Deferred Compensation
New rule requiring written agreements or policies will not affect teacher salaries until
2008-09 school year.
Many educators work 10 or 11 months but receive their compensation spread over 12 months. This
practice is called “deferred compensation” and is intended to make personal budgeting easier. For
example, if you work from August to May but receive checks in June and July, you are receiving
deferred compensation.
In 2007, the U.S. Treasury Department released new regulations interpreting the deferred
compensation requirements in the Internal Revenue Code. The new rules state that compensation
generally cannot be deferred for more than 13 months without penalty. The new rules also require a
written agreement between an employer and an employee, or a written district policy, in order to
defer compensation into the following tax year. The written agreement must be in place before the
first day of the employee’s service; otherwise, the deferred compensation is subject to a
20-percent excise tax charged to the employee.
Certified classroom teachers and most certified administrators are employed under contract by
the district, and these contracts usually provide that the educator will be paid over 12 months.
As long as the employment contract has such a provision and is signed and returned by the employee
prior to the first day of duty, the contract should suffice as the required written agreement. For
those not employed under contract, it is also likely that a written district policy providing for
deferred compensation would fulfill the district’s obligation for a written agreement.
When these new regulations first came to the education community's attention, there were many
questions as to how they would be implemented. In response to ATPE’s efforts to seek clarification, your questions
and those of other educators, the IRS released additional information regarding the regulations.
The additional information both clarifies the IRS interpretation of the regulations and provides
educators and school districts additional time to comply with them.
The IRS press release, which is included below, indicates that a district may comply with the
regulation by either providing the staff with an individual deferred compensation election form or
by having or establishing a written policy providing for deferred compensation. The IRS has also
announced that the new regulation will not be applied until the 2008-09 school year, thus allowing
school districts and educators time to comply with the new requirements.
IR-2007-142, Aug. 7, 2007
WASHINGTON — Moving to clear up confusion about a
recent tax law change, the Internal Revenue Service today reassured teachers and other school
employees that new deferred-compensation rules will not affect the way their pay is taxed during
the upcoming school year.
Recently, the IRS has received inquiries from teachers
who had been told that they had to make certain decisions about their pay this month or risk
severe penalties. At issue is a 2004 law change that applies to people who decide to defer
compensation from one year to a future year. In April, the Treasury Department and the IRS
issued final rules implementing this law change.
Under the 2004 law, when teachers and other employees
are given an annualization election – that is, they are allowed to choose between being paid
only during the school year and being paid over a 12-month period – and they choose the 12-month
period, they are deferring part of their income from one year to the next. For instance, a
teacher who chooses to get paid over a 12-month period, running from August of one year through
July of the next year, rather than over the August to May school year, falls under this law.
The IRS clarified that the new rules do not require
school districts to offer teachers an annualization election. Thus, school districts that have
not been offering teachers this election are not required to start.
School districts that offer annualization elections may
have to make some changes in their procedures. The IRS announced that the new
deferred-compensation rules will not be applied to annualization elections for school years
beginning before Jan. 1, 2008, so school districts and teachers will have time to make any
changes that are needed.
A list of
Frequently Asked Questions
contains more information.
Access the
original IRS press release.
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individual legal advice or the provision of legal services. Accessing this information does not create an
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