457(f) Plan Termination

What are the considerations regarding terminating a 457(f) Plan.  I am obviously aware that we need to be concerned with presumption of a substantial risk of forfeiture.  Are there guidelines?  Let's say for example scenario A) is the organization voluntarily terminates the Plan; and scenario B) is the organization is actually ceasing operations (perhaps because they lost their primary grant).  These are hypotheticals, but I am curious to know what the rules are concerning terminating one of these things.

Among other statutes and rules, one might consider this portion from 26 C.F.R.§ 1.409a-3:

(ix)  Plan terminations and liquidations.  A plan may provide for the acceleration of the time and form of a payment, or a payment under such plan may be made, where the acceleration of the payment is made pursuant to a termination and liquidation of the plan in accordance with one of the following:

. . . .

(C)  The service recipient’s termination and liquidation of the plan, provided that—

(1)   The termination and liquidation does not occur proximate to a downturn in the financial health of the service recipient;

(2)   The service recipient terminates and liquidates all agreements, methods, programs, and other arrangements sponsored by the service recipient that would be aggregated with any terminated and liquidated agreements, methods, programs, and other arrangements under § 1.409A-1(c) if the same service provider had deferrals of compensation under all of the agreements, methods, programs, and other arrangements that are terminated and liquidated;

(3)   No payments in liquidation of the plan are made within 12 months of the date the service recipient takes all necessary action to irrevocably terminate and liquidate the plan other than payments that would be payable under the terms of the plan if the action to terminate and liquidate the plan had not occurred;

(4)   All payments are made within 24 months of the date the service recipient takes all necessary action to irrevocably terminate and liquidate the plan; and

(5)   The service recipient does not adopt a new plan that would be aggregated with any terminated and liquidated plan under § 1.409A-1(c) if the same service provider participated in both plans, at any time within three years following the date the service recipient takes all necessary action to irrevocably terminate and liquidate the plan.

https://www.ecfr.gov/cgi-bin/text-idx?SID=f092b45ea77423218f153cca788c4415&mc=true&node=se26.6.1_1409a_63&rgn=div8

Do you know if that would cover the substantial risk of forfeiture issue on a 457f?

and thank you!!

In my experience, most 457(f) plans are structured as short-term deferrals that are exempt from 409A and its plan termination/liquidation rules. Generally 457(f) on its own does not prohibit an acceleration of vesting and payment (again, as long as the plan is exempt from 409A). I would think applying the 409A 12-24 month payment delay may actually subject the plan to 409A where it otherwise may not be and potentially cause early taxation upon the date of accelerated vesting under 457(f). 

If the existing plan is a short-term deferral, I think you can terminate the plan, accelerate the vesting terms to require continued employment only until the plan termination date, and make full payment immediately thereafter. I believe that would also continue the substantial risk of forfeiture until the plan termination date (assuming the plan has been in place for a few years). 

austin3515, I'm in agreement with EBECatty. This will be driven to some extent by what the document says, but in most situations I think that unless the participant(s) are, for some reason, going to forfeit, then in connection with the termination you will have to accelerate vesting of the accrued-to-date benefit (e.g., if there was an accrual over a number of years, not all of which have transpired), or perhaps all of the benefit (again, depends on what plan says), which in either case will cause inclusion in gross income for FIT and FICA purposes, which in turn under most documents will result in payment. The 457(f)'s that I draft always cover termination in that way.

Probably not a material concern but one thing to factor in if this is just a desire to terminate and pay out the amounts in the normal course rather than in connection with a dissolution of the company or some other significant corporate event (e.g., Austin's scenario A vs. scenario B) is the decision to terminate this 457(f) plan arguably could impact the entity's ability to safely maintain future 457(f) plans. 

A lot of the SRF issues with 457(f) plans historically seem to include IRS skepticism that tax-exempt really would subject amounts to forfeiture if the vesting requirements aren't fully satisfied.  I can see that if the entity has a history of still paying out 457(f) amounts as severance or in some other fashion even though participants failed to satisfy vesting.  That sort of skepticism seems out of place though if the organization is shutting down.  On the other hand, if the entity just decides to terminate and accelerate vesting without some transformative reason (perhaps under the guidance of the executive who participates in the 457), I'd be concerned the IRS could question the SRF in future plans.  Seems like a stretch (particularly if just happens once) and I've never seen it come up but the IRS doesn't need much encouragement to look askance at these arrangements.  If there are independent business reasons for the termination, I'd certainly be sure to set them out in the board action.

austin3515, 401 Chaos makes a good point. A pattern of terminating individual arrangements to accommodate the employees who have them could allow the IRS to infer that the organization's 457(f) arrangements lacked SRF generally.