The 2016 proposed regulations significantly expanded 457(f) plan sponsors’ ability to permit elective deferrals, use noncompetition agreements and make larger severance payments than otherwise permitted under 409A without immediate taxation to participants. In a recent presentation, Ruth Wimer, Mary Samsa and Joseph Urwitz discuss the surprising opportunities with respect to tax-exempt and governmental entities’ “ineligible nonqualified deferred compensation” arrangements in 2016 regulations. They also address the rules and limitations of the short-term deferral exception, the interaction of the 2016 regulations with existing regulations, other types of arrangements potentially affected, as well as best practices for employers.
On June 22, 2016, the Internal Revenue Service (IRS) issued proposed regulations under Section 457(f) of the Internal Revenue Code of 1986, as amended (Code). These long-awaited regulations were first previewed in IRS Notice 2007-62. In that Notice, the IRS announced its intention to issue proposed regulations that would harmonize the rules for deferred compensation plans of tax-exempt organizations (and state and local governments) under Section 457(f) with the then-new special rules for all deferred compensation arrangements under Section 409A. After nine years, the proposed regulations now issued address three principal issues, although with some unexpected changes and opportunities.
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