B does not make this election. The 
substantial risk of forfeiture for the property transferred to 
individual A lapses in 2012 and the substantial risk of forfeiture for 
the property transferred to individual B also lapses in 2012. Thus, the 
property transferred to individual A is included in A's gross income for 
2010 when A makes a section 83(b) election and the property transferred 
to individual B is included in B's gross income for 2012 when the 
substantial risk of forfeiture for the property lapses.
    (ii) Conclusion. In this Example 2, in each case, the compensation 
deferred is not subject to section 457(f) or this section because 
section 83 applies to the transfer of property on or before the date on 
which there is no substantial risk of forfeiture with respect to 
compensation deferred under the arrangement.
    Example 3. (i) Facts. In 2004, Z, a tax-exempt entity, grants an 
option to acquire property to employee C. The option lacks a readily 
ascertainable fair market value, within the meaning of section 83(e)(3), 
has a value on the date of grant equal to $100,000, and is not subject 
to a substantial risk of forfeiture (within the meaning of section 
457(f)(3)(B) and within the meaning of section 83(c)(1)). Z exercises 
the option in 2012 by paying an exercise price of $75,000 and receives 
property that has a fair market value (for purposes of section 83) equal 
to $300,000.
    (ii) Conclusion. In this Example 3, under section 83(e)(3), section 
83 does not apply to the grant of the option. Accordingly, C has income 
of $100,000 in 2004 under section 457(f). In 2012, C has income of 
$125,000, which is the value of the property transferred in 2012, minus 
the allocable portion of the basis that results from the $100,000 of 
income in 2004 and the $75,000 exercise price.
    Example 4. (i) Facts. In 2010, X, a tax-exempt entity, agrees to pay 
deferred compensation to employee D. The amount payable is $100,000 to 
be paid 10 years later in 2020. The commitment to make the $100,000 
payment is not subject to a substantial risk of forfeiture. In 2010, the 
present value of the $100,000 is $50,000. In 2018, X transfers to D 
property having a fair market value (for purposes of section 83) equal 
to $70,000. The

[[Page 188]]

transfer is in partial settlement of the commitment made in 2010 and, at 
the time of the transfer in 2018, the present value of the commitment is 
$80,000. In 2020, X pays D the $12,500 that remains due.
    (ii) Conclusion. In this Example 4, D has income of $50,000 in 2010. 
In 2018, D has income of $30,000, which is the amount transferred in 
2018, minus the allocable portion of the basis that results from the 
$50,000 of income in 2010. (Under section 72(e)(2)(B), income is 
allocated first. The income is equal to $30,000 ($80,000 minus the 
$50,000 basis), with the result that the allocable portion of the basis 
is equal to $40,000 ($70,000 minus the $30,000 of income).) In 2020, D 
has income of $2,500 ($12,500 minus $10,000, which is the excess of the 
original $50,000 basis over the $40,000 basis allocated to the transfer 
made in 2018).

[T.D. 9075, 68 FR 41240, July 11, 2003]