457(f) Plan Guidance Expected in 2011

May 20, 2011 ( – A client alert from law firm Drinker Biddle says it appears that the IRS is getting ready to issue the long-anticipated regulations governing Internal Revenue Code Section 457(f) plans.

By Rebecca Moore | May 20, 2011

According to the law firm, Cheryl Press, Senior Counsel in the IRS Office of Chief Counsel, confirmed, in an April 11 Webcast sponsored by the National Association of Government Defined Contribution Administrators (NAGDCA), that the regulations are in the “clearance” process at the IRS and Treasury Department and could be published by NAGDCA’s 2011 annual conference, which falls in September of this year.  

Several of the expected provisions, which are designed to synchronize 457(f) requirements with those of Code Section 409A, include: 

  • Post-severance “non-compete” clauses will not create a “substantial risk of forfeiture” of 457(f) benefits, and accordingly, will not operate to defer taxation of previously-vested amounts; 
  • Severance arrangements will only be considered “bona fide” severance pay plans, which are exempt from Code Section 457 requirements, to the extent they (i) are payable only upon involuntary severance from employment, (ii) limit distributions to two times the lesser of the employee’s annual compensation or the Code Section 401(a)(17) compensation limit that applies to qualified retirement plans ($245,000 in 2011), and (iii) require distributions to be completed by the end of the second taxable year following the year in which the employee separated from service. These requirements mirror those of an “involuntary separation pay plan” that is exempt from 409A; 
  • Elective deferrals of salary are not permitted to be made to a 457(f) plan. Because employees have a current right to receive salary, the IRS’ position is that a deferral of such amounts would only reasonably occur where an employee seeks to avoid taxation by exposing it to a purported “substantial risk of forfeiture” that does not, in fact, exist. As an alternative, the IRS may permit elective salary deferrals only if they are “matched” by the employer, or if the present value of the amounts, if deferred, otherwise significantly exceeds the present value of the salary; and 
  • Further extensions of vesting periods made subsequent to an employee’s initial election (so-called “rolling vesting”) will be disregarded and, therefore, will not further defer the taxation of vested 457(f) deferred compensation. 


Press’ recent comments indicate that the regulations will include some manner of “grandfathering” or transitional relief for existing 457(f) accounts, the law firm said.  

Additional issues to be addressed in the regulations, include: 

  • Unused, accrued vacation and sick leave pay cannot be transferred to a 457(f) plan. Such amounts may be cashed out, or in some cases, contributed to a 401(k) or 403(b) plan; and 
  • The present value of a participant’s 457(f) account balances may be determined on an annual, as opposed to daily, basis. 


The law firm explained that 457(f) plans are nonqualified deferred compensation plans that may be sponsored by tax-exempt and governmental entities and provide for greater tax deferral opportunities than are available under 457(b) plans (which generally limit deferrals to $16,500 annually, plus certain catch-up contributions).   

According to Biddle Drinker, in anticipation of the regulations’ release, some 457(f) plan sponsors have already amended their plans to comply with the guidance provided in Notice 2007-62 (see IRS Indicates Guidance Coming on 457 Plans).  

Plans that have already been amended may, in some cases, require additional amendments to reflect regulatory provisions that were not previously described in Notice 2007-62. The extent to which 457(f) plan document provisions and practices will need to be changed will also depend on the extent of the “grandfathering” or other transitional relief, if any, that is provided for existing accounts in the regulations.