Bona Fide Severance Pay Plan

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1. A client is considering a "severance pay plan" funded solely by employee pre-tax dollars, and payable upon any termination of employment. If the employee dies before termination of employment, the deferred compensation is "forfeited" and instead the employee receives a death benefit under a split dollar arrangement. (Alternatively, if the employee terminates prior to death, the split dollar benefit is lost).

While there is no formal guidance, the informal guidance provided by the service in PLR 199903032 seems to strongly suggest that a benefit payable on _any_ termination of employment likely will not be considered a bona fide severance pay plan (especially, it seems, if the plan is funded solely through employee pre-tax deferrals).

Are tax exempt employers adopting plans like this?

2. Assume the Service decides this is a deferred comp plan subject to section 457(f). When is the "severance" benefit taxable? Is there a substantial risk of forfeiture until the employee actually terminates employment, because the severance benefit is forfeited upon death? Or is there immediate taxation, because the employee can choose to terminate at any time and receive the severance benefit?

3. I should be doing real estate closings.

Thanks-

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[mbozek]

Who is going to write an opinion or advise the client that this arrangement to make tax deferred contributions would meet the requirements for a severance plan under IRC 457? I assume that the employer would want assurance that such a plan would be permitted under the tax law before adopting the plan.