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457(b) for Board Members


austin3515

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Independent Contractors can participate in a 457b. I thought I would find 100 articles about why it is great to have a 457b for Board Members paid as independent contractors but I found none. Am I missing something? It seems like an obvious use of this feature.

Are people doing this?

Austin Powers, CPA, QPA, ERPA

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Also, how is the 1099-MISC reporting handled when an independent contractor participates? Presumably the taxable amount should be lower by their contributions, but because the contribution is vested they would need to pay the SE Taxes.

I find a lot of articles that say "independent contractors can participate" but not a lot that delve into the details...

Austin Powers, CPA, QPA, ERPA

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Maybe this question is naive, but are non-profit Board members typically compensated? Anyway, if they are compensated then perhaps they would prefer going their own way with a ("Keogh") 401(a) plan or a SEP or SIMPLE, rather than getting wound up with some organization's plan.

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One of the obvious reasons why NP board members don't want a 457b plan is that the account balances cannot be rolled over to an IRA. np board members can contribute fee to solo 401k plan where deferrals can be 23,000 and/or 20% of net earnings from SE which will allow them to deduct part of fee as business expense.

mjb

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They can establish a SEP and deduct 20% of net earnings on line 32 of the 1040. Since the board members are HCEs of their employers, their 402g amount may be limited to less than 18,000 which would allow for some deferrals to a solo 401k. 1099 is self employment income reported on Schedule c.

mjb

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Can't help you Austin without looking at the 1099 instructions, but my guess is that 457(b) contributions wouldn't appear anywhere on the 1099-MISC, whether they are elective deferrals out of current Board fees OR additional amounts allocated by the organization. There is no 409A reporting involved because 457(b)s are exempt from 409A. And there is no payment of self-employment taxes up front or reporting of self-employment income because the 3121 rules don't apply to self-employment taxes. Distributions, however, would be reported on the 1099.

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20% for the SEP but almost 100% for the 457b, because there board fees are just above the 18K limit.

This is very interesting jpod. The 1099 probably is just the amounts actually paid to the board member. Then when the distribution is paid, it's reported on the same 1099-MISC. The only issue I have is how does the board member pay the full amount of payroll taxes because the contributions will be fully vested.

Sounds like so far no one has actually been through this...

Austin Powers, CPA, QPA, ERPA

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There is no self-employment tax paid on vested deferred comp (as I said the 3121 rules applicable to FICA/Medicare do not apply to self-employment taxes). The SE tax is paid when the deferred comp is paid.

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For reals??? That makes this easy!

So in other words, let's assume they defer 100%. They get NO 1099 until they take a distribution X Years later, and then they report the 1099 MISC income as SE income at that time.

jpod, anything written up that I could have for the files??

Austin Powers, CPA, QPA, ERPA

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This is not responsive to Austin's last Q but I am still surprised that a non-profit compensates its Board members.

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Would you settle for IRS commentary buried in Notice 2005-1, the first guidance on 409A? The first line in the answer is what I belive you are looking for (and yes, 409A doesn't apply to 457(b) plans, but the sentiment is the same) -

Q-36 What are the SECA tax consequences of a failure to satisfy the requirements of § 409A?

A-36 Gross income of a self-employed individual (for example, a nonemployee director, partner, or independent contractor) derived by the individual from any trade or business is generally subject to tax in accordance with the Self-Employment Contributions Act (SECA) when includible in gross income. See §§ 1401, 1402(a). Accordingly, an amount derived from an individual’s trade or business that is includible in the self-employed individual’s gross income under § 409A is generally subject to the application of SECA taxes at the time such amount is includible in gross income.

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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