IRS Rules County's Deferred Compensation Plan Qualifies Under Section 457(b)

IRS Greenlights County's § 457(b) Deferred Compensation Plan: Key Takeaways for Governmental Employers

The IRS ruled in PLR-115104-25 (April 17, 2026) that County C’s deferred compensation plan qualifies as an eligible § 457(b) plan, allowing participants to defer taxes on contributions until distribution. The ruling confirms the plan’s compliance with § 457(b), which permits state and local governments to sponsor deferred compensation arrangements for employees, with assets held in a trust under § 457(g) to avoid constructive receipt. The IRS did not address whether the plan’s features—including automatic enrollment and Roth contributions—triggered additional scrutiny under § 457(e)(1)(A), which limits eligibility to governmental entities. While the ruling provides clarity for County C, it remains non-precedential, meaning other governmental employers cannot rely on it as binding authority.

For governmental employers, the decision underscores the importance of structuring § 457(b) plans to meet the trust requirement under § 457(g) and ensuring compliance with distribution rules under § 457(d), which restricts in-service withdrawals before age 59½. The IRS’s approval hinged on the plan’s adherence to statutory limits, including the $23,000 deferral cap (2024 limit, indexed for inflation) and the prohibition on loans, which could otherwise undermine the plan’s tax-deferred status. Taxpayers sponsoring similar plans should review their trust arrangements and distribution policies to align with the ruling’s guidance.

Plan Design and Features

County C, a political subdivision of State S and an eligible employer under § 457(e)(1)(A), sought a private letter ruling to confirm its deferred compensation plan qualified as an eligible § 457(b) plan. The plan incorporated the following features:

• Eligible Automatic Contribution Arrangement (EACA) under § 414(w), defaulting employees into elective deferrals at a uniform percentage unless they opted out within 30–90 days. EACA permitted permissible withdrawals within 90 days of the first deferral without penalties under § 72(t).
• Roth contributions under § 402A, allowing after-tax deferrals elected before compensation vested or became payable, in compliance with § 457(b)(4).
• Deferral limits under § 457(c), capped at $23,000 (2024, indexed for inflation), with catch-up provisions for participants in their last three years before retirement and age fifty-plus catch-ups under § 457(e)(18).
• Distribution rules aligned with § 457(d), requiring commencement by April 1 of the year following attainment of age 73 or separation from service, and compliance with § 401(a)(9) for required minimum distributions.
• Direct rollovers under § 402(c)(4) to eligible retirement plans (including IRAs and other governmental plans), with nonspouse beneficiary limitations under § 402(c)(11). Roth balances could only be rolled over to designated Roth accounts or Roth IRAs per § 402A(e)(1) and § 408A.
• Unforeseeable emergency distributions under § 457(d)(1)(A)(iii) and § 1.457-6(c), limited to amounts reasonably necessary to address qualifying hardships (e.g., medical emergencies, imminent foreclosure).
• Plan-to-plan transfers permitted upon termination of service, subject to § 1.457-10(b).
• Trust requirements under § 457(g)(1), mandating irrevocable trusts holding assets exclusively for participants and beneficiaries, with participant-directed investments.

IRS Ruling: Compliance Validation

The IRS’s private letter ruling (PLR-115104-25) confirmed the county’s § 457(b) plan met all statutory eligibility requirements, addressing six key compliance points:

1. Eligible Plan Status: The Plan qualified as an eligible deferred compensation plan under § 457(b), with structure (deferral limits, distribution timing, trust requirements) aligning with statutory definitions. The IRS cited § 457(b)(2), which sets the maximum deferral limit at the lesser of 100% of includible compensation or $23,000 (2024, indexed for inflation).

2. Tax Deferral Treatment: Deferred compensation and attributable income were includible in gross income under § 457(a)(1)(A) only upon distribution, not deferral, per § 457(a)(1)(A).

3. Tax-Free Rollovers: Distributions rolled over to eligible retirement plans under § 402(c)(8)(B) were not includible in gross income in the year of distribution, pursuant to § 457(e)(16). Rollovers must meet § 402(c)(4) definitions (e.g., direct transfers, 60-day rollovers).

4. Trust Tax Exemption: The trust under § 457(g)(1)—holding assets exclusively for participants and beneficiaries—was exempt from tax under § 501(a) per § 457(g)(2)(A), ensuring income within the trust was not currently taxable to participants.

5. Roth Distribution Treatment: Qualified Roth distributions were not includible in gross income under § 402A(d)(1), though governmental § 457(b) plans are not permitted to offer Roth contributions under IRS guidance.

