457(f) salary deferral -- what to do?

[Guest ecleverdon]

Client has a 457(f) salary deferral plan that began pre-2005. Clearly the amounts attributable to 2005 and later are subject to 409A. My first question is whether pre-2005 salary deferrals are grandfathered; second, if grandfathered, will a termination of the plan be a material modification that would subject the grandfathered amounts to 409A? Would freezing the plan be the best option at this point?

[Just Me]

In order for the pre-2005 salary deferrals to be exempt from 409A, they would need to have vested prior to January 1, 2005, i.e., no longer be subject to a substantial risk of forfeiture. It is rare that a deferral subject to Section 457(f) would be vested because under the 457(f) tax structure, once there is no longer a substantial risk of forfeiture, it's includible in gross income of the employee. Although the definitions of substantial risk of forfeiture are different between 457(f) and 409A, I'd be mighty surprised if these amounts were eligible for grandfathering.

[Guest ecleverdon]

Thanks for the input! I think you're right that these amounts aren't grandfathered, as I have since found a number of commentators who have agreed with this point.