Announcement 2000-1 sets forth the IRS position that no W-2 reporting is required for a plan which meets either the requirements of, or the exceptions to (e.g., the exception for bona fide severance plans), I.R.C. § 457(B). The implication is that plans which do not meet such requirements must do W-2 reporting for amounts includible in income under their plans. This, of course, flies in the face of TAM 199903032, which had stated that no income tax withholding or W-2 income tax reporting was required until amounts under a failed 457 plan were actually or constructively paid out, even if the employee was subject to income tax withholding on such amounts at an earlier date. I guess this is IRS's happy new year's message?
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Employee benefits legal resource site

[This message has been edited by CVCalhoun (edited 01-11-2000).]

I disagree with part of your conclusion. The TAM says that no withholding for income tax purposes is required although the amounts are currently included in the employees' income under Code Section 457(f). As a result, that amount is required to be reported on form W-2 in Box 1 under the TAM.

The Notice says that certain plans (deemed by the governmental entity to be severance plans exempt from 457) will not need to follow the rule of the TAM by taking those benefits out of the Code Section 457(f) category. This is not inconsistent with the TAM. If the plan meets the Notice requirements, there is no present income to the employees as they become vested - thus no W-2 reporting. If the plan fails to meet the requirements of the Notice, the TAM governs and W-2 reporting is required although withholding may not be presently required.

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Keith R. Kost
Baker & Hostetler, LLP
3200 National City Center
1900 East Ninth St.
Cleveland, OH 44114-3485
(216) 861-7290

www.Bakerlaw.com

Hmm, I'm afraid I would disagree with you on this one. Form W-2, Box 1 requires reporting of "wages, tips, and other compensation," not all amounts which represent income. The statutory basis for Box 1 is I.R.C. §§ 6051, 6052, and 6053. Those sections require the reporting of wages subject to income tax withholding (in box 1), Social Security wages (in box 3), and Medicare wages (in box 5). However, they do not provide a basis for requiring the employer to report as "income" amounts which are not "wages" for purposes of I.R.C. § 3401 and are not otherwise described in I.R.C. § 6051(a).

Moreover, the basis for in TAM 199903032 for not withholding on amounts taxable under 457(f) was that withholding is required only on amounts which are actually or constructively paid, not amounts includible in income for other reasons. Thus, the same reasoning should apply to prevent the amounts from being subject to Form 1099 reporting under I.R.C. § 6041. Although the amounts are "income," they are not actually or constructively "paid," so that under TAM 199903032, they would not be subject to reporting in either Box 1 of the Form W-2 or on a 1099. However, Announcement 2000-1 suggests, by negative implication, the opposite result.
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Employee benefits legal resource site

[This message has been edited by CVCalhoun (edited 01-11-2000).]

1. Are you able to do something about the width of the posts? They are difficult to read. Thank you.

2. I only skimmed the notice. My impression was that the IRS has exempted state universities from 457(f) for almost anything that they call a severance program while leaving private universities to ignore 457(f) for whatever they want to designate as a severance program. Shouldn't the standard be the same? Are you aware of the IRS asserting in an audit that a severance program was really deferred comp taxable under 457(f).

3. If the IRS takes the position that amounts taxable under 457(f) are not wages under 3401, is it leaving itself open to an attack that amounts taxable under 457(f) aren't really income and can't be taxed?

Okay, I fixed that width problem. I've got to be good for something around here.

As for the income versus wages issue, I.R.C. § 457(f) clearly says that deferred vested amounts in a nonqualifying plan are income to the employee. The problem is that when Congress passed that provision, it did not make a corresponding change in I.R.C. § 3401 (dealing with the definition of wages). Thus, it would appear that the TAM is probably right as a matter of statutory construction. On the other hand, if the amounts are includible in the employee's income in a year when they are not included in Form W-2 wages, I seriously doubt that a lot of employees are going to do their own calculations of the taxable amount (which can be quite complex, even for employers) and then pay tax on it.

For a wrap-up on this issue, see

http://benefitslink.com/boards/index.php?showtopic=2246