If you are a highly compensated top decision-maker in a tax exempt organization, you may have access to this retirement savings opportunity. A §457(f) Deferred Compensation Top Hat Plan provides top executives with a means to supplement their retirement savings. As a plan participant, you may fund your account with pre-tax payroll deductions and/or tax-deferred contributions may be made by your employer for your benefit.
However, with §457(f) plans, the deferred compensation is considered to be an asset of your employer until it is paid out to you upon separation of service, when ordinary income and FICA taxes will apply. Taxes are deferred as long as a substantial risk of forfeiture is present. The IRS considers assets to be at a substantial risk of forfeiture as long as they remain available to the general creditors of the organization and will not vest unless you remain with your employer for your full contract period.
While the substantial risk of forfeiture can be a major drawback, its presence allows for unlimited contributions to be made to your §457(f) account each year.
You may also make the maximum contribution allowed to another employer-sponsored retirement plan [i.e. §401(k) / §403(b) / §457(b)], in addition to deferring as much of your income as you wish to your §457(f) account.
How do §457(f) plans operate?
Your employer establishes the plan and selects which investment options will be available. You will be able to decide how much you wish to invest each pay period and how your contributions will be allocated among the available investment options. The Legend Group establishes the plan in accordance with your employer’s instructions and directs your contributions to the appropriate investments. When the substantial risk of forfeiture no longer exists, the assets in the plan will become taxable to you.
What should I keep in mind when considering a §457(f) Deferred Compensation Top Hat plan?
Unlike other most other employer-sponsored retirement plans, your deferred compensation is not set aside in a trust for your benefit. Instead, it remains an asset of your employer until it is distributed to you. This means that your deferred compensation will be exposed to your employer’s general creditors until distribution.
Participants are eligible to take distributions only upon the completion of the terms of their contracts, i.e. when the substantial risk of forfeiture no longer exists.
When the substantial risk of forfeiture no longer exists, the assets in the plan will become taxable to you.
§457(f) accounts may not be rolled into another type of tax-deferred retirement plan, nor to an IRA – even after separation from service.
Legend Equities Corporation and its affiliates do not provide tax or legal information or advice.
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