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  70 West Madison St.
  Suite 1500
  Chicago, Illinois 60602
  (312) 696-1373

  aswilliams@golanchristie.com 

 

 

 

 

The highlights of the new rules include:

  • Severance pay arrangements, disability plans, voluntary early retirement “window” plans, sick and vacation plans, and death benefit plans as defined do not defer compensation and are not subject to Section 457(f).
  • Short term deferrals of compensation (benefits paid or made available by the 15th day of the third month following the calendar year or the employer’s taxable year during which benefits vest) are not treated as a deferral of compensation under Section 457(f). This can buy some administrative time at year-end for those plans that currently require payment by the end of the calendar year in which vesting occurs.
  • In appropriate circumstances, non-compete agreements will impose a substantial risk of forfeiture in order to defer the recognition of taxable income under Section 457(f). This is contrary to Section 409A which does not recognize compliance with a non-compete agreement as imposing a substantial risk of forfeiture.
  • Termination of employment for “good reason” by an employee is recognized as an involuntary termination. Triggering a benefit payment on involuntary termination of employment can by itself impose a substantial risk of forfeiture for Section 457 vesting purposes. Termination for good reason also can qualify as the required “involuntary termination” for purposes of the Section 457 severance pay exception.
  • The new rules allow the voluntary extension of an existing substantial risk of forfeiture in limited circumstances in order to permit the postponement of vesting and a resulting additional period of income tax deferral.

The proposed regulations also observe that most deferral arrangements subject to Section 457(f) will also be subject to Code Section 409A restrictions. So, any revision of a 457(f) plan (the proposed regulations include even individual employment contracts as “plans”) responsive to the new rules will also need to pass Section 409A scrutiny and deal with its sometimes conflicting requirements.

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Andrew S. Williams
Golan & Christie LLP
70 West Madison St.
Suite 1500
Chicago, Illinois 60602
(312) 696-1373
aswilliams@golanchristie.com

 

   
Copyright © 2016 Andrew S. Williams. All rights reserved.