For-Profit Subsidiary of Non-Governmental Entity

A 501(c)(3) organization forms a 100% wholly owned for-profit subsidiary. The CEO of the 501(c)(3) is retiring 12/31/20, but they want to sign him to a part-time contract with the for-profit to help get it launched effective 1/1/21. His services would be provided exclusively to the for-profit gong forward, and he would be paid from its payroll and not the 501(c)(3)'s. The services would be meaningful/substantial - probably more than 20% of full-time, but less than 40%. They want to pay a meaningful signing bonus up front, but they could be convinced to spread it out over a longer period built into the part-time salary. The contract would be for 12 to 24 months.

A couple of questions/issues come to mind:

• Would the arrangement in any way implicate section 457 by virtue of the fact that the for-profit is 100% controlled by the 501(c)(3)?
• Would the arrangement in any way implicate section 457 by virtue of the fact that the individual previously was employed by/CEO of the non-profit parent?
• Any other issues spring to mind?

Thanks for any thoughts you might have.

I am a comp consultant for more than 44+ years (I started when I was 12)---why a signing bonus (since they already know well his skills) ?

We've only done one year arrangements which meet the short-term rules ----not sure about 457.  But from a governance standpoint, 2 years seems like a long time frame in my experience.

10 hours ago, kgr12 said:

Would the arrangement in any way implicate section 457 by virtue of the fact that the for-profit is 100% controlled by the 501(c)(3)?

There is no rule that would mechanically/automatically make a wholly-owned for-profit subsidiary of a nonprofit an "eligible employer" for purposes of 457 and thereby put you under 457(f) instead of 404(a)(5).

10 hours ago, kgr12 said:

Would the arrangement in any way implicate section 457 by virtue of the fact that the individual previously was employed by/CEO of the non-profit parent?

Only if the for-profit arrangement was a substitute for something the individual was owed by the nonprofit that had been subject to 457. If the two arrangements are truly independent, no.

10 hours ago, kgr12 said:

Any other issues spring to mind?

If the for-profit was that in name only and never made a profit or paid income tax, and amounted to an agent of the nonprofit, relying on its capital infusions to fund the individual's payments, the IRS could presumably try to disregard it and say the arrangement was really an obligation of the nonprofit. Substance over form. But you have not indicated that those are your facts.

Bob,  thanks for that input. I believe the signing bonus is to incentivize him to take the gig, as opposed to riding off into the sunset.

Luke, thanks for addressing each of those questions, and agree.