457 & substantial risk of forfeiture & good reason term

[Locust]

I was watching a recent ALI ABA presentation by IRS reps, including Cheryl Press, on 457. She seemed to be saying that a 457(f) benefit where vesting was conditioned upon involuntary termination of employment or voluntary termination for "good reason" (within the meaning of 409A regulations) would not necessarily be a substantial risk of forfeiture (SRF). She seemed to say that the IRS was considering not accepting a voluntary termination for good reason as a SRF because it was not "verifiable" when the IRS auditors came in several years later to audit the payment. Note that Reg. ss 1.409A-1(n) clearly says that for 409A purposes a good reason termination (as defined in that section) will be considered an involuntary termination of employment. However, the only significance of this for 409A appears to be in the exception for a separation pay plan.

My issue is with 457(f) arrangements. In a 457(f) arrangement the SRF determines the date of taxation. So if a good reason termination is not a SRF, does its inclusion in a 457(f) arrangement result in immediate taxation?

I'm not going to eliminate a good reason termination as a vesting event in 457(f) arrangements based on what the IRS might do - it's too important for the executive, and I don't see why it should be treated differently for 409A and 457(f) purposes. Ms. Press is asking for comments on the recent Notice regarding new 457 standards, and this seems like a good area to address.

What do you think of this reasoning by Ms. Press?

[jpod]

Her reasoning seems to be inconsistent with the Notice, which says (I think) that the definition of SRF in the 409A regs will be used for purposes of 457f.

On the other hand, let's assume that the IRS allowed a good reason condition to be a SRF. A follow-up question would be: does the occurrence of the good reason event cause taxation under 457f, even if the employee does not elect to quit and take the money? If so, then for the IRS to say that good reason = SRF is kind of pointless.

[Guest Grecoisdead]

457(f) plan with the "good reason" voluntary termination language.

The participant becomes vested and takes a distribution when they voluntarily terminate with a "good reason" as defined by the plan. They must provide notice within a short window when a "gr" exist, allow for the sponsor to fix, and if it is not fixed, they have a 24 month window in which to exercise the out and get the funds.

Does the occurrence of a "gr" event alone make the SRF no longer valid? Or would it only go away if the participant provides notice to the sponsor and no action is taken by the sponsor to rectify (even if they do not term, but the window is open)?

Thoughts?