INTERNAL REVENUE SERVICE Index No.: 457.01-00 457.05-00 Number: 199940015 Release Date: 10/8/1999

CC:EBEO:Br1 - PLR-104974-99 July 7, 1999 State X =

Plan =

This is in response to your letter dated February 26, 1999, on behalf of State X requesting a ruling on the federal tax consequences of the Plan. State X intends the Plan to be an eligible deferred compensation plan under section 457 of the Internal Revenue Code of 1986 (the "Code"). State X is an eligible employer within the meaning of section 457(e)(1)(A). State X established the Plan for the benefit of eligible employees of State X. Under the Plan an employee may elect to defer compensation he or she would have received for services rendered to an employer in any taxable year. No amounts will be made available to the participant or beneficiary earlier than the calendar year the participant attains age 70 1/2, when the participant is separated from service with State X, or when the participant is faced with an unforeseeable emergency as defined under the Plan in accordance with the requirements of section 457. The deferral of income will commence no sooner than the first pay period of the month following the date of the election to defer. The Plan provides for a maximum amount that may be deferred by a participant in any taxable year and for a catch-up computation for amounts deferred for one or more of the participant's last three taxable years ending before normal retirement age under the Plan. The amounts that may be deferred under the annual maximum limitation and the catch-up provision are within the limitations set out in section 457 of the Code. With certain limitations, a participant or beneficiary (or an alternate payee as described below) may elect the manner in which his or her deferred amounts will be distributed. The election must be made prior to the date any amounts become payable to the participant or beneficiary under the Plan. If the participant fails to make a timely election, distribution will commence at the time and in the manner set forth in the Plan.

-2The manner and time of benefits must meet the distribution requirements of section 401(a)(9) and 457(d)(2) of the Code. The Plan further provides that the corpus or income of the trust fund may not be diverted to or used for other than the exclusive benefit of the participants or their beneficiaries, and that all amounts deferred under the plan will be transferred to the trust within a time period that is administratively reasonable. The trust under the Plan was established pursuant to a written agreement that is represented to be a valid trust under the laws of State X. In accordance with section 457(g) of the Code, the rights of the participant under the Plan shall not be subject to the rights of creditors and shall be exempt from execution, attachment, prior assignment or any other judicial relief or order for creditors or other third persons. The terms of the trust make it impossible prior to the satisfaction of all liabilities with respect to participants and their beneficiaries for any part of the assets and income of the trust to be used for, or diverted to, purposes other than the exclusive benefit of participants and their beneficiaries. Section 457 of the Code provides rules for the deferral of compensation by an individual participant in an eligible deferred compensation plan (as defined in section 457(b)). Section 457(a) provides that in the case of a participant in an eligible deferred compensation plan, any amount of compensation deferred under the plan and any income attributable to the amounts so deferred shall be includible in gross income only for the taxable year in which such compensation or other income is paid or otherwise made available to the participant or beneficiary. Section 457(b)(5)prescribes that an eligible deferred compensation plan must meet the distribution requirements of section 457(d). Section 457(d)(1)(A) provides that for a section 457 plan to be an eligible plan, the plan must have distribution requirements providing that under the plan amounts will not be made available to participants or beneficiaries earlier than i) the calendar year in which the participant attains age 70 , ii) when the participant is separated from service with the employer, or iii) when the participant is faced with an unforeseeable emergency as determined under Treasury regulations. However, section 401(a)(9)(C)(i) generally allows plans to postpone the required beginning date until April 1 of the calendar year following the later of the calendar year in which the employee retires or in which he attains age 70 .

-3A basic requirement prescribed by section 457(b)(5) is that an eligible section 457 plan must meet the section 457(d) distribution requirements described above in order to retain its tax-deferred eligible status. A section 457 plan would violate these provisions of section 457(b)(5) and the regulations thereunder if the participant or anyone else received a distribution earlier than the earliest date established in section 457(d)(1)(A). Section 457(e)(9)(A) provides that the total amount payable to a participant under the plan will not be treated as made available merely because the participant may elect to receive such amount (or the plan may distribute such amount without the participant's consent) if (i) such amount does not exceed $5,000, and (ii) such amount may be distributed only if--(I) no amount has been deferred under the plan with respect to such participant during the 2-year period ending on the date of the distribution, and (II) there has been no prior distribution under the plan to such participant under this option. Section 1.457-2(h)(4) of the Income Tax Regulations defines an unforeseeable emergency as severe financial hardship to the participant resulting from a sudden and unexpected illness or accident of the participant or of a dependent, loss of the participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant. Section 457(g)(1) provides that a plan maintained by an eligible governmental employer shall not be treated as an eligible deferred compensation plan unless all assets and rights purchased with such deferred compensation amounts and all income attributable to such amounts, property, or rights of the plan are held in trust for the exclusive benefit of participants and their beneficiaries. Section 457(g)(2) provides that a trust described in section 457(g)(1) shall be treated as an organization exempt from tax under section 501(a). Section 457(g)(2)(B) provides that the amounts in the trust are treated as includible in the gross income of participants and beneficiaries only to the extent, and at the time, provided in section 457. Under the terms of the Plan and trust, the trustee must hold all of the section 457(b) plan assets for the exclusive benefit of the participants and their beneficiaries, and all amounts deferred under the Plan must be transferred to a trust meeting the requirements of section 457(g)of the Code within an administratively reasonable time period. Based upon the provisions of the revised Plan summarized above, we conclude as follows:

-41. The Plan established by State X is an eligible deferred compensation plan as defined in section 457(b) of the Internal Revenue Code of 1986. All assets and income of the Plan described in section 457(b)(6) will be held in trust for the exclusive benefit of participants and their beneficiaries. 2. Amounts of compensation deferred in accordance with the Plan, including any income attributable to the deferred compensation, will be includible in the recipient’s gross income for the taxable year or years in which amounts are paid or otherwise made available to a participant or beneficiary in accordance with the terms of the Plan. 3. The trust established under the State X 457(b) Plan is treated under section 457(g) as exempt from federal income taxation pursuant to section 501(a). No opinion is expressed concerning the timing of the inclusion in income of amounts deferred under any deferred compensation plan other than the Plan described above. In addition, this ruling applies only to deferrals made after the date this ruling was issued. If the Plan is significantly modified, this ruling will not necessarily remain applicable. This ruling is directed only to State X and the participants of the Plan and applies only to the Plan submitted on February 26, 1999. Section 6110(k)(3) of the Internal Revenue Code provides that it may not be used or cited as precedent. Temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted. Therefore, this ruling may be modified or revoked if the adopted temporary or final regulations are inconsistent with any conclusion in the ruling. See section 12.04 of Rev. Proc. 99-1, 1999-1 I.R.B. 6, 47. However, when the criteria in section 12.05 of Rev. Proc. 99-1 are satisfied, a ruling is not revoked or modified retroactively except in rare or unusual circumstances. Sincerely yours, ROBERT D. PATCHELL Assistant Chief, Branch 1 Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations)

-5Enclosure: Copy for section 6110 purposes

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