Retirement

Is a 457(f) plan right for your company?

Bill Gates once said that Microsoft could not have accomplished what it had without its top 15-20 crucial employees. Microsoft now has over 100,000 employees, including some of earth’s brightest people, but it is this critical group of executives that have really made the difference. Similarly, without the right people in the right positions at the right time, the mission of any non-profit cannot be accomplished.

A 457(f) plan is an excellent way to reward these key executives who are crucial to achieving an organization’s mission. These plans can be a great tool to attract, maintain and keep key executives happy. This solution can be the difference in finding and keeping those amazing executives or losing them to the competition.

Section 457(f) plans are not retirement plans. They are designed to defer compensation, with no limit, and taxes to some point in the future. They act as an incentive program for executives who meet some predesignated goal, the attainment of a certain number of years of service, age, or by the executive helping the organization achieve a certain level of success for the organization.

Treating a 457(f) plan like a retirement plan could spell trouble for an organization. Certain options, made available in qualified retirement plans, are not allowed in “f” plans such as:

– Loans
– Transfers
– Rollovers
– Roth contributions

Participation in the plan must be “exclusive,” which means only a limited number of executives benefit from the program. Yes, this is contrary to the rules of qualified retirement plans. This key group is commonly referred to as the “Top Hat” group and is generally limited to less than 15% of the company. Participants are those with significantly more pay and decision-making abilities than the rank-and-file of the organization.

Employers who may offer these “golden handcuff” plans are limited to nonprofit organizations such as hospitals, universities and 501(c)(3) organizations.

This future reward is referred to as deferred compensation. The key employee is performing work now, but will not be paid until a future year. In addition to the executive’s regular salary, she will be paid more for exceling. However, once an employee reaches the agreed upon goal, she must realize this money as income on her taxes.

Contributions can be invested with a funding company or the employer can keep the funds on their own books. Either way, contributions are considered “unfunded,” which means they legally always belong to the employer until the funds are distributed to the employee.

Non-profit organizations have noble goals, such as improving literacy, reducing hunger or homelessness, or improving or saving lives. The level of success your organization achieves will be directly linked to those making decisions. Make sure to have the right critical people in your organization to succeed by utilizing this amazing benefit!