Non-Profits: Brace for 457F Executive Compensation Plan Changes

Non-Profits: Brace for 457F Executive Compensation Plan ChangesNow is the time for all non-profits to examine their use of so-called 457F non-qualified deferred compensation plans ahead of sweeping new regulations expected in the near future. 

“Non-profits have been expecting these regulations ever since the rules regulating non-qualified deferred executive compensation were changed with the enactment of Section 409A of the Internal Revenue Code,” says Jay P. Turner an employee benefits attorney who works regularly with non-profits, including hospitals and health care organizations. “We’ll now have certainty in the regulations regarding how 457F plans must be run. And we also know the regulations will mean significant changes to how these plans are structured.” 

Turner says all non-profits, but especially hospitals and health care organizations where 457F plans are widely used to compensate high-level executives, must start now to prepare for the regulations. 

“First and foremost they should know which of their compensation arrangements can be classified as non-qualified deferred plans,” says Turner. “When Section 409A was enacted, many employers found that they had arrangements that were subject to the law that would not have been considered a nonqualified plan before. A simple letter agreement between an executive and employer may now be subject to a laundry list of requirements that, if not met, would trigger taxes and penalties.” 

After assessing plans, non-profits should also consider clauses in these agreements that might be problematic under the new law. 

“The new regulations will likely complicate the use of non-compete agreements, and this is a significant problem for many non-profits, particularly healthcare organizations,” says Turner. “They have traditionally used noncompetes with physicians. And some are still using them, hoping they will be grandfathered in, but this is a significant risk to take given the penalties the IRS could apply.” 

Turner is available to discuss what non-profits should be doing now to prepare for the introduction of new regulations for 475F non-qualified deferred compensation plans. [11/10/2011]