Tax of Defined Benefit SERP under 457(f)

[Locust]

I'm reviewing an actuary's draft of a SERP that has been proposed for the boss of a governmental hospital. It provides for 100% vesting of the benefit immediately, but the formula is a defined benefit formula based on final pay at normal retirement with an offset for a qualified plan benefit and Social Security. Payment is made in a lump sum (actuarial equivalent of benefit) right after retirement.

The assumption I think is that the executive won't be taxed for income tax or FICA until he retires, because the amount payable to him won't be "ascertainable" until then.

I know that the FICA rules do not require taxation until the benefit is ascertainable, and that won't occur until the boss terminates employment. [However, I believe that the rules allow the employer to include in FICA when earned, even though not ascertainable.]

But what about for income tax purposes? There's an IRS Technical Advice Memo (Ltr 199903032) that says that the rules are different and that in this situation, the executive is income taxed when he is vested - which would mean in this situation that he's taxed every year that he accrues benefits. You'd have an unusual situation - income tax in one year and FICA taxes later.

Question: What is the practice out there for defined benefit 457(f) arrangements? Would you feel comfortable with delaying income tax until the benefit is "ascertainable"?

[Guest mjb]

why not look at this as a 457(b) arrangement in which the employee can defer the present value of up to 15k (20 if over 50) of the accrued benefit each year. You need to consult with an actuary to determine the PV of each year's accrued benefit.

[Locust]

MJB - Thanks. It's possible that the value of the annual increases do fall within the 457(b) limits, and I'll look into that. One of the things that would have to change would be the addition of the 457(b) limits to the plan document - 457(b) doesn't apply unless the limits are stated in the plan document.

Any comments on the ascertainable amount rule and 457(f)?