Is 457 the sole choice?

[Ken Davis]

Is 457 the ONLY choice for a state university to offer non-qualified deferred compensation? In other words, unless the requirements of 457 are met, does 457 render an employee unable to defer the taxation of income when he/she has no constructive receipt of the income?

Thanks,

Ken Davis

[Locust]

The only choices are 457(b) - eligible 457 plan, or 457(f) - ineligible 457 plan. The way it works, if it is deferred compensation and it meets 457(b) it is taxed one way (favorably), and if it is deferred compensation and it doesn't meet 457(b), it is taxed under 457(f) (not as favorably, but still some possibilities).

The alternative is a taxable benefit - cash, a taxable annuity, or life insurance are the common alternatives. With the limits of 457, the new 409A rules that apply to 457(f) arrangements, and historically low tax rates, cash doesn't look that bad.

[Guest chicago]

If this is a govermental plan it can also offer a 401(a) plan or plans. Does you state permit governmental entities to set up 401(a) plans. My state - California does and there are many db and dc plans. If you would like further info contact me.

[Ken Davis]

Thank you both for your replies. The specific issue I'm thinking about is a fairly common aspect of the way university faculty are paid, but I've never seen the 457 angle discussed.

Faculty on a 9-month contract typically are paid over 12 months. Schools accrue a liability at Dec. 31 to account for salary earned by faculty during the fall semester, but which will not be paid until the following year. The faculty member is vested when the services are performed.

It would be almost impossible to make such faculty pay plans fit the requirements of 457(b), and the right to the pay is nonforfeitable, so it seems to me that 457 would make the income taxable when it is earned (during the fall semester) and not when it is paid (spring or summer).

But maybe such plans are not deferred compensation plans to which 457 aplies. Thoughts?

Thanks,

Ken Davis

[Locust]

If it's a short term deferral, there may be help in ss 409A.

Section 457 doesn't address this, but under the new ss 409A, short-term deferrals of 2 1/2 months or less are exempt from ss 409A. I would hope that this principle established under ss 409A would carry over to 457 - that is, short-term deferrals would not be subject to 457. The reasoning - if the arrangement is not within the limits of 457(b), it is governed by 457(f), which is subject to ss 409A. However, tax accounting principles might say that 457(f) says that you are taxed when vested, and that's that, even though the employee doesn't have the right to immediate payment.

Caveat: There are many unanswered questions for ss 457 raised by ss 409A.

[Ken Davis]

If it's a short term deferral, there may be help in ss 409A.

Section 457 doesn't address this, but under the new ss 409A, short-term deferrals of 2 1/2 months or less are exempt from ss 409A. I would hope that this principle established under ss 409A would carry over to 457 - that is, short-term deferrals would not be subject to 457. The reasoning - if the arrangement is not within the limits of 457(b), it is governed by 457(f), which is subject to ss 409A. However, tax accounting principles might say that 457(f) says that you are taxed when vested, and that's that, even though the employee doesn't have the right to immediate payment.

Caveat: There are many unanswered questions for ss 457 raised by ss 409A.

Yes, Locust, the vesting is exactly what concerns me. If 457 overrides lack of constructive receipt and the faculty pay plan is subject to 457 (and either it is or it isn't), 457(b) would be almost impossible to meet, so that leaves 457(f). Vesting with no risk of forfeiture results in immediate taxation under 457(f). Surely I'm missing something here, but I can't put my finger on it.

Ken Davis

[mbozek]

I dont understand your issue. 409A does not "overide" a lack of constructive reciept but adds a layer of taxation in additon to the taxation which would otherwise apply under pre 409A tax law, e.g., constructive reciept under pre-409A law if payment is made available under the plan. 409A does not mandate construtive reciept as NQDC in an employment contract that pays an employee as services are performed- If it did then every employment contract for more than one year would become NQDC because it promised payment in a future year when the service is performed.

[Ken Davis]

I dont understand your issue. 409A does not "overide" a lack of constructive reciept but adds a layer of taxation in additon to the taxation which would otherwise apply under pre 409A tax law, e.g., constructive reciept under pre-409A law if payment is made available under the plan. 409A does not mandate construtive reciept as NQDC in an employment contract that pays an employee as services are performed- If it did then every employment contract for more than one year would become NQDC because it promised payment in a future year when the service is performed.

If you're responding to me, I didn't say anything about 409A. The thread began with my question as to whether for a state university the ONLY choice to offer a NQDC plan was to come within the boundaries of 457. The answer was Yes. Do you agree with that?