non qualified deferred comp for credit union

[Guest tiger]

a credit union client of ours would like to offer an additional retirement program for their CEO. They currently have a money purchase plan and 401(k). Can we set up a deferred comp plan for the CEO funded with life insurance or are we limited to a 457 plan, which, as I understand, would reduce the deferrel of the CEO from $10,000 to $8,000? Please advise. Thanks

[Guest Kathleen Meagher]

I think you are stuck with a 457 plan, and that may not do the CEO much good. Any deferred compensation plan maintained by a not-for-profit organization must comply with 457, so the credit union can't set up a non-457 deferred comp. plan.

If you have an "eligible"--i.e. non-forfeitable--457 plan, the $8,000 limit applies and it is aggregated with the 401(k) limit, so if the CEO is contributing the max to the 401(k) plan he or she couldn't defer into the 457. And, the IRS has said that any contributions to a 457 plan reduce the aggregate 401(k)/457 limit to the lower 457 amount.

You could set up an "ineligible" 457 plan that would permit the CEO to exceed the $8,000 limit, but the benefits would have to be subject to a substantial risk of forfeiture, and most folks don't like that.

I assume the proposed 457 plan would only cover the CEO--as you probably know, non-profits' 457 plan must be top hat plans because they are subject to ERISA.

Hope this isn't too long-winded an answer.

[Guest CVCalhoun]

I would generally agree with Kathleen Meagher that a nonprofit cannot have a nonqualified deferred compensation plan other than a 457 plan, and that a 457 plan would not permit the deferral of anything more than could be deferred under the 401(k). However, I would note that certain kinds of arrangements which in common usage are considered "deferred compensation" arguably do not constitute deferred compensation within the meaning of section 457(f). These would include arrangements for transferring to the CEO nonqualified options redeemable in securities of an entity other than the employer (e.g., shares in a mutual fund), or split dollar life insurance arrangements.

There are lots of questions about the legal status and effects of such arrangements, and careful drafting is necessary. But in the absence of other alternatives, many tax-exempt organizations are considering them.