Not-for-profits

that sponsor a 457(f) plan: what you need to know

NEW IRS proposed guidance is welcome news and provides not-for-profit employers with more flexibility than originally expected.

Rules for not not-for-profit organizations who offer non-qualified deferred compensation are limited. You must follow the rules outlined in Internal Revenue Code Sections 457, 409A and related guidance.There are two types of plans under IRC Code Section 457: Eligible plans under sub-section (b) and Ineligible plans under section (f): 

• Eligible 457(b) plans that operate very similarly to 403(b)/401(k) plans and have an annual benefit limit equal to the 403(b)/401(k) plan salary deferral limit ($18,000 for 2016).

• Ineligible 457(f) plans that have no annual benefit limit but the participants must include the benefits in taxable income when the substantial risk of forfeiture lapses.

Helping you you design and operate an inelgigible 457(f) plan
The Internal Revenue Service recently issued proposed regulations under Code Section 457(f) which describe, among other things, just what constitutes a substantial risk of forfeiture under an ineligible 457(f) plan and what types of benefits are not considered to be ineligible 457(f) plans.The proposed regulations also provide guidance in key areas used to determine whether a substantial risk of forfeiture exists or not. Some topics they address:

1. Non-compete agreements
2. Rolling risks of forfeiture (e.g., rolling vesting schedules)
3. Determination of the present value of accrued benefits
4. Plans that are not considered ineligible 457(f) plans, including bona fide severance pay plans

In each of these areas, the proposed regulations provide specific rules which must be followed in order for you to design and operate an ineligible 457(f) plan in accordance with the guidance.

Note: the proposed regulations state that current plans will be subject to the new rules (i.e., they are not provided grandfathered status), and that once finalized, the new regulations will be applied to both existing and newly adopted ineligible 457(f) plans.

What you need to do
Employers with existing deferred compensation arrangements and/or employment contracts that provide for severance pay must do the following:

• Take inventory of the types of benefits provided 
• Review the plan provisions to see if they are in compliance with proposed guidance
• Determine changes that need to be made to the plan/employment contract provisions to bring the arrangement into compliance
• Upon issuance of final regulations, make appropriate changes to the plan/employment contract provisions.

The proposed regulations will not be effective until 90 days after final regulations are published. They may be relied on in the interim if desired.

If you have questions or concerns
The Employee Benefit consultants at BerryDunn are well versed in the rules that apply to deferred compensation and severance pay plans offered by not-for-profit organizations. They can help guide you through the process to determine if any changes must be made to the benefits you’re offering or are considering. Contact Bill Enck if you have questions.