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

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.

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
   1. Noncompete covenants
   2. "Rolling risk of forfeiture"
   3. Separation pay plans
5. The 21% excise tax on payments over $1 million or excess parachute payments
   1. Who is a covered employee
   2. What is an excess parachute payment
6. Evaluating practical applications of 457(f) regulations

The panel will review these and other key issues:

• Analyzing the rules that trigger the 21% excise tax on compensation above $1 million or excess parachute payments to covered employees
• Noncompete covenants regarding whether a substantial risk of forfeiture exists
• Planned vesting schedules and timing of cash payouts
• When is the deferral of the current base salary permitted
• Evaluating whether a plan falls under both 409A and 457(f)
• Opportunities and limitations in structuring compliant executive compensation plans for nonprofit organizations

Learning Objectives

After completing this course, you will be able to:

• Understand rules that trigger the 21% excise tax on compensation over $1 million or excess parachute payments to covered employees
• Recognize the tax implications of planned vesting schedules and timing of cash payouts
• Ascertain when is the deferral of current base salary permitted
• Discern whether a plan falls under both 409A and 457(f)

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business, legal or public firm experience at mid-level within the organization, providing tax planning and preparing complex tax forms and schedules for non-profit and exempt organizations; supervisory authority over other attorneys and advisers. Knowledge and understanding of non-profit and exempt organization structure, equity compensation in these entities, Section 409A elections; familiarity with equity compensation alternatives and IRC 457(f).

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).