457(f) and AJCA

[Guest Philip]

Do 457(f) plans really need to be amended for AJCA? The conference committee report states that deferred compensation will be taxable if (1) not subject to a substantial risk of forfeiture or (2) the plan doesn't contain the new rules. If a 457(f) plan provides for a substantial risk of forfeiture, then the provisions of AJCA should not be necessary. Am I missing something?

[mbozek]

Benefits in a 457f plan are subject to income tax and Sect 885 in the first year that there is no risk of forfeiture, e.g. no requirement to perform substantial services. Amounts deferred after 12/31/04 will be subject to the restrictions in sect 885.

[Guest pcalore]

I would like to follow up on this issue, if I might. Is the real consequence under Section 409A for a 457(f) plan which is not amended to add the restrictions on deferrals and payouts, that participants in the plan will be subject to the 20% penalty tax on deferrals to the plan (including interest thereon)? And if so, will the penalty only be assessed at some point in the future when the particpant's account is no longer subject to a substantial risk of forfeiture?

[davef]

457(f) plans that have rolling risks of forfeiture might be impacted by the new rules. Depending on how legitimate a plan's rolling vesting schedule is, the new rules could create a taxable event sooner than anticipated.

[mbozek]

Section 409A applies to all amounts under a 457(f) plan unless they are earned and vested prior to 1/1/05. According to IRS officials a NQDC plan must conform to 409A at all times in form, e.g., terms must be in compliance with 409A. This will require all NQDC plans subject to 409A to be amended in 2005 even if there are no amounts deferred after 12/31/04.

[Guest pcalore]

If the deferred compensation "plan" is part of an employment agreement, will the actual employment agreement need to be amended to add all of the provisons of Code Section 409A or can the employer just adopt administrative procedures containing these provisions? Section 409A hints at this to the extent it provides that there is a plan failure when a plan " is not operated in accordance with" the requirements of 409A.