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.