Noncompete as a Substantial Risk of Forfeiture under Section 457(f)

[card]

Hi-

An earlier thread (from 2002, below) discussed noncompete provisions as a SRF under section 457(f), and some members expressed concern about whether they work. Has anything happened in the meantime to change your mind?

I have seen some suggestions that the Service's failure to address this issue in the recent 457 regs is a "tacit acknowledgment" that these provisions work. I am still concerned however that, at best, the guidance in section 83 applies.

I have heard some of the major consulting firms say that use of noncompetes as a section 457(f) SRF is now very common. (For example, a 2 year/ 50 mile radius noncompete.) Is this your experience as well?

Obviously legal advice shouldn't be based on the herd concept, but sometimes there is safety in numbers, and I would assume this is another area where any adverse guidance from the Service might be applied prospectively.

thanks.

card

http://benefitslink.com/boards/index.php?s...2&hl=noncompete

[smm]

I'm the one who started that 2002 thread and my opinion is that a non-compete clause does not work. A participant is vested (and taxable) when there is no substantial risk of forfeiture and the use of a "non-compete" clause is not a substantial risk of forfeiture.

[Guest jfp]

I participated in the 2002 thread and I still believe that a substantial risk of forfeiture can exist even if it does not involve continued performance of services.

Also, see the IRS 2001 CPE text dealing with 457; it should still be available on the IRS website. It suggests that you can have a srf even if no further services are required.

[Kirk Maldonado]

Well, I'm in the middle on this topic. I think that they can work in the right circumstances. But I will freely admit that in most cases they don't work. This is a very fact-specific question, so I don't think that anybody can give a blanket answer as to whether they work or don't.

I have been personally involved in a number of corporate transactions where there were non-competes, and believe, the other side had the money and the inclination to enforce them if there was any breach.

In fact, if anybody wants to do the legal research, there are a slew of cases brought by one particular major US corporation very aggressively enforcing non-competes.