SECTION 2. BACKGROUND AND

GENERAL INFORMATION

.01 Section 457 of the Internal Revenue Code applies to nonqualified de

ferred compensation plans established by state and local government and tax-exempt employers. These plans may be either eligible plans that meet the requirements of § 457(b) or ineligible § 457(f) plans. Under § 457(a), compensation deferred pursuant to eligible plans that meet the requirements of § 457(b) and the income attributable to such deferred compensation are not includible in gross income until the taxable year in which the deferred amounts are actually paid or made available to the plan participant or beneficiary.

.02 Section 1447(a) of the SBJPA and section 1071 of TRA ’97 amended § 457(e)(9) of the Code, generally effective for years beginning after December 31, 1996, to permit in-service distributions of amounts of $5,000 or less payable under a § 457(b) plan under certain conditions, and to permit an additional election by a participant to further defer commencement of distributions under a § 457(b) plan after the first permissible payout date. Section 1447(b) of the SBJPA added new paragraph (15) to § 457(e) of the Code, also effective for years beginning after December 31, 1996, under which the $7,500 maximum deferral limitation under §§ 457(b) (2) and 457(c)(1) is indexed (in $500 increments) for cost of living adjustments. (The maximum deferral limitation for 1998 is $8,000.)

.03 Section 1448 of the SBJPA added new subsection (g) to § 457 of the Code to provide that all assets and income under a § 457(b) plan that is maintained by a state or local government employer must be held in trust for the exclusive benefit of plan participants and their beneficiaries. Before the enactment of the SBJPA, § 457(b)(6) mandated that all § 457(b) plans be unfunded (so that plan assets could not be set aside for the exclusive benefit of participants and beneficiaries). Section 457(g) generally applies to assets and income held by a governmental § 457(b) plan on and after August 20, 1996. However, in the case of a § 457(b) plan in existence on August 20, 1996, maintained by a state or local government employer, a trust is not required to be established pursuant to § 457(g) before January 1, 1999.

by TRA ’97, the Service published Revenue Procedure 96–56, 1996–2 C.B. 389, which announced that, due to study of these changes, the Service would suspend issuance of rulings regarding the tax effects of provisions under the SBJPA affecting § 457(b) plans until further notice. Notice 96–63, 1996–2 C.B. 228, invited comments on whether the Service should publish model language to provide § 457(b) plan sponsors with a streamlined method for amending their plans to comply with the new SBJPA provisions relating to § 457(b) plans.

.05 In addition, the Service has recently issued Notice 98–8, 1998–4 I.R.B. 6, which provides substantive guidance concerning the revisions to § 457 made by the SBJPA and TRA ’97. The Service is issuing this revenue procedure providing model amendments based on the guidance provided in Notice 98–8.