Any Suggestions on How to Accomplish This?

[Scott]

A tax-exempt entity has an executive who is currently in his early 50s. They want to allow him to "retire" at age 60 but still stay on the payroll as an employee through age 65 so he remains eligible for health insurance. The entity does not have retiree medical.

What they would like to do is to provide that at age 60, he will receive $20,000 per year until he is 65, taking the position that by receiving the $20,000 per year, he is still an employee and eligible for health insurance, even though he won't really be required to perform any services. I realize that there are several issues as to whether the "employee" status and eligibility for health insurance will fly, but my 457 question is as follows.

I'm assuming that the promise to pay $20,000 per year at age 60 is a deferred compensation arrangement and therefore subject to 457. Does everyone agree on that?

My thought is that if the arrangement is not set up as an eligible 457 plan, the payments will be taxed as soon as he hits age 60 and can "retire." Therefore, paying $20,000 per year is not beneficial to him since he will be taxed on the entire amount at that time. However, if he doesn't receive a payment each year, any argument he has that he is still an employee through age 65 is pretty much toast.

The other alternative is to try to set this up as an eligible 457 plan, in which case the deferrals will have to be set up so that no more than the annual limit is deferred each year, which may or may not be enough to get to the desired total $100,000 benefit. The good thing is that the executive will not be taxed until he receives a distribution, but the bad thing is that he cannot receive a distribution until he severs employment. If he terminates employment at age 60 and starts receiving $20,000 per year, it's hard to argue that he remains an employee for health insurance purposes. On the other hand, if he remains employed at age 60 for health insurance purposes, he can't start receiving the distributions and the employer will have to continue paying him normal wages.

I entertained the idea of the employer terminating the plan when he hits age 60, but I'm not sure the regulations allow distributions upon termination of a plan to be paid other than as a lump sum.

Does anyone see any way the desired goal can be accomplished?

[E as in ERISA]

What about an agreement that he has to make himself available to provide services upon demand of the entity? And/or that he even shows up a certain number of hours per month. And he is not entitled to the $20,000 unless he does so each year through 65? That might solve a couple of your problems.

I've seen different variations on this type of agreement. And some have more risk than others. But it's a possible avenue to pursue.