6. EACA Compliance: The Plan’s EACA under § 414(w)—defaulting employees into deferrals with opt-out rights—did not violate § 457(b)(4) or § 1.457-4(b), provided participants received adequate notice and opt-out rights per § 414(w)(2).

EACA and Roth Contributions: Compliance Clarified

The IRS’s ruling (PLR-115104-25) validated two critical features of the county’s § 457(b) plan:

• EACA Compliance: The Plan’s default enrollment structure under § 414(w)—automatically enrolling employees into deferrals unless they opt out—complied with § 457(b)(4) and § 1.457-4(b), provided participants received clear notices and opt-out rights per § 414(w)(2) and § 414(w)(4). The 90-day permissible withdrawal window for elective contributions was also confirmed.

• Roth Contributions: The Plan’s Roth contribution structure under § 402A was compliant, with after-tax deferrals includible in gross income in the year of deferral (per § 402A(a)(1)) but qualified distributions tax-free (per § 402A(d)(1)). Note: Tax-exempt employers remain ineligible to offer Roth contributions under § 402A(e)(1).

Practitioner Guidance: Governmental employers should ensure EACA notices comply with § 414(w)(4) and Roth elections are properly documented to meet § 402A requirements.

Distribution Rules, Rollovers, and Transfers

The IRS confirmed the Plan’s compliance with distribution and transfer mechanisms:

• Distribution Timing: Benefits must commence by April 1 of the year following the participant’s attainment of age 73 or separation from service, per § 457(d) and § 401(a)(9). Distributions are permitted upon separation, age 73 (or 70½ for pre-2020 hires), or qualifying unforeseeable emergencies under § 457(d)(1)(A)(iii) and § 1.457-6(c).

• Direct Rollovers: Eligible rollover distributions under § 402(c)(4) could be rolled over to eligible retirement plans under § 402(c)(8)(B), including IRAs and other § 457(b) plans, with nonspouse beneficiary limitations under § 402(c)(11). Roth balances were restricted to designated Roth accounts or Roth IRAs per § 402A(e)(1) and § 408A. Rollovers were tax-free under § 457(e)(16) if transferred to eligible retirement plans.

• Plan-to-Plan Transfers: Transfers of account balances to another eligible governmental plan were permitted upon termination of service under § 1.457-10(b), provided conditions (e.g., severance) in § 1.457-10(b)(2) were met. Transfers were non-taxable and complied with distribution timing rules.

• Additional Features: Accumulated sick pay and vacation pay could be deferred if elected by the participant per § 1.457-4(d). The trust under § 457(g) held assets exclusively for participants and beneficiaries, with participant-directed investments.

Unforeseeable Emergencies and Trust Requirements

The IRS’s ruling clarified boundaries for unforeseeable emergency distributions and trust requirements:

• Emergency Distributions: Permitted under § 457(d)(1)(A)(iii) and § 1.457-6(c)(2) for severe hardships (e.g., illness, accident, property loss). Distributions were limited to amounts "reasonably necessary" to address the emergency, excluding scenarios mitigable by insurance, asset liquidation, or deferral cessation.

• Trust Requirements: The trust under § 457(g)(1) must hold assets exclusively for participants and beneficiaries, be irrevocable, insulated from the employer’s general creditors, and free from commingling. Trusts could not serve general governmental purposes.

Implications for Governmental Employers

The IRS’s non-precedential ruling (PLR-115104-25) provides practical guidance for governmental employers, validating key features (EACA enrollment, Roth contributions, catch-up provisions, emergency distribution criteria) while imposing strict compliance boundaries. Key takeaways:

• Plan Features: Governmental employers may incorporate EACA-like enrollment and Roth contributions, provided notices/opt-out procedures are documented. Catch-up provisions (e.g., three-year catch-up under § 457(e)(18)) align with statutory limits but require precise drafting to avoid exceeding caps. Material modifications may invalidate IRS approval (per Rev. Proc. 2026-1, § 11.05).

• Trust Compliance: Trust assets must be exclusively dedicated to participant benefits and insulated from employer creditors. Failure to comply risks immediate taxation and disqualification. The ruling’s narrow interpretation of "reasonably necessary" for emergency distributions serves as a template for plan administrators.

• Tax-Exempt Employers: The ruling offers persuasive authority but requires caution regarding constructive receipt risks if plan assets are not properly secured.

Action Item: All employers must thoroughly document plan features, as material modifications or misstatements could trigger retroactive revocation.