Interim Guidance on the Application of § 457(f) and 409A to Certain Recurring Part-Year Compensation

Notice 2008-62 describes regulations IRS intends to propose under § 409A which will make the requirements of § 409A not apply to public school employees who work over 10 months and are paid over 12 months in most instances. Section 409A applies to nonqualified deferred compensation that is earned in one year but not paid until a future year. According to previous guidance from the IRS, if a school district allows employees who work less than 12 months to “elect” to be paid over 12 months, such employees have to submit a written election form to the school district in order to avoid any additional tax of 20% on the compensation deferred from one year to the next. IRS anticipates proposing regulations stating that no deferred compensation will arise under § 409A if: (1) the arrangement does not defer payment beyond the last day of the 13th month following the beginning of the service period; and (2) no more than the applicable dollar amount under § 402(g)(1)(B) in effect for the calendar year in which the service period begins ($15,500 for 2008) is deferred. According to the IRS, if a teacher works August 1, 2008, through May 31, 2009, and is paid over 12 months, the arrangement would not provide deferred compensation for the purposes of § 409A unless the teacher earns more than $186,000 for the school year. This rule may be relied on “beginning with the first taxable year that includes July 1, 2008.”