When it comes to offering non-qualified deferred compensation to executives of not-for-profit organizations, there aren’t many options. Your organization must follow the rules and related guidance outlined in Internal Revenue Code Sections 457 and 409A. There are two types of non-qualified deferred compensation plans: Eligible (457(b) plans) and ineligible (457(f) plans)
- 457(b) plans operate very similarly to 403(b) or 401(k) plans and have an annual benefit limit.
- 457(f) plans have no annual benefit limit but the participants must include the benefits in taxable income when the substantial risk of forfeiture lapses.
Changes are on the table
And that's largely a good thing.The proposed regulations provide guidance in several key areas used to determine whether a substantial risk of forfeiture exists or not. For the most part, the proposed guidance is welcome news and provides an employer with more flexibility than originally expected.
Earlier this year, the IRS issued proposed regulations which describe 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. Because of the tax implications to the executive, this is important for your organization to understand and communicate.
What the proposed regulations cover:
- Non-compete agreements
- Rolling risks of forfeiture (e.g., rolling vesting schedules)
- Determining the present value of accrued benefits
- Plans that are not considered 457(f) plans, including bona fide severance pay plans
In each of these areas, the proposed regulations provide employers with specific rules to follow in order to design and operate a plan, whether it's an existing plan or one adopted before or after the rules are finalized. Current plans will not have grandfathered status.
What you need to do
For existing deferred compensation arrangements or employment contracts that provide for severance pay for deferred compensation arrangements,you must:
- Take inventory of the types of benefits you provide (e.g., severance pay, 457(b), 457(f) plans)
- Review plan provisions and determine the changes you need to make in order for them to be in compliance with the guidelines.
- Make the appropriate changes to the plan or employment contract provisions before the final regulations are effective.
- The final regulations generally will not be effective until 90 days after they've been published. You may rely on them in the interim.
If you have questions or concerns
We've helped many not-for-profit organizations design and develop executive compensation packages, including deferred compensation plans. Our Benefits Compensation experts are well versed in the rules that apply to deferred compensation and severance pay plans and can help guide you through the process to:
- Create a plan that meets the needs of your executive and your organization
- Determine if any changes must be made to the benefits you’re currently offering