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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.



Andrew L. Oringer

Andrew L. Oringer

Dechert LLP

  • Partner at Dechert LLP and is co-chair of the firm’s ERISA and Executive Compensation Group and leads the firm’s national fiduciary practice in New York
  • He counsels clients on their employee benefit plans and programs, benefits-related tax matters, and fiduciary issues arising in connection with the investment of employee benefit plan assets
  • His practice includes advising clients regarding ERISA and employee benefits generally, including 401(k) and other retirement plans as well as medical and other welfare plans
  • His advice to clients encompasses all aspects of corporate transactions and initial public offerings in which benefits and compensation issues play a central part
Stefan P. Smith

Stefan P. Smith

Locke Lord LLP

  • Partner at Locke Lord LLP
  • Has extensive experience in employee benefits and executive compensation law
  • Works with both public and private entities to establish and ensure the continued compliance of tax-qualified defined contribution and defined benefit retirement plans, including 401(k)/profit-sharing plans, traditional defined benefit plans, money purchase plans, employee stock ownership plans, and cash balance plans
  • Assists with employee benefit matters arising during mergers and acquisitions and works with all forms of health and welfare plans and executive and equity-based compensation, including incentive and nonqualified stock options, restricted stock awards, stock appreciation rights, employee stock purchase plans, phantom equity, performance unit and bonus plans, SERPs and other excess benefit plans, and nonqualified deferred compensation plans
J. Marc Fosse

J. Marc Fosse

Tucker Huss

  • Shareholder at Trucker Huss
  • Focuses on all the tax, securities, corporate, and accounting issues related to executive and equity compensation arrangements
  • Works with publicly traded, private, nonprofit and government clients in the design, implementation, and operation of domestic and international executive nonqualified and supplemental deferred compensation plans, as well as equity-based and other long-term incentive compensation arrangements
  • Regularly advises clients regarding handling employee benefit matters in corporate mergers, acquisitions, divestitures, initial public offerings, and other corporate transactions
  • The co-author of the treaties Executive Compensation for Emerging Growth Companies (Thomson Reuters, 3rd ed. 2018), and is a frequent speaker on topics related to executive compensation

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