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Timing of 457(f) Taxation


kgr12

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Does the short term deferral rule offer the flexibility to determine the year in which a 457(f) benefit is taxed? For example, if the benefit "vests" in April 2020, and is distributed to the participant on March 10, 2021, is the benefit taxed in 2020 or 2021?

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The payments are no longer subject to a substantial risk of forfeiture if they "vested" in April 2020.  Under both the 457(f) or 409A rules (both rules apply), they can be paid by March 15, 2021 (the short-term deferral period for 457(f) and 409A). They will be taxed as 2021 income if distributed by March 15, 2021.  

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  • 1 month later...

Thanks Former Esq., appreciate your reply.

Under the 409A short-term-deferral rule, yes, it would seem that it would be taxed in 2021 since it was, in the language of the 409A regs, "actually or constructively paid" in 2021.

I have two further questions though for anyone who'd like to weigh in:

1. The 457(f) regs, which came out in 2016, well after the 409A regs, state that compensation is includible in gross income in "the first taxable year in which there is no substantial risk of forfeiture." 1.457-11(a)(1). Does this trump the the 409A language regarding actually or constructively paid? Said another way, does the short-term deferral rule keep 457(f) benefits subject to SRF out of the applicability of 409A, but the language of the 457(f) regulation determine the timing of the taxation?

2. If the 409A regs do nevertheless determine the timing of the taxation, is there an argument that the benefit was constructively paid in 2020 when no longer subject to SRF, and actually paid on March 10, 2021, and therefore there is flexibility in deciding when it is to be taxed?

 

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