Transfers-457(f) to private employer's top hat plan

[Guest Bill Roberts]

Can an employee's interest in a 457(f) plan maitained by a tax exempt, non-governmental entity be transferred to a for-profit entity's "top hat" plan if both plans permit the transaction? By this I mean, can it be transferred without the transfer being a taxable distribution to the employee. The employee has a sizeable balance in 457(f) plan. He is moving to a taxable entity, but does not want to be taxed on the balance. The 457(f) plan says you must take your distribution when you leave. (Perhaps that can be negotiated around or the money moved before the employee moves.)

[mbozek]

Assuming that it is possible which I have not thought about, why would an employee want to take a chance on transferring the deferred comp to a new employer on a non contractually enforcable basis??? ON second thought this makes no sense because there is no 457(f) equivalent in a nqdc plan for a profit making er. If he is terminated from his new job what legal right does he have to receive the funds, no less a rate of return, if the funds are not vested. This employee should take the deferred comp in cash, pay tax and start over again with his new employer. Secondly he may already be in constructive receipt if he is vested at termination of employment.

[pjkoehler]

A quick check of Code Sec 457(f)(1)(A) reveals that the participant is taxable in the first taxable year in which there is no "substantial risk of forfeiture." Code Section 457(f)(3)(B) provides that a "subtantial risk of forfeiture" ceases to exist in the first taxable year in which the participant's right to receive a distribution is no longer conditioned on his performance of future services for the employer, i.e. he's vested in the benefit. If, under the plan, a terminated employee has the right to direct his former employer to "transfer" the benefit liability to a third party, it would be quite a stretch to argue that it remains subject to a "substantial risk of forfeiture."

[Guest Tom Geer]

The short answer is "no." First, pjkoehler is right. Second, when the for-profit offers to pay for services to the non-profit, there is a transfer to the participant of the promise to pay by the for-profit which gets analyzed and taxed under the section 83 rules for transfers of property because the plan benefit is not a "mere promise to pay" that is analyzed as deferred compensation. I am sure there are other analyses that zing it, too.

[Guest Bill Roberts]

In this situation, the individuals who are receving 457(f) benefits are leaving the organization in what amounts to a spin off transaction. It is a "same desk" factual situation. The participants are going to a for-profit entity from a non-profit entity, but will do the same work. They do not want to be taxed on the 457(f) plan money. They would be willing to put it in a top hat plan with the "new" employer.

I couldn't find any rulings that were any help. I thought that the substantial risk of forfeiture issue was insurmountable. If this was top hat plan to top hat plan perhaps it could be done. The 457(f)/83 requirement is too different a requirement from the top hat.

[mbozek]

While I dont think u can avoid taxation of the DC amt how about a reverse-_ have the employees receive the funds from the NP and then elect to defer an equal amt of their salary from the new employer and contaribute it to a new top hat plan. Since the ee are going to be taxed on the pay out and will receive the funds as comp they can deduct their contribution to the new plan from their comp for rest of 2002.

[Guest Bill Roberts]

I hadn't thought of that approach. It is an excellent work around. Thanks. Sometimes you don't see the forest for the trees!

[pjkoehler]

Bill, who owns the for-profit entity? If the tax-exempt holds a controlling interest, the for-profit should, appropriate plan language permitting, be able to assume the benefit obligation under the tax-exempt's "top hat" plan with respect to an executive whose employment is transferred on condition that the executive enter's into a release of claims against the tax-exempt. Even, if the for-profit is not under common control with the tax-exempt, there is a line of private letter rulings that is consistent with such a transfer of liabilities. This approach avoids the unpleasantness of taxable distributions and "make-up" deferrals to restore the value of the executive's account balance.

[Guest Tom Geer]

Good one mbozek. Even better since there's no penalty on distribution and the employee can probably take the money out in installemnts to match the offset.

[mbozek]

Tom: Your idea is a good one if the amt of the payment will exceed the comp paid in 02 by new er.

[QDROphile]

Has anyone considered the FICA consequences of the distribution/contribution suggestion? Is someone in for double FICA taxation -- the the contribution to the top hat plan is subject to FICA taxes currently unless it falls into one of the exceptions.

[Mike Preston]

You can avoid double-FICA with the installation of a qualified plan, rather than a nq plan. While the new cross-testing regs might make it difficult to implement if the employer doesn't already sponsor a cross-tested plan, it just may be that the individuals in question are not HCE's with respect to the new employer. Especially if their compensation is negotiated at a level which is lower than it might otherwise be because of the funds being put into the new plan. If they aren't HCE's, then the effective limit for a plan would be 100% of pay, as long as the employer isn't bumping up against the 25% of pay limit. Personally, I don't understand why most 457 plans aren't replaced with qualified plans for non-profits. Every time I've gotten involved in one, we have done that and everybody is much happier.