7 Action Items For Deferred Compensation

December 1, 2016       The NonProfit Times      

It only took nine years, but the Internal Revenue Service (IRS) earlier this year released proposed regulations for deferred compensation by tax-exempt employers. In 2016 the IRS started to offer specifics on Notice 2007-62.

The main focus of the regulations is Section 457(f) plans, and those regulations include when an employee is subject to income taxes on that money.
Eddie Adkins, a partner in the Washington National Tax Office of Grant Thornton LLP, said that employers can plan so that compensation is not subject to income tax until paid. Possible actions include:

  • If bonuses and other forms of compensation are not paid out soon enough after vesting to qualify as a short-term deferral, consider changing the payment terms to qualify.
  • Evaluate whether existing severance pay plans qualify for the exemption from 457(f) and if not, consider changing the terms to qualify.
  • Evaluate sick leave and vacation plans to ensure they qualify for exemptions from 457(f), focusing on factors that might cause the exemption not to qualify.
  • Take the necessary steps to ensure noncompetition provisions will be respected as a substantial risk of forfeiture.
  • If employees are permitted to defer current compensation, decide whether to make a matching contribution once the final regulations go into effect.
  • If rolling risks of forfeiture are being used or considered, prepare to make any necessary adjustments so that the extension of the risk of forfeiture is respected under the regulations.
  • Develop procedures to calculate the present value of deferred amounts in accordance with the regulations.