457(f) DB SERP Excess Plan

[Guest lvegas]

Assume 457(f) DB SERP pays benefits at retirement lost as a result of limits on a "linked" qualfied plan (further assume compliance with 409A). Assume mid-year vesting after, say 5 years, meaning the present value of the accrued benefit is taxable at that time under 457(f), but ultimately paid at retirement (except for accelerated payments for withholding taxes). In years after vesting but before retirement, there will be additional accruals under the 457(f) plan due to incease in compensation and service credits.

For income inclusion purposes, I have in my head that these additional, post-vesting accruals will be taxable in the later years as they accrue (perhaps even on a month to month basis, which could have a withholding tax effect). However, I also have heard of 457(f) plans that use an "assumed retirement date" concept under which the actuaries' calculation take into account assumed future benefit accruals when determining the taxable amount in the year of vesting. My gut feeling is that the former approach is more appropriate, but I haven't come across anything definitive (perhaps b/c it is self evident?).

[Guest Linda Wilkins]

It appears that you did not receive a response on this post.

I have a similar issue in a case where a substantial risk of forfeiture lapsed in 2008 requiring inclusion in income of the present value of a future stream of payments. In the future years when the actual payments are made, should we prorate the amounts already includible in income and withhold income tax on the excess over that? It seems yes is the correct answer. Would there be a more appropriate way to allocate to future payments the earlier discounted amount included in income?

The increased payments are due solely to the present value calculation in 2008, no earnings are credited to future installment payments.

Any further thoughts?

[jpod]

It seems to me that any additional vested benefits beyond increases due to interest or mortality factors would be taxable as they accrue under 457(f) and 3121(v). By the way, you refer to required "withholdings," but where in the Code or the regs. do you find a requirement to withhold income taxes on unpaid amounts which are included in income due to 457(f)?

[Guest Linda Wilkins]

I think my post implied this and it should not. TAM 199903032 is the only IRS guidance I am aware of on this issue and it is clear that no income tax withholding occurs until an amount is actually or constructively paid, even if the 457(f) benefit is fully vested and taxed immediately.