Not-for-profit organizations walk a fine line with their compensation arrangements. The IRS and the public keep a close eye on executive pay. At the same time, organizations need to offer a competitive compensation package in order to attract and retain the right talent.
Evaluating the entire compensation package, particularly the benefit plan package, can help your organization offer an appealing arrangement to your key employees. A 457(b) deferred compensation plan provides highly paid employees the ability to defer income above the amounts employees can defer under the organization’s other retirement plans. The “top hat” plan is also the only way not-for-profit organizations can provide nonqualified compensation to their employees.
A well-designed 457(b) plan can help give your not-for-profit organization a competitive edge in the benefits marketplace. Review the following carefully to determine how you can maximize the benefits of a 457(b) plan.
457(b) plans are eligible, tax-deferred compensation plans that have the same deferral limits as 403(b) and 401(k) plans. For 2015, an individual may defer $18,000 under a 457(b) plan. The $18,000 limit may be either an employee or employer contribution or a combination of both. Contributions to 457(b) plans are not aggregated with contributions to 403(b) or 401(k) plans, so an individual could maximize deferrals to a 403(b) or 401(K) plan but still have up to $18,000 deferred in the 457(b) plan.
Plan participants can receive distributions from the plan upon severance from employment or, if the plan permits, an individual may delay distributions until age 70 ½.
Though deferral limits are similar, other elements of 457(b) plans differ from those of traditional benefit plans. For example, if an individual is eligible to receive a distribution, such distribution is subject to income tax even if the individual does not take the distribution, unless an election to delay receipt has been executed. Also, excess contributions could subject the entire plan to current taxation if excess contributions are not corrected in a timely manner.
High-Risk Reporting Areas
Your organization should examine the following closely, as they are common reporting problems found in 457(b) plans:
- Catch-Up Contributions: Participants in non-governmental 457(b) plans are not permitted to make the age 50 and older catch-up contributions.
- Excess Deferrals: All excess deferrals must be distributed by April 15 of the calendar year following the year in which the excess was collected. If the deadline is missed, the 457(b) plan becomes currently taxable.
- New Employment Agreements: When negotiating new employment agreements that relate to deferred compensation, employers should not overlook their 457 plans currently in place.
- Department of Labor Form 5500 Exemption Letter: If a plan files the exemption letter within 120 days of adopting the plan, it does not have to file the annual Form 5500 return. If the exemption letter is not filed within that window, then the Form 5500 must be filed annually. Failure to file can result in penalties as high as $1,100 per day.
- Election to Postpone Distribution: The election allows an employee, upon leaving the organization, to delay 457(b) plan distribution until age 70 ½. If the employee does not make the election, the employee is immediately taxed on the account balance even if the employee does not take a distribution.
Making the Most Out of Your Plan
When your organization follows the proper requirements for a 457(b) plan, the plan can offer highly compensated employees an additional benefit to working for your organization. The above is only a brief summary of some of the highlights of a 457(b) plan. The plans can be complex to manage, so you might want to enlist the help of a professional experienced with benefit plan reporting.
If you have specific comments, concerns or questions, please contact us here.
Bernie Kaplan is the Managing Director of the Retirement and Benefit Plan Services Group in the Boston office. He can be reached at 617.761.0541 or Bkaplan@cbiztofias.com. Bernie consults on a wide variety of employee benefit topics including 403(b) plans, qualified retirement plans, executive compensation, nonqualified deferred compensation, section 409A and health care reform.