Substantial Risk Forfeiture: Retirement 457(f)

[Guest woodchuck]

Can someone help me out? I have a 457(f) plan. Eligible employees must be employed on the particular date (e.g., 1-1-2009) to receive payment on that date. If you terminate prior to that date, you forfeit the payment, unless its due to your death or disability. Question: would it be a SRF to provide that if you terminate due to your retirement (e.g., you won't continue to work for anyone), you would still receive the installment? Or will that not be sufficient to create a SRF? The SRF would arguably be that if you quit but continue to work, then you would forfeit the payment. Thanks!

[QDROphile]

According to the 409A regulations, refraining from sevice is not a risk.

[Guest woodchuck]

Right, but our plan will comply with 409A because payments will not be made until the date set forth in the plan. Thus, the plan won't be a failed 409A plan so that we would have to figure out when the SRF for 409A purposes no longer applies.

I see this instead as a 457(f) issue. And, by analogy, what would work (or not) under 83. Looks to me that this would be a facts and circumstances question under 1.83-3©. So if the person making the deferral was just about to retire anyway, then there isn't really a SRF for 83/457(f) purposes.

[QDROphile]

"Instead" is not a word to use when dealing with 457(f) and 409A.

[jpod]

I think what Qdrophile is hinting at is that you should look at IRS Notice 2007-62.

[QDROphile]

The IRS issued the notice because not enough people were listening to statements that 409A overlays and applies to 457(f) situations. The intended audience was predisposed not to hear, so they brought out the hammer.

[jpod]

QDROphile, I respectfully disagree. Heretofore there was no regulatory definition of SRF for purposes of 457(f). 409A does not fill the gap. If one assumes a different and presumably more liberal definition of SRF for 457(f) than for 409A, it was possible to fully comply with both Sections of the Code even though the arrangement used a definition of SRF that did not buy you out of 409A(i.e., the only consequence of not having a 409A SRF is that your arrangement must comply with 409A, which can be as simple as pie). The Notice tells the world that IRS intends to publish regs. under 457f that will adopt the same definition of SRF as is used in the 409A regs.

[Guest woodchuck]

Thanks for your replies. Let me explain how this would work again in a bit more detail. The deferred compensation would be vested and paid as of the earlier of the following: a date certain (e.g., 1-1-2012), termination of employment due to death, termination of employment due to disability, termination by the employer without cause, or, termination by the employee on or after the normal retirement age in the plan (e.g., age 65). I should add that this is not a salary deferral plan - - the plan is employer-funded.

If the employee terminates employment for any reason other than one of these events, there is complete and total forfeiture.

Per Notice 2007-62, the eventual regs under 457(f) will 409A will follow 1.409A-1(d). O.K., but under that regulation, compensation is generally subject to a substantial risk of forfeiture if entitlement to the amount is conditioned on the performance of substantial future services by any person or the occurrence of a condition related to a purpose of the compensation, and the possibility of forfeiture is substantial.

Here, payment is conditioned on the performance of substantial future services - - you generally need to work until 1-1-2012. The possibility of forfeiture is substantial because if you quit before then, you won't get paid anything, unless one of the exceptions applies.

I found a couple of PLRs and one TAM under Section 83 and 457(f) indicating to me that inclusion of a payment provision for termination on or after a normal retirement age will not result in a lack of a substantial risk of forfeture.

I'm feeling better that inclusion of a NRA payment date in the plan won't result in constructive receipt under 457(f).

[jpod]

I have to assume from your extended post that age 65 precedes the date certain. Therefore, the date certain becomes meaningless, as the amount will no longer be subject to a SRF upon attainment of age 65. As such, it will be taxable at age 65 whether or not the individual retires/terminates at that time. There is a SRF prior to age 65, but once you hit age 65 the SRF goes away. I don't think I'm going out on a limb to suggest that this would have been the correct interpretation without regard to Notice 2007-62.

[Guest woodchuck]

Thanks - - I should have realized that when you'd hit the NRA, you'd be in constructive receipt with no further SRF. I think I've got this sorted out now. I appreciate the feedback!

[Guest BruceC]

Thanks - - I should have realized that when you'd hit the NRA, you'd be in constructive receipt with no further SRF. I think I've got this sorted out now. I appreciate the feedback!

Woodchuck

Does the plan specify that once reaching NRA that annual or other scheduled payments will be paid over retirement years, or are you in constructive receipt of the whole enchilada and declare the entire balance as ordinary income that year?

BruceM

[Tot]

Thanks - - I should have realized that when you'd hit the NRA, you'd be in constructive receipt with no further SRF. I think I've got this sorted out now. I appreciate the feedback!

Woodchuck

Does the plan specify that once reaching NRA that annual or other scheduled payments will be paid over retirement years, or are you in constructive receipt of the whole enchilada and declare the entire balance as ordinary income that year?

BruceM

Entire balance of account on date NRA is attained is taxable under 457(f). Amounts paid out thereafter will be part return of basis (tax-free), part income (taxable).