Mastering IRC 457(f): Guidance for ERISA Counsel in Structuring Deferred Compensation Plans for Nonprofit Entities

Strafford

This CLE/CPE course will provide employee benefits, ERISA counsel, and tax advisers with a thorough and practical guide to deferred compensation for nonprofit and exempt organization executives and employees. The panel will discuss critical tax rules impacting the structuring of deferred compensation plans and define additional opportunities and challenges for exempt organization directors and professionals.

The regulations under Section 457(f) provide planning opportunities for nonprofit entities in structuring deferred compensation plans for executives. This has become particularly important with the 21 percent tax penalty on most tax-exempt organizations that pay their "covered employees" compensation that either exceeds $1 million for the taxable year or is treated as an "excess parachute payment."

Compensation that is no longer subject to a substantial risk of forfeiture (i.e., vested) as defined under IRC Section 457(f) will be included for calculating these amounts in the year the compensation vests, even if paid or taxed in a subsequent year.

Counsel and tax advisers for nonprofit entities will need to master the ins and outs of IRC Section 457(f) and the regulations to advise their clients on structuring compensation arrangements to maximize tax benefits for the executives and the organization and to minimize the amounts that will exceed the $1 million threshold or be treated as excess parachute payments.

A powerful tool is to defer compensation to a later period when the executive may have lower taxable wages. However, once a covered employee, always a covered employee, so post-termination payments may not even escape penalties.

Counsel and tax advisers must understand when compensation is subject to a substantial risk of forfeiture and when that risk lapses. In drafting these compensation agreements, counsel and advisers must understand the relationship between IRC Sections 457(f) and 409A so executives aren't subject to severe penalties for either a document or operational failure under the plan.

Listen as our experienced panel provides a critical analysis of IRS Section 457(f) regulations and implications of current tax rules, as well as offers guidance on opportunities and limitations in structuring executive compensation plans for exempt organizations.

Outline

1. Introduction to IRC Section 457
2. Exceptions to application of 457(f)
3. Interaction between 457(f) and 409A guidance
4. What is substantial risk of forfeiture and deferred compensation
   • Noncompete covenants
   • "Rolling risk of forfeiture"
   • Separation pay plans
5. The 21% excise tax on payments over $1 million or excess parachute payments
   • Who is a covered employee
   • What is an excess parachute payment
6. Evaluating practical applications of 457(f) regulations

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