EBECatty

457(f) Taxation Short-Term Deferral?

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Looking for any suggestions on how this fact pattern is typically handled:

Tax-exempt entity has an annual incentive plan set up in much the same way as, for example, a public company. There are target financial and qualitative goals then threshold, target, and maximum bonuses. The measurement period is the calendar year.

Payouts are made by March 15 of the following year to avoid 409A. Employees must be employed on the date of payment to receive the bonus, so the vesting date for typical active employees is the date of payment. Income and FICA taxes are due and withheld from the payment. No 457(f)-specific problems as the vesting and payment years are the same.

However, employees who die, become disabled, or retire (with typical criteria, e.g., 65 with 10 years of service) during the plan year are awarded a pro-rated bonus paid at the same time as the normal payout date. Their otherwise-applicable performance criteria must be met, but they don't have to continue working. The financial performance is determined as of December 31 of each year (but "officially" approved after the close of the year). I don't think this would maintain a SROF until the administrator or committee officially approved the financial results. It sounds like everything is vested (if it ever will be) as of December 31 each year.

So do the dead, disabled, and retired employees owe taxes during the plan year in which they die, becomes disabled, or retire?

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We don't have regs yet but I think it is safe to assume that there is no deferral of compensation subject to 457(f), assuming the deferral is not done at the election of the participant or death beneficiary, as the case may be.

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Thanks jpod.

I'm not familiar with what the final regs are anticipated to say, but are you saying they will carve out a short-term deferral similar to 409A and 3121?

I'm thinking if you retire in June 2016, the financial goals are met on December 31, 2016, but you're not paid until March 1, 2017, wouldn't that be a deferral of compensation (without some exception)?

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I am saying that I THINK the regs will provide a short term deferral exception, to put it in line with FICA rules and 409A, and even without regs I haven't heard anything to suggest that the IRS examiners don't assume such an exception doesn't exist already.

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