Federal Insurance Contributions Act (FICA) Taxation of
Amounts Under Employee Benefit Plans

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

TITLE: Federal Insurance Contributions Act (FICA) Taxation of
Amounts Under Employee Benefit Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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
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 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. section 3121(a)) that constitute an amount deferred
under a nonqualified deferred compensation plan.

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.

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 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 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 within 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 (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.

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 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 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
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.

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.

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.

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 before
1994 that 3 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. For
example, in the case of an amount deferred before 1994 4 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 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,.22 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, 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 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 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 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..34 (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 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-of-living 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 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
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.

(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 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;.46

(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 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
The examples are as follows:.48 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 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 x 25 years x
$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 x 26 years x $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 x 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 x 27 years x $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.50
additional payments, which is $18,845 ($2,620 x 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:

Year  Annual Gross  Assumed Qualified  Net Annual
      Amount        Plan Annual        Payment under
                    (based on          Nonqualified Plan
                    cost of living)
2003  $200,000      $145,000           $55,000
2004  $200,000      $150,000           $50,000
2005  $200,000      $155,000           $45,000
2006  $200,000      $160,000           $40,000
2007  $200,000      $165,000           $35,000
2008  $200,000      $170,000           $30,000
2009  $200,000      $175,000           $25,000
2010  $200,000      $180,000           $20,000
2011  $200,000      $185,000           $15,000
2012  $200,000      $190,000           $10,000
2013  $200,000      $195,000           $5,000
2014  $200,000      $205,000           or $0 
and thereafter greater

(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.53 (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 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 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 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 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..61 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 x 25 years x $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 x 26 years x $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.

(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 x 25 years x $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 x 26 years x $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 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..64 (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 x $4,080) of
each year's benefit payment is excluded from 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 x .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 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-in-first-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 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 first-in-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 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 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 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 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..82 (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 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..84
(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.

(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 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.87 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.88 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-effective-date 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 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.93 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 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 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 pre-effective- 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 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 Effective dates and transition rules.

(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 (Public Law 98-21, 97
Stat. 65), as amended by section 2662(f)(2) of the Deficit Reduction
Act of 1984 (Public Law 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..99 (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) 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 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 Current OMB identified and described
control No..103

*****

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)

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