This is the second of a series of articles that describe non-qualified deferred compensation plans (NQDC) that are available to non-profit employers. For an organization that is a 501(c) non-governmental tax-exempt organization, there are two types of non-qualified deferred compensation plans available to the organization’s key employees. Those types are under Non-Profit Section 457(b) and Section 457(f) plans. NQDC plans are generally limited to a select group of management or highly compensated employees. The plan sponsor can select the key employees that can participate in the plans.
Non-Profit Section 457(b) is an “eligible” non-qualified deferred compensation plan for healthcare and non-profit organizations under IRC 501(c).
This “Top Hat” plan must limit participation to groups of highly compensated employees or groups of executives, managers, directors, or officers. The plan may not cover rank-and-file employees.
Plan Documents
The plan documents involved in establishing a 457(b) and 457(f) plan are not IRS approved but have been in use and amended with changing regulations for several decades. The plan document characteristics include:
The plan document must limit eligibility to a select group of highly compensated employees, executives, managers, directors or officers.
The plan cannot include rank-and-file employees.
Employee deferrals are fully vested.
Employer contributions may be established with a vesting schedule.
The requirements for distributions at termination are employer specific and will be stated in the plan documents.
Loans are not permitted.
May allow incoming transfers from other non-governmental plans, subject to IRS 457(b) regulations.
Allow outgoing transfers to other non-governmental plans, subject to IRS 457(b) regulations.
Withdrawals are permitted when the employee leaves the organization or is terminated.
Plan features to include in the plan documents:
Withdrawals from the account are penalty-free before 59 ½ when leaving the job or retiring, there is no 10% tax penalty.
Unforeseeable emergency withdrawals that meet certain conditions may be permitted.
Administration of the Plan
The plans require a third-party administrator (TPA) that provides participant level recordkeeping comparable to the services provided for a defined contribution plan such as daily transactions, market values, participant portal and statements. A start-up plan may want to consider using a bundled service provider that offers TPA services, trustee services, reporting, proprietary and non-proprietary investments.
Filing Requirements
Non-governmental 457(b) plans must file a one-time notification within 120 days of the plan’s existence with the Department of Labor. They are not required to file Form 5500 and they are not subject to Title I of ERISA. These plans are exempt from the non-discrimination testing that is required for 401(k) plans.
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