Short-term deferral and 457(f)

[Ken Davis]

Does income inclusion at December 31, 2011 under 457(f) make 409A a non-issue for 2011? Or, must the actual payment of the income occur by March 15, 2012? I'm struggling with the short-term deferral regs. Specifically the first sentence in 1.409A-1(b)(4)(i) that seems to first require that the payment must not be a "deferred payment." Reading further at (i)(D) a payment is a "deferred payment" if the plan provides it will be made after March 15 for a calendar year service provider. So, is it correct to say that the short-term deferral exception will NOT be met if the income is recognized at December 31 under 457(f), but the plan provides that actual payment will be made the following June 15?

Thanks,

Ken Davis

Univ. of South Alabama

[XTitan]

Notice 2007-62

V. INTERACTION OF §§ 409A AND 457(f) UNDER ANTICIPATED STANDARDS

Under the rules at § 1.409A-1(b)(4)(i) relating to short-term deferrals, a deferral of compensation for purposes of § 409A does not occur if the plan under which a payment is made does not provide for a deferred payment and the service provider actually or constructively receives such payment on or before the first day of the applicable 2½ month period. Under § 1.409A-1(a)(4), the inclusion in income of an amount under § 457(f) is treated as a payment of the amount for purposes of the short-term deferral rule contained in § 1.409A-1(b)(4).

If the standard for a substantial risk of forfeiture for purposes of § 409A described in Part IV of this notice is adopted, a substantial risk of forfeiture under § 457(f)(1)(B) could not lapse later than the date the substantial risk of forfeiture lapsed under § 409A and § 1.409A-1(d). Accordingly, if a participant under an ineligible plan under § 457(f) included an amount of deferred compensation in gross income when it ceased to be subject to a substantial risk of forfeiture under § 457(f), the amount generally would not be subject to § 409A because the right to the amount and the payment would qualify as a short-term deferral under § 1.409A-1(a)(4). However, the right to earnings on amounts that have previously been included under § 457(f) would be deferred compensation for purposes of § 409A unless the right to the earnings independently satisfied the requirements for an exclusion from coverage under § 409A.

There are rumors that guidance will be forthcoming. Hope this helps.

[Guest George Chimento]

<<However, the right to earnings on amounts that have previously been included under § 457(f) would be deferred compensation for purposes of § 409A unless the right to the earnings independently satisfied the requirements for an exclusion from coverage under § 409A. >>

That's a correct analysis from XTitan in my view. Let me add a little bit about the post-vesting earnings element, which can inadvertantly become deferred compensation if not paid by March 15 following the 457(f) vesting year.

The way many of us draft these 457(f) agreements is to provide that the vesting date occurs early in January rather than in December, i.e. vested in January of 2013 rather than December of 2012. That gives an extra 12 months -- until March 15, 2014 in this example -- to distribute the earnings as short term deferrals.