457(f) termination

[Guest wjr]

A private tax-exempt organization has a 457(f) plan and are restructuring and will become a for-profit organization. In order for the participants to avoid immediate taxation, can they set up a Top Hat plan for the newly structured company and allow the participants in the 457(f) the opportunity to elect to defer all the income they will receive from the 457(f) due to its termination?

Or, can the new company just assume sponsorship of the "frozen" 457(f) plan and distribute the income as initially provided in the agreements?

[Carol V. Calhoun]

Since this is not a governmental entity, the 457(f) plan presumably covered only a top hat group to begin with. Thus, there is no reason that the private entity could not just continue the existing plan, even though it would no longer be described in section 457(f). Or it could terminate the existing plan, but pay out the amounts already deferred when due. The deferred compensation rules for taxable entities are actually more liberal, not less, than 457(f).

[Guest wjr]

Thanks Carol - And yes it does only cover a "select group".

So, if they were to just continue the plan as is, which no longer falls under 457(f), does that mean that the taxation upon distribution would be more favorable if they were to elect installment payments and be subject to taxes only as received?