Updates
April 01, 2005
457(f) Plans of Tax-Exempt and Government Employers Need Review, or Participants May Pay a High Price
The new Section 409A of the Internal Revenue Code, which took effect this year and imposes major changes on nonqualified deferred compensation plans, will have a significant impact on many 457(f) plans. 457(f) plans are nonqualified deferred compensation plans which are sponsored by tax exempt entities and by certain governmental employers, and which do not meet the "eligible" plan requirements of Code section 457(b). In addition to following the tax timing rules under 457(f), such plans must be operated in good faith compliance with the new 409A rules throughout 2005, and must be amended for compliance by December 31st of this year. Failure to comply will cause participants to owe income taxes on their 457(f) plan benefits, plus 20% penalties, plus interest, which may not leave much for the participants. Thus, it is crucial that 457(f) plans be designed to avoid the new law's potentially high price. (Note that "eligible" 457(b) plans are not subject to the new rules.)
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