The '96 Tax Act clarified the status of the Service Awards program, determining that these were not deferred comp programs under section 457.
This was an important determination, because under 457, amounts paid into a plan can become taxable to the participant when the "risk of forfeiture" is gone. For most volunteer awards programs, this is long before retirement, so a volunteer might have been taxed on money he would not receive for 20 or 30 years. Under the '96 Act, amounts received from an awards program are taxable only when received. Also, the amounts received are not considered wages, for social security purposes.
The relevant Internal Revenue Code Section is:
Section 457(e)(11)
CERTAIN PLANS EXCLUDED.--
(A) IN GENERAL.--
The following plans shall be treated as not providing for the deferral of compensation:
(i) Any bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plan.
(ii) Any plan paying solely length of service awards to bona fide volunteers (or their beneficiaries) on account of qualified services performed by such volunteers.
(B) SPECIAL RULES APPLICABLE TO LENGTH OF SERVICE AWARD PLANS.--
(i) BONA FIDE VOLUNTEER.--
An individual shall be treated as a bona fide volunteer for purposes of subparagraph (A)(ii) if the only compensation received by such individual for performing qualified services is in the form of--
(I) reimbursement for (or a reasonable allowance for) reasonable expenses incurred in the performance of such services, or
(II) reasonable benefits (including length of service awards), and nominal fees for such services, customarily paid by eligible employers in connection with the performance of such services by volunteers.
(ii) LIMITATION ON ACCRUALS.--
A plan shall not be treated as described in subparagraph (A)(ii) if the aggregate amount of length of service awards accruing with respect to any year of service for any bona
fide volunteer exceeds $3,000.
(C) QUALIFIED SERVICES.--
For purposes of this paragraph, the term "qualified services" means fire fighting and prevention services, emergency medical services, and ambulance services.
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If that isn't clear, the explanation of the joint conference committee, who essentially wrote the law, follows:
TREATMENT OF LENGTH OF SERVICE AWARDS FOR CERTAIN VOLUNTEERS UNDER SECTION 457 (SEC. 1458 OF THE SENATE AMENDMENT.)
PRESENT LAW (pre-'97)
Compensation deferred under an eligible deferred compensation plan of a tax-exempt or governmental employer that meets certain requirements (a "sec. 457 plan") is not includible in gross income until paid or made available. One of the requirements for a section 457 plan is that the maximum annual amount that can be deferred is the lesser of $7,500 or 33-1/3 percent of the individual's taxable compensation.
Amounts deferred under plans of tax-exempt and governmental employers that do not meet the requirements of section 457 (other than amounts deferred under tax-qualified retirement plans, section 403(b) annuities and certain other plans) are includible in gross income in the first year in which there is no substantial risk of forfeiture of such amounts.
NEW LAW:
Under the Senate amendment, the requirements of section 457 do not apply to any plan paying solely length of service awards to bona fide volunteers (or their beneficiaries) on account of fire fighting and prevention, emergency medical, and ambulance services performed by such volunteers. An individual is considered a "bona fide volunteer" if the only compensation received by such individual for performing such services is reimbursement (or a reasonable allowance) for expenses incurred in the performance of such services, or reasonable benefits (including length of service awards) and nominal fees for such services customarily paid by tax-exempt or governmental employers in connection with the performance of such services by volunteers. Under the Senate amendment, a length of service award plan will not qualify for this special treatment under
section 457 if the aggregate amount of length of service awards accruing with respect to any year of service for any bona fide volunteer exceeds $3,000.
In addition, any amounts exempt from the requirements of section 457 under the Senate amendment are not considered wages for purposes of the Federal Insurance Contribution Act ("FICA") taxes.
Effective date.--The provision applies to accruals of length of service awards after December 31, 1996.
