Nonprofit deferred salary

[Rainethe]

So there's a nonprofit that has an individual who has worked there for eight years (and founded the nonprofit). Over the years this individual took no money but there was an oral agreement with the board that she was owed a deferred salary of 20K per year, which will be paid the year after the individual's departure (at a rate of no less than 20K per year). This individual is about ready to depart the organization and only now wants to in writing. Obviously, since this is a nonprofit and deals with deferred compensation, this seems like it would fall under a 457 plan. Could it be considered a top hat plan (obviously not a highly-compensated person, but considered a member of a select group of management)? 457(b) or 457(f)? Any help would be appreciated. 

[jpod]

As the founder she presumably qualifies as a "top hat group" member.  Has she been the "boss" all this time?

That there was an oral commitment from the Board to pay her later raises some potential sticky issues under Section 457(f) of the IRC.  While it is not likely that the IRS is going to try to assess back taxes from her based on the past "vesting" of "deferred compensation," once this is reduced to writing you most certainly will have to contend with the 457(f) ramifications. 

 

[XTitan]

Not to mention that 457(f) plans must also comply with 409A which requires plans be in writing (among other things).

[Kevin C]

A 457(b) for a non-profit also has be to in writing. See 1.457-3(a). 

[Luke Bailey]

I have been here many times. Unless you use a noncompete that works (see the proposed Section 457(f) regs for the narrow circumstances where this may work), once the retired founder has a legally binding right to the payments (which may be when they are put it in writing, or, depending on the facts and circumstances, may even be now or some time in the past), she will be or was taxable immediately on the present value of the payments. The future payments will also be taxable, but offset to a great extent by her basis resulting from the large up-front tax payment (only the deemed interest resulting from the discount taken to determine present value will be newly taxable). The agreement will also need to comply with 409A (mostly, require fixed payments, which is what is contemplated anyway), or she will owe an additional 20% tax.

The most compliant/practical thing to do is probably to design the agreement to pay her in cash the amount of her tax immediately, and reduce the future payments. Most of the future payments, again, will be nontaxable.

[Patricia Neal Jensen]

Agree with Luke.  The taxation etc of this payment is a current problem not an historic one.  Put the agreement in writing now for this year etc.  The amount allegedly owed for the past is too large for 457(b) (limit is $16, 500 this year) so you have the 457(f) and 409(A) rules and costs to cope with.

[LIBERTYKID]

Agree with Luke.  I could never find anyway out of this fact situation which comes up from time to time.