Substantial Risk of Forfeiture and 457(f)

[Randy Watson]

We have a 457(f) plan that pays benefits in a lump sum within 2-1/2 months following the end of the plan year in which the participant completes 10 years of service. We meet the STD there. The problem is that the plan allows the participant to extend the distribution date for 5 years beyond the otherwise applicable distribution date. We still have a SRF for purposes of 457(f), so no income inclusion. My understanding is that the SRF would be shot for purposes of 409A and now we have to make this payment comply with 409A. Does that sound right? Need more info?

[jpod]

A few observations.

1. Income inclusion date is the vesting date, not the date of payment. Therefore, under the plan as written, the 2-1/2 month deadline for payment may get you out of 409A, but why do you wish to leave open the possibility that vesting and payment will not be simultaneous, or almost simultaneous?

2. I agree with your observation about the need to make the revised plan 409A-compliant, unless there is something about the new deal that continues the SRF of forfeiture for purposes of Section 409A (e.g., will there be a material increase in potential benefits - other than earnings - as consideration for the additional deferral?).

3. Assuming you have not continued the SRF for purposes of Section 409A, won't the IRS say that you haven't continued the SRF for 457(f) either? (See Notice 2007-62.)

[Randy Watson]

A few observations.

1. Income inclusion date is the vesting date, not the date of payment. Therefore, under the plan as written, the 2-1/2 month deadline for payment may get you out of 409A, but why do you wish to leave open the possibility that vesting and payment will not be simultaneous, or almost simultaneous?

2. I agree with your observation about the need to make the revised plan 409A-compliant, unless there is something about the new deal that continues the SRF of forfeiture for purposes of Section 409A (e.g., will there be a material increase in potential benefits - other than earnings - as consideration for the additional deferral?).

3. Assuming you have not continued the SRF for purposes of Section 409A, won't the IRS say that you haven't continued the SRF for 457(f) either? (See Notice 2007-62.)

1. We inherited this plan, so I'm not exactly sure why the original drafter would create the possibility for a payment after income tax inclusion.

2. Nope. No changes.

3. The 409A definition of SRF is narrower. I thought such continuances were always permitted for purposes of a 457(f) SRF.

[jpod]

Concerning point 3, look at the Notice.

[Randy Watson]

Thanks!