As nonqualified deferral plans for credit unions normally use cliff vesting to qualify for tax deferral under 457(f), and supplemental employer contributions rather than elective deferrals, the new rules should require few if any changes to credit union plans.

The guidance is also expected to address what qualifies as a bona fide severance benefit for purposes of 457(f). Compensation paid under a bona fide severance plan will be taxed as received. Compensation in excess of the bona fide severance limits will be taxed in a lump sum at termination. We expect the bona fide  plan limit to be two times the lesser of (i) the executive’s annual compensation, or (ii) the qualified plan compensation limit ($250,000 in 2012).

As with deferred compensation, we expect that few changes will be required to comply with the new rules, and certainly there is no expectation that severance will actually have to be limited to the two-times limit.

As we wait for the proposed 457(f) regulations to be issued, credit union boards and management should consider:

1. Does the credit union have any nonqualified deferral plans that use noncompetes or elective deferrals?
2. Has the credit union established severance arrangements (contained in employment agreements or in separate arrangements) that exceed the expected bona fide limits?

If so, you should be prepared to update your plans when the new rules come out. If not, it will still be important to verify that no other changes to your plans are required.

1. Continued Employer Protection.

It may surprise some, but boards really do value noncompete restrictions. In a nonqualified plan, they protect against unfair competition much more effectively than injunctive noncompetes in employment agreements. Enforcing the noncompete in a deferral plan involves doing nothing—not writing the check. Enforcing injunctive noncompetes often involves lawyers, Latin words and long-lasting litigation. We expect many employers to continue to include noncompete restrictions in their plans, just not rely on them to defer taxes.

Example:  The Deferral Plan provides an annual employer contribution of $10,000. Each year’s contribution vests three years after it is made. Upon vesting, the contribution is taxable and the employer distributes enough to pay the taxes due, but retains the balance. It distributes the balance two years after the executive terminates employment, provided the executive does not compete with the employer during the two-year period.

2. Section 83.

So far, the IRS comments about the anticipated guidance indicate it will apply only to 457(f) plans, and not to Section 83 plans. Section 83 governs the taxation of property that is transferred to an employee. Like 457(f), Section 83 recognizes bona fide noncompete restrictions as SRFs that defer taxes. Therefore, it appears that noncompete restrictions will continue to defer taxation under Section 83 arrangements even after the IRS publishes the 457(f) guidance.

Example:  The employer transfers ownership of a life insurance policy to a key physician. The physician must return the policy to the employer if the physician terminates employment prior to age 62 and competes with the employer. The life insurance is property, so its transfer is governed by Section 83. Therefore, assuming the anticipated guidance is limited to 457(f), the physician will not be taxed on the value of the policy until remaining employed to age 62 or satisfying the noncompete restrictions.

If the anticipated guidance concludes noncompete restrictions are not SRFs, we fully expect that well-intentioned advisers will use phrases such as “Noncompete restrictions in deferral plans are illegal.”  They will not be illegal. They could not be used to defer taxation in 457(f) arrangements, but they can be used to protect against unfair competition. Depending on the scope of the guidance, they may also continue to defer taxation under Section 83 arrangements, and possibly under some 457(f) arrangements if the IRS decides to grandfather any prior plans.

Consistent with prior practice, the IRS just published another private letter ruling concluding that a reduction in the benefit formula is not a change in the formula that forfeits great-grandfathering.

Given the limited (and dwindling) number of great-grandfathered plans, the more important impact of the ruling is its confirmation that reducing benefits is generally not treated as a change in benefits. This is important for law and regulatory changes that, like the Tax Reform Act of 1986, are not express about the issue. For example, the 2003 split dollar regulations give nearly no guidance on what constitutes a “material modification” that forfeits grandfathering. This new private ruling gives additional analogous support for reducing split dollar benefits without forfeiting grandfathering and subjecting the plan to the new regulations. (Compare 409A, which specifically states that a reduction in benefits is not a material modification that forfeits grandfathering.)

From: bna.com

If the final regulations look like the proposed rules, few, if any, changes to current plans will be required. 457(b) plans designed to meet the 409A requirements could remove the 409A restrictions (such as annual deferral elections and five-year postponements for changing the time and form of benefit payments). Even now, new plans can be installed with greater confidence in the 457(b)/457(f) approach.

• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457(b) plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.
• The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
• The limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $195,000 to $200,000.
• The limitation for defined contribution plans under Section 415(c)(1)(A) is increased from $49,000 to $50,000.
• The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $110,000 to $115,000.
• The annual compensation limit under Section 401(a)(17) is increased from $245,000 to $250,000.

Source

I love lists, and this one made sense to me in what can sometimes be a mess of fuzzy guidelines.

Read the entire post here: http://blog.nafcuservices.com/2011/09/18/10-best-practices-of-compensation-oversight-by-your-credit-union-board/

She continued, ”We’re very slim staffed and our higher-ups are at an even slimmer level.  And once we clear [the proposed regulations] through our building and work through everything, we have to get it through Treasury, and they’re pretty slimly staffed too.”

Regarding the substance of the new regulations, Press reiterated that the regulations will be “similar” to the 409A rules (e.g., disallow pre-tax voluntary deferrals and the use of noncompete restrictions to defer taxes), but that the IRS is not “going to worry about having everything being exactly the same as 409A.”

For those keeping track, August 2011 will be the fourth anniversary of the original IRS announcement that it would publish the new regulations.  Only time will tell how much longer we must wait.

The Payment Data Collection page used to file DFVC materials electronically provides under Statement 2 that “I understand that I am only submitting, and receiving relief for, the filings for the plan and the plan years that are listed above.”  As “plan” is singular, and as we could find no way to list multiple plans, we contacted the DOL.  Our concern was each filing required a separate fee, so if we could not list multiple plans, the client would have to pay multiple fees.  This treatment was the opposite of how we had understood the fee in the past.  Previously, we understood that there was only one $750 fee no matter the number of plans covered.

We talked to two different people at the DOL, in the office that handles DFVC filings, and we were told the fee was $750 per plan.  We told them we had never interpreted the rules that way, nor had we understood the DOL to have interpreted them that way in the past.

After reexamining the regulations, we contacted the DOL to make our case one last time. We explained our dilemma and cited the language in the DFVC Regulations (60 Fed. Reg. 20876 (1995) and 67 Fed. Reg. 15060 (2002)), which expressly provides that there is one penalty amount without regard to the number of plans or number of participants covered under such plans.  This time the DOL agreed that only one fee would be required.  Our contact explained how we should make such filings.

The procedure is to put all of the plan names, separated by slashes, into the “Plan Name” box on the online DVFC filing. Then, as in the past, list all plans in need of correction on the hard copy of the top-hat filing with their effective dates and number of participants, and submit it by mail.

Perhaps the DOL does not get many questions on the DFVC Program for top-hat plans, and staff members deal more often with other DFVC filing issues.  In any case, we are glad that we persisted.