Section 457(f): Compensation Guide for Nonprofits

Gain a better understanding of the rules and requirements of section 457(f) plans.

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 recent passage of new tax reform legislation that adds a 21% 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 it is paid, or taxed, in a subsequent year.
Employee benefits and ERISA counsel for nonprofit entities will need to master the ins and outs of IRC Section 457(f) and the proposed 457 regulations in order to advise their clients on how to structure compensation arrangements to not only maximize tax benefits for the executives and the organization but also to minimize the amounts that will exceed the $1 million threshold or be treated as excess parachute payments. One of the major tools counsel will have is deferring compensation to a later period when the executive may have less taxable wages. However, once a covered employee, always a covered employee, so post-termination payments may not even escape the new penalties.
Counsel will want to understand when compensation is subject to a substantial risk of forfeiture and when that risk lapses. The proposed regulations provide some available tools to deal with when the risk of forfeiture will lapse, such as during a post-termination noncompete period or a provision adding a rolling risk of forfeiture. The proposed regulations also created certain compensation arrangements that are exempt from the requirements of IRC Section 457(f), such as separation pay plans or short-term deferrals. In drafting these agreements, counsel will also need to understand the relationship between IRC Sections 457(f) and 409A so executives do not end up paying severe penalties for either a document or operational failure under the plan. Gain a critical analysis of IRC Section 457(f) regulations, implications of tax reform, and offer guidance on opportunities and limitations in structuring executive compensation plans for exempt organizations.

Faculty

Andrew L. Oringer

The Wagner Law Group

Stefan P. Smith

Baker & Hostetler, LLP

J. Marc Fosse

Seyfarth Shaw LLP