457(f) information

[Guest scottyd]

I am quite familiar with how a 457(B) works, however I am interested in the 457(f). I am not entirely clear on how this works - is it entirely salary reduction or can an employer make arbitrary contributions to it? I have a non-profit who wants to make contributions to the CEO and I am not sure if this plan fits the bill. Can someone please enlighten me - I would appreciate it!

Thanks,

Scott Dauenhauer, CFP

[pjkoehler]

scottyd: Code Section 457(f) applies to ineligible plans that provide elective (salary deferrals) as well as nonelective forms of deferred compensation. The nonelective form of deferred compensation that you mention is more commonly referred to as a Supplemental Executive Pension Plan or SERP. Amounts paid or made available under a 457(f) plan are taxable to the participant under the rules applicable to the taxation of annuities set forth in Code Sec. 72 in the first taxable year in which the amounts are not "subject to a substantial risk of forfeiture." This term is defined as a condition that exists so long as a the participant's right to receive the amount requires that he yet perform substantial future services for the employer, usually considered not vested. This is the key disadvantage of the 457(f) plan vis a vis the eligible or 457(B) plan. A participant in an eligible plan is not taxable until the amount is actually distributed, even if he's fully vested. Whether restrictions other than performance of future servcies may also rise to the level of the "substantial risk of forfeiture" is a debate that recently played out in another thread. If the exempt org's executive is not inclined to take aggressive tax filing positions, deferral of taxation under an ineligible plan will require a plan design that anticipates the year in which he will first become taxable whether or not he terminates employment.