IRS Issues §457 Guidance on Teacher Part-Year Comp

July 2, 2008 ( - The Internal Revenue Service has issued a notice of the proposed treatment of recurring part-year compensation under §457(f) and §409A of the Internal Revenue Code.

In Notice 2008-62, the IRS said the regulations to be proposed are expected to address certain types of arrangements involving recurring part-year compensation, including common arrangements involving public school employees who provide services during a 10-month school year and elect to be paid ratably over 12 months. The IRS said taxpayers may rely on the guidance effective July 1.

The regulations to be proposed under §457(f) will specify that an arrangement in which an employee or independent contractor receives recurring part-year compensation as defined in §409A does not provide for deferred compensation for purposes of § 457(f) if:

  • the arrangement does not defer payment of any of the recurring part-year compensation beyond the last day of the 13 th month following the beginning of the service period, and
  • does not defer from one taxable year to the next taxable year the payment of 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).

The agency said it anticipates these rules should exclude from coverage under §457(f) and §409A most arrangements for public school teachers and other school-year employees under which they are permitted to annualize school-year compensation (whether or not they are given individual elections). The notice gives examples for school district employees under certain payment scenarios.

The IRS previously addressed the impact of §409A rules on teacher compensation in August 2007 (See IRS Clarifies 409A NQDC Rules’ Impact on Teacher Comp ).

The notice, scheduled to be published in Internal Revenue Bulletin 2008-29 dated July 21, 2008, is  here .