457 plan only NQ option available to tax-exempts?

[Guest patom]

If a tax-exempt organization wishes to offer a non-qualified plan, is a 457 plan their only option? Also, with 457 plans, I belive the maximum contribution level (both deferral & match?) cannot exceed a given limit less the deferrals made to a 401(k) and/or 403(B) plan. If a tax-emempt employer already maintains a 401(k) plan, is there any reason to sponsor a 457 plan?

[Guest wmacdonald]

Yes and no, sound like a lawyer, but I'm not. The first type of Section 457 plan is called an "eligible deferred compensation plan". Eligible plans must meet specific requirements contained in Code Section 457. If those requirements are met,participants may defer taxes on their elective deferrals and any employer contributions under the plan (and earnings on those deferrals and contributions) until amounts are paid or made available to them. Although technically a nonqualified plan,an eligible plan resembles a tax-qualified plan in that,as long as the plan meets the requirements of Code 457,plan participants are not taxed on their plan interests until they in fact receive plan distributuions,even if they are fully vested in those interests and even if,in the case of a governmental eligible deferred compensation plan,those interests are funded. The limits were $8,000 in 2000.

The second type of Section 457 plan is called an "ineligible deferred compensation plan". Ineligible plans are deferred compensation plans of government and nonchurch tax-exempt employers that do not meet the Section 457 requirements for eligible plans and resemble,in some ways,the nonqualified plans of for-profit employers. Unlike participants in an "eligible plan",participants in an "ineligible plan" are taxed on their elective deferrals and any employer contributions under the plan when those amounts cease to be "subject to a substantial risk of forfeiture". Earnings are taxed when amounts are paid or made available under the plan.

A number of creative people have designed plans, that try and avoid the "substantial risk of forfeiture" rules. One way, up until the IRS's new position, was split dollar life insurance. There are not many solutions that don't carrier tax risk. We have one concept, that is a "employee" ERISA trust, that is quite creative. I would be willing to talk off line, if you want to hear more. Hope this helps.

[Guest Ralph]

Thank you for the response. That helps a lot. One follow up question with respect to inelgiible deferred compensation plans......are they subject to any contribution limits? And, if not, why wouldn't an employer always prefer to set up an inelgiible plan?

[Guest derfbme]

What about the use of a non-qualified 457 using sec. 83 as an option--forgive the term.

[Guest patom]

I'm not all that familiar with non-qualified plans. Do you mean a nonqualified stock option plan? If so, is this a type of "ineligible" 457 plan ? If so, would it be subject to contribution limits?

[Guest derfbme]

There are several articles on the subject one that I have handy was written by John P. Beavers and can be found at http://www.johnpbeavers.com/compensations/options.asp

If for some reason you can't obtain it form the site, I'd be happy to fax it to you.

[IRC401]

I responded to this question on the government message board. Keep in mind that "eligible" 457 plans are (as a practical matter) available to tax-exempt entities only if the plan is not subject to ERISA. If Title I applies, the 457 plan assets will need to be put in a trust, at which point they will become immediately taxable.

[Kirk Maldonado]

IRC401:

Would the Section 457 plan have to be funded even if participation were limited to "top-hat employees" in the case of a plan that is subject to Title I of ERISA?

[IRC401]

Kirk-

I am not aware of any reason why a tax-exempt entity couldn't sponsor a "top-hat" eligible 457 plan. I should have stated that the plan must be excluded from Part 4 of Title I.