Cited
As of: Jul 18, 2014

DEPARTMENT OF THE TREASURY

Treasury Decision 8814

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

1999-1 C.B. 598; T.D. 8814; 1999 IRB LEXIS 1838; 1999-9 I.R.B. 4 

March 1, 1999

  [*1]  

SUBJECT MATTER: Section 3121-Definitions

APPLICABLE SECTIONS: 
26 CFR 31.3121 (v) (20-1: Treatment of amounts deferred under certain nonqualified deferred compensation plans. Internal Revenue Service 26 CFR Parts 31 and 602

TEXT: 

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   [*2]  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   [*3]  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   [*4]  Form 941, Employer's Quarterly Federal Tax Return, Form 94 1c, 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   [*5]  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 F.R. 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 rule-making (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 F.R. 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   [*6]  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 section 3121 (a)) that constitute an amount deferred under   [*7]  a nonqualified deferred compensation plan.n1
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.   [*8]  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   [*9]  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.

	
o  	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.

o  	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 non-account balance   [*10]  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 non-account 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).

o  	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).

o  	The final regulations   [*11]  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.

o  	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).

o  	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   [*12]  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 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 raten2(AFR) until it is included in wages.

o  	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   [*13]  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   [*14]  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 al 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   [*15]  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   [*16]  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   [*17]  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   [*18]  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   [*19]  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   [*20]  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,   [*21]  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   [*22]  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   [*23]  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   [*24]  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   [*25]  a fixed rate of interest, not less than AFR, rather than on the basis of income under the plan.

Effective Dales 
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   [*26]  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.
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 periodsn3before 1994 that applies it the employer acted in accordance with a reasonable, good faith   [*27]  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.n4For example, in the case of an amount deferred before 1994 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   [*28]  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, 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   [*29]  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.
* * *

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   [*30]  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:

 3I.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   [*31]  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.   [*32]  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 non-qualified 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   [*33]  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   [*34]  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   [*35]  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   [*36]  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   [*37]  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)   [*38]  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   [*39]  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,   [*40]  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)   [*41]  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   [*42]  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   [*43]  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) (I) 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   [*44]  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   [*45]  specified circumstances.
(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   [*46]  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   [*47]  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   [*48]  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   [*49]  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   [*50]  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   [*51]  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   [*52]  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   [*53]  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   [*54]  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   [*55]  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   [*56]  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 63 (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   [*57]  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   [*58]  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   [*59]  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   [*60]  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   [*61]  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   [*62]  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   [*63]  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   [*64]  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   [*65]  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   [*66]  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   [*67]  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;

(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   [*68]  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   [*69]  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   [*70]  (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 http://www.soa.org.) The examples are as follows:

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   [*71]  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   [*72]  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   [*73]  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,   [*74]  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 CAM 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 } 25 years } $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 } 26 years } $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   [*75]  is $28,767 ($4,080 } 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 } 27 years } $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 additional payments, which is $18,845 (52,620 } 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 (h) (1) (A) limitation in effect for the year, where the section 415 (b) (1) (A)   [*76]  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 Amount	Assumed Qualified Plan Annual Payment (based on cost of living)	Net Annual Payment under Nonqualified Plan	
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 and thereafter	$200,000	$205,000 or greater	$0	
(ii)   [*77]  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   [*78]  (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,   [*79]  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 (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   [*80]  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   [*81]  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   [*82]  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   [*83]  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   [*84]  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 dale, 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 lime, 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   [*85]  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 lax 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   [*86]  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)   [*87]  (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) (1) (the 417 (e) mortality table), both determined as of the January I 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   [*88]  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   [*89]  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 (he 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   [*90]  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   [*91]  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,   [*92]  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 (he 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   [*93]  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   [*94]  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.
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 } 25 years } $100.000). As of December   [*95]  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 5270,400 (10 percent } 26 years } $104,000). Thus, during 2003. Employee B has earned a legally binding right to an additional payment at age 65 of 520,400 ($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   [*96]  date at age 65, the present value of the future payment earned during 2003 is $20,400. The entire difference between the 520,400 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   [*97]  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 } 25 years } $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 } 26 years } $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   [*98]  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 liming 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   [*99]  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 I, 2003, is 7 percent.
(ii) Under paragraph (d) (2) (iii) (B)   [*100]  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   [*101]  taken into account, and (he 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 } .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   [*102]  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.
(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   [*103]  (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 } $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   [*104]  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 } .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   [*105]  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   [*106]  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   [*107]  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)   [*108]  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 non-account 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   [*109]  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   [*110]  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.   [*111]  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),   [*112]  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   [*113]  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.   [*114]  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   [*115]  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   [*116]  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 I. (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,   [*117]  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   [*118]  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   [*119]  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   [*120]  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 dale 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   [*121]  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   [*122]  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   [*123]  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, 526,950, 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   [*124]  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 dale in accordance with paragraph (d) (1) of this section.
Example 10, (i)   [*125]  The facts are the same as in Ex ample 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 54,000 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   [*126]  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 59,569 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   [*127]  $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 515,834 (the present value of $4,000, payable at age 60, using a 6 percent interest rate and the UP-84 mortality table). Employer   [*128]  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 515,834 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   [*129]  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   [*130]  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   [*131]  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   [*132]  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   [*133]  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   [*134]  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   [*135]  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 cams 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   [*136]  $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   [*137]  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   [*138]  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.
(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   [*139]  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   [*140]  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   [*141]  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.
(iv) Instead, Employer M may treat the $2,000 shortfall as wages paid on March 31, 2004, and withhold and deposit FICA   [*142]  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)   [*143]  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 I, 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   [*144]  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   [*145]  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 I, 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   [*146]  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   [*147]  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) 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 (preeffective-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 preeffective-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   [*148]  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 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   [*149]  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 preeffective-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   [*150]  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   [*151]  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   [*152]  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   [*153]  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   [*154]  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   [*155]  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 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)   [*156]  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   [*157]  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   [*158]  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 I, 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   [*159]  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   [*160]  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   [*161]  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   [*162]  } 12.4 percent) and $1,450 of HI tax ($50,000 } 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   [*163]  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-dale 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   [*164]  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   [*165]  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   [*166]  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   [*167]  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   [*168]  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 (0 (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   [*169]  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.

(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   [*170]  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   [*171]  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)   [*172]  (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   [*173]  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   [*174]  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. 78 05.

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 identified and described	Current OMB control No.	
* * *	
31.3121 (v) (2)-1	1545-1643	
* * *	

 
Robert E. Wenzel,
Deputy Commissioner of Internal   [*175]  Revenue.
Approved December 23, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury (Tax Policy)
(Filed by the Office of the Federal Register on January 28, 1999, 8:45 a.m., and published in the issue of the Federal Register for January 29, 1999, 64 F.R. 4542)

FOOTNOTES: 

n1 
The 1983 Amendments did not amend the definition of net earnings from self-employment under section 1402 (a) or the liming 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.

n2 
The regulations define the applicable federal rate as the mid-term applicable federal rate, as defined pursuant to section 1274 (d), for January I of the calendar year, compounded annually.

n3 
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.

n4 
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 
********** Print Completed **********