If we’ve said it once, we’ve said it a hundred times (ok, maybe just that one time) – recruiting and retaining top talent can be a headache for nonprofit organizations forced to compete against for-profit organizations offering sought-after executives hefty base salaries and generous equity packages. For one thing, nonprofits must comply with IRS rules mandating compensation paid to their employees be both “reasonable” and not “excessive,” and for another, nonprofits don’t typically issue stock or other equity.
To tempt top talent to their teams, nonprofit organizations may elect to include nonqualified deferred compensation (NQDC) plan benefits in their executive compensation packages. Non-governmental nonprofit organizations[1] can sponsor both “eligible” NQDC plans under Code §457(b) (457(b) plans) and “ineligible” NQDC plans under Code §457(f) (457(f) plans).
While both 457(b) plans and 457(f) plans offer eligible participants a way to defer receipt of current compensation, they do so in different ways. To help you determine which Code §457 NQDC plan would be best suited to the needs of your non-governmental nonprofit organization, the chart below compares (at an admittedly high level) some of the features and limitations of 457(b) and 457(f) plans.
[1] Such organizations include (but aren’t limited to) Internal Revenue Code (Code) §501(c)(3) organizations, private universities, and certain healthcare organizations. This article focuses on plans offered by non-governmental nonprofits – NQDC plans sponsored by federal, state, or local governmental entities or by churches or church-associated organizations are subject to different rules and are not covered.
[2] Code §409A imposes strict requirements on “nonqualified deferred compensation.” Violating the requirements of Code §409A can lead to significant adverse tax consequences for affected participants, including immediate taxation of amounts intended to be deferred, substantial penalties, and additional reporting requirements.
[3] Having a 457(b) plan be treated as a 457(f) plan, and subject to both Code §457(f) and §409A is not a good thing.
[4] Governmental 457(b) plans may permit such contributions, however.
[5] Such elections must be made with care and follow the 457(b) plan’s requirements. See fn. 3.
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