457(f) Flexibilty?

[kgr12]

I'm trying to get a handle on just how powerful the short term deferral rule is in allowing flexibility in 457(f) plans that would not otherwise be permitted under 409A. Does the inapplicability of 409A to 457(f) benefits that remain subject to a substantial risk of forfeiture mean that you work under the far more flexible "pre-409A" rules that govern 457(f) plans alone?

Let me give an example that I don't think pushes the envelope too hard: in 2009 tax-exempt employer promises its top executive that he/she will receive $25K each year for 10 years beginning January 2016 if he/she remains continuously employed through January 1, 2016. In 2012, parties instead want to revise the agreement to provide a lump sum payment of $250K on January 1, 2016 if executive is continuously employed through that date.

In this example, vesting and timing of benefit are the same before and after the change. If 409A applies, any change in the timing and manner of payments would necessarily push out the payment/vesting date by 5 years to 2021. If not subject to 409A because of the short term deferral rule, I'm supposing you can keep the January 1, 2016 date (in spite of the change in the timing and manner of payment) without fear of causing a 409A problem?

As noted, I don't think this example pushes the envelope that hard in terms of many of the more aggressive "pre-409A" 457(f) strategies.

I'd apprecaite your thoughts and ideas.

[Guest LeeNunn]

I'm trying to get a handle on just how powerful the short term deferral rule is in allowing flexibility in 457(f) plans that would not otherwise be permitted under 409A. Does the inapplicability of 409A to 457(f) benefits that remain subject to a substantial risk of forfeiture mean that you work under the far more flexible "pre-409A" rules that govern 457(f) plans alone?

Let me give an example that I don't think pushes the envelope too hard: in 2009 tax-exempt employer promises its top executive that he/she will receive $25K each year for 10 years beginning January 2016 if he/she remains continuously employed through January 1, 2016. In 2012, parties instead want to revise the agreement to provide a lump sum payment of $250K on January 1, 2016 if executive is continuously employed through that date.

In this example, vesting and timing of benefit are the same before and after the change. If 409A applies, any change in the timing and manner of payments would necessarily push out the payment/vesting date by 5 years to 2021. If not subject to 409A because of the short term deferral rule, I'm supposing you can keep the January 1, 2016 date (in spite of the change in the timing and manner of payment) without fear of causing a 409A problem?

As noted, I don't think this example pushes the envelope that hard in terms of many of the more aggressive "pre-409A" 457(f) strategies.

I'd apprecaite your thoughts and ideas.

[Guest LeeNunn]

[This might be OK on a one-off basis, but if you go into the transaction with this kind of planning in mind, you need to watch out for the anti-abuse language in proposed Treas Reg 1.409A-4(a)(1)(ii)(B). To paraphrase someone smarter than I am, the proposed 1.409A-4 regs are intended to address the calculation of amounts includible in income when taxpayers fail 409A. When you try to "make lemonade out of lemons," the IRS is going to be one step ahead of you. Your example illustrates an acceleration, but the concept also applies to the deferral of unvested stock options. You're asking how can you be taxed if you're subject to a SROF. The answer is that the IRS might disregard the SROF if they think this is part of established strategy.

Also, be aware that the criteria for SROF differ under 457(f) and 409A. Your example suggests a conservative approach to 457(f) in which you expect forfeitures on involuntary separation. More aggressive strategies attempt to both defer taxation and minimize forfeitures.