Distributions from 457(f) Plan

[#toomanyrules]

When are 457(f) contributions actually payable? I know it depends on the document, but under the regulations, when can a 457(f) plan allow for distributions? Is it permissible to distribute  upon full vesting, if the participant is still employed? I don't see anything in the regulations that allow actively employed participants to withdraw vested amounts, other than for unforeseeable emergencies, taxes, or attainment of age normal retirement age, or at a stated event. 

Would becoming fully vested be considered a "Stated Event"?

[Peter Gulia]

Internal Revenue Code of 1986 § 457(f) is a rule about when compensation counts in income.

“In the case of a plan of an eligible employer providing for a deferral of compensation, if such plan is not an eligible deferred compensation plan, then— the compensation shall be included in the gross income of the participant or beneficiary for the 1st taxable year in which there is no substantial risk of forfeiture of the rights to such compensation[.]” I.R.C. (26 U.S.C.) § 457(f)(1)(A).

What people call a § 457(f) plan is one the parties hope maintains a substantial risk of forfeiture until the compensation is paid (or at least until it would be payable if the participant or beneficiary claims it).

If you’re designing a plan, reading 457 Answer Book’s chapter 11 could help you consider which restrictions might be enough to support a substantial risk of forfeiture.

If you’re applying a written plan, it’s RTFD—Read the Fabulous Document.

Many participants prefer that a right not happen too quickly, because whatever a participant has a right to take generally counts in income.

[CuseFan]

True - but timing of taxation and distribution do not have to be coordinated.

T - you can trigger payout based on defined event(s) which can include vesting. A common design I've seen is a deferred bonus - for example, executive gets a deferred bonus for 2022 that vests 1/1/2026 if the executive is still employed and which is then taxable and paid to the executive in 1Q2026. All of which is defined in the plan.

[Paul I]

Generally, the plan can allow the participant to defer the coming year's deferred comp to a point in time defined by a specific time period or definitely determinable event.  The election is made before the year starts and the distribution occurs at a definitely determinable point in time. 

For example, a younger individual with a child that is now 8 years old may elect to take distribution in 10 years - roughly around the age the child may go to college.  The election can be tied to the payment being made in 10 years - that is determinable.  The election cannot be tied to when the child goes to college because that is not determinable.  An older individual in the same plan could elect to have the amount payable at age 65.

The plan can allow a participant to make different elections for different years.  Allowing that option requires meticulous administration.

Vesting will have to occur with respect to this deferred amount on or before the amount can be paid, and the amount will be taxable when it vests without a substantial risk of forfeiture.  Some plans use class-year vesting so there is always an amount at risk of forfeiture.  As CuseFan noted, timing of taxation and distribution can occur at different points in time.