non profit and non qualified plans

[k man]

a non profit tax exempt org wants a executive benefit plan for a select group of HCE's.. the plan would not allow for elective deferrals. it would only be employer money. could this entity do this plan or are they restricted by 457?

[Guest mjb]

All IRC 501© entities are subject to the limitation on deferrals for non qualified plans in IRC 457. If deferred amounts are vested, the amount of deferral cannot exceed $15,500 regardless of whether the employee defers the funds or the employer promises to pay the funds at a later date See IRC 457(b). Deferred amounts in excess of $15,500 are permitted under IRC 457(f) if the deferred amounts are subject to a substantial risk of forfeiture until the employee is no longer required to perform substantial services.

[jpod]

I agree with what mjb said, except to note that 457(b) contains some rules limiting the timing of payment. If the intended arrangement will not comply with those rules, you're stuck having to work around 457(f) (and 409A) even for amounts not in excess of the annual dollar limit. Also, you mentioned a select group of "HCEs." Note that the DOL's interpretation of who can be in a "top hat" plan is not the same as the IRC definition of "HCE." In many cases (depending upon the employee population involved and their compensation levels), a "top hat" group is much smaller than the HCE group.

[Guest flogger]

A not-for-profit entity can certainly do what you're suggesting under 457(f) without regard to the typical qualified plan deferral or employer restrictions. The biggest problem with not-for-profits is that the participant is taxed on the benefits when they become vested (i.e., there no longer exists a substantial risk of forfeiture), not when they receive the benefits.

For example, consider a benefit that is defined to be $100,000 per year for 20 years upon attainment of age 65, with cliff vesting (0% before 65 and 100% at 65). When the participant reaches 65 (and has met all the requires to receive the benefit), the participant is taxes on the flow of the entire $2M at age 65.

Therefore, you may want to design the benefit as a lump sum equal to the PV of the benefit flow just so the participant has the monies to pay the taxes. Further, if there is any vesting before 65 (in this example), the participant is taxed on the PV of the vested benefit at the time of vesting.

The same rules apply if you're structuring the benefit as a defined contribution instead of a defined benefit.

Of course there are many other issues that have to be considered (like P&L charges, funding, ancillary benefits etc), but it can be done.

[k man]

A not-for-profit entity can certainly do what you're suggesting under 457(f) without regard to the typical qualified plan deferral or employer restrictions. The biggest problem with not-for-profits is that the participant is taxed on the benefits when they become vested (i.e., there no longer exists a substantial risk of forfeiture), not when they receive the benefits.

For example, consider a benefit that is defined to be $100,000 per year for 20 years upon attainment of age 65, with cliff vesting (0% before 65 and 100% at 65). When the participant reaches 65 (and has met all the requires to receive the benefit), the participant is taxes on the flow of the entire $2M at age 65.

Therefore, you may want to design the benefit as a lump sum equal to the PV of the benefit flow just so the participant has the monies to pay the taxes. Further, if there is any vesting before 65 (in this example), the participant is taxed on the PV of the vested benefit at the time of vesting.

The same rules apply if you're structuring the benefit as a defined contribution instead of a defined benefit.

Of course there are many other issues that have to be considered (like P&L charges, funding, ancillary benefits etc), but it can be done.

awesome..so basically i can set up a non qualified plan under 457(f) and i think be able to avoid 409A as long as the plan does not involve a deferral of compensation, correct?

[jpod]

Client needs to be aware of (a) 990 reporting requirements, and (b) if it is a 501©(3) or (4), the rules for avoiding Section 4958 excise taxes.

[QDROphile]

Don't overlook a big catch in flogger's example. If the participant terminates employment before age 65, the participant gets nothing.

Also, you are not avoiding 409A. You are providing deferred compensation that is not taxable until a substantial risk of forfeiture lapses, in accordance with 409A.

Especially because of the novelty of 409A, this is not a playground for the uninitiated or for the old dogs who refuse to let go of the old tricks.

[k man]

it dawned me that i might have put this thread in the wrong sub category. if the plan will not include any employee deferrals would it still be subject to 457(f) or would it just be subject to 409A.