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Annualized Faculty Salaries Will Not Be Treated as Deferred Compensation under IRS Rules

July 9, 2008

Annualized faculty salaries based on work performed on a 9- or 10-month schedule will generally not constitute deferred compensation, according to IRS Notice 2008-62.  Proposed regulations to implement this rules are under development at the IRS.  Until they are issued, employers may rely on the notice.
 
The IRS has issued interim guidance indicating that Internal Revenue Code Sec. 457(f) will not apply to certain types of arrangements involving recurring part-year compensation, including common arrangements involving school, college, and university employees. The Treasury and the IRS expect this rule to be included in upcoming proposed regulations, however the notice clarifies that effective July 1, 2008, arrangements in which an employee or independent contractor receives recurring part-year compensation does not constitute nonqualified deferred compensation under sections 457(f) if the following two conditions are met: 

  • All wages for the year of service (which may begin before the first day of classes) must be paid by the last day of the 13th month following the beginning of the service period ; and  
  • The amount of wages that are deferred from one taxable year to the next taxable year (which is what IRS considers to happen when the wages are "stretched out") must not  exceed the limit on employee contributions to Section 401(k), 403(b), and 457(b) plans for the calendar year in which the service period begins. 

For the 2008-2009 school year, employers must apply the 2008 contribution limit, which is $15,500.

With regard to the second condition, the notice explains how to calculate how much is deferred from one year to the next, providing the following examples:

a)  For a 10-month school year beginning on August 1, annualizing of salaries up to $186,000 will satisfy this condition. 
b)  For a 10-month school year beginning on September 1, annualizing of salaries up to $232,500 will satisfy this condition.

It is NACUBO's understanding that while institutions pay some employees annual salaries greater than the amounts listed here, the vast majority of those individuals work throughout the year and therefore would not be subject to deferred compensation rules in the absence of the notice. If this is not the case at your institution and you believe that this provision will have widespread impact on faculty at your campus that work under 9- or 10-month schedules AND whose salary exceeds the amounts listed above, please contact Mary Bachinger.

This bulletin includes excerpts from an American Payroll Association report..