Installment distributions from a 457(f) plan?

[Guest TaxedToDeath]

Since amounts deferred under a 457(f) plan are taxable when they are no longer subject to a substantial risk of forfeiture, does providing for installment distributions from a 457(f) plan after a participant attains full vesting make any sense?

There's no tax deferral on the subsequent installment payments because almost everything (except earnings on deferred amounts credited after the deferred amounts are no longer subject to a substantial risk of forfeiture) has already been taxed when the participant attained full vesting. Unless a participant is anticipating high earnings on the deferred amounts and wishes to defer taxation on those earnings until they are paid from the plan, what would be the point of providing for installment distributions?

[ETA Consulting LLC]

I cannot conceive a situation where it would make sense. Since the rule is that the amount becomes taxable in the year it is no longer subject to a substantial risk of forfeiture, the typical practice is to try to coincide the actual distribution with that time frame.

Good Luck!

[Carol V. Calhoun]

I have never seen installment distributions (or indeed any deferral beyond the date of vesting) included for tax purposes. I have very occasionally seen installment distributions by employers who follow the "tin cup" theory--that it is embarrassing to an organization, and potentially harmful to its ability to attract donations, if a former high-level executive ends up on welfare or otherwise obviously in poverty. Thus, the employer may wish to ensure that the executive cannot spend all the money up front, and end up without resources later in life. In such instances, there is commonly a first-year distribution to cover the tax owed, followed by annual distributions of the remaining amount. Of course, in such an instance, the installment form of payments is not subject to employee election.

[jpod]

Agree with Carol, and will also note that I have seen installments along the pattern she has described justs because it is easier to swallow by any constituencies who might care (e.g., other employees, donors, the media, etc.).