austin3515

Short-Term Deferral Exception / 457f

7 posts in this topic

OK, I am missing something.  The new proposed regs indicate that Short-Term deferrals are not subject to 457f.  Short-term deferrals are deferrals that are paid shortly after they become vested.  Because 457f's are taxable when they vest, we always payout shortly after they become vested.

So what would be a 457f plan?  And why don't any of these articles address that question?

Share this post


Link to post
Share on other sites

A short term deferral is not considered deferred compensation for purposes of Section 457(f); consequently, they are taxed when received (or constructively received), not when vested.  A deferral that is not a short term deferral is subject to 457(f) (unless it means another exception). 

Share this post


Link to post
Share on other sites

But do you see where my question is coming from?  If a plan puts away $50,000 a year for 5 years, the money vests on the 5th anniversary, and the plan pays out $250,000 plus interest 30 days after it vests, what kind of a plan is that?  I would have told you that was a plain vanilla 457f plan.  I didn't think there was any other way to run a 457f plan because the monies are taxable as soon as they vest.

By the way I know I am missing something simple and basic, so please do talk to me like I don't know anything!

Edited by austin3515

Share this post


Link to post
Share on other sites

I've seen 457(f) plans with post-vesting distributions.  I've seen 457(f) plans with installment payments.  Expecting to see 457(f) plans with voluntary deferrals.  It may not make sense from a tax perspective (to the participant), but the employer may have their own reasons for the designs. 

On the other hand, a short-term deferral arrangement + an inadvertent operational error = possible need to comply with 457(f)/409A, so a catch-all provision might just make some sense.. 

 

Share this post


Link to post
Share on other sites

I was working with a 457(f) plan just yesterday that vested an executive in 15 annual installments upon reaching age 65 while employed. The plan made a tax distribution upon vesting to cover the present value of the 15-year payout. I didn't design the plan, but there are definitely some out there that don't meet the short-term deferral exception. 

Share this post


Link to post
Share on other sites

A few thoughts:

  • As others have discussed, some 457(f) plans pay out later than they vest, for non-tax-related reasons.
  • Although deferrals are taxed when they become vested, income accrued thereafter is not subject to immediate taxation.  Thus, the payment of that income may be subject to 409A.
  • A substantial risk of forfeiture can exist for purposes of 457(f) based on a noncompete agreement under certain circumstances.  Such an agreement can never postpone the SRF for 409A purposes.  So it is possible to have an agreement under which the amount is paid out when the SRF lapses for 457(f) purposes, and still have the agreement considered deferred compensation for 409A purposes.

Share this post


Link to post
Share on other sites

Very very helpful, thanks!  I had heard of all of these things, I guess I'm just surprised to hear that they are all that common. I guess I'm keeping it simple which is a good thing, though I do know enough to call in the experts when needed.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now