New Deferred Compensation Regulations

The IRS recently released proposed regulations that provide guidance for the nonqualified deferred compensation arrangements of tax-exempt organizations. The regulations, which have been anticipated by the industry since 2007, address the interplay between Section 457 and Section 409A, which govern the nonqualified deferred compensation arrangements of all employers, including tax-exempt organizations. The newly proposed Section 457 regulations provide plan design opportunities specifically for tax-exempt employers, which could aid in the recruitment and retention of key executives.

The proposed regulations provide comprehensive guidance for nonprofit employers and offer several options for employers structuring deferred compensation plans. Section 457(f) requires the immediate taxation of nonqualified deferred compensation upon vesting. Its newly proposed regulations contain plan design features that effectively delay the vesting event, thereby avoiding immediate taxation and providing much-needed clarity to when compensation is subject to or exempt from Section 457(f).

The new regulations distinguish between for-profit and nonprofit deferred compensation requirements with changes specific to six aspects – risk of forfeiture, salary deferrals, noncompete agreements, short-term deferrals, severance pay and other welfare plans.

For an in-depth analysis of the changes and how they could impact nonprofits’ compensation agreements,read our client alert here.

What can you do now?

Prior to the finalization of these regulations, tax-exempt organizations can take immediate action to align current deferred compensation procedures with the recent changes. Nonprofits, foundations and universities should review their current deferred compensation arrangements, severance plans and welfare benefit plans in light of these proposed regulations, and develop a plan to implement the necessary updates. Additionally, nonprofit executives should be proactive and take steps to effectively communicate with their employees in regards to the changes.

Click here to learn more about BDO’s Compensation and Benefits practice.