Tax Reform Effect on 457(f) Plans

“I understand that the recently passed tax reform legislation did not contain many retirement plan provisions that would affect us, but heard that our 457(f) plan could be indirectly affected by the new law, Is this true?“

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

You are correct that, though there were only a few retirement-related provisions in the American Tax Cuts and Jobs Act (the formal name of the tax reform legislation), there is a compensation provision of the new law that could have an indirect effect on 457(f) plans.

Specifically, a new 21% percent excise tax will apply to the top-five highest-paid employees (or former employees) of a tax-exempt or governmental entity each year on any compensation that exceeds $1 million per employee. For health care organizations such as your hospital, however, it should be noted that amounts paid directly to certain medical professionals for the performance of services are excluded.

While this provision does not directly affect retirement plans, there may be an indirect impact due to the type of compensation that counts for determining the excise tax. For example, 457(f) deferred compensation that is vested (no longer subject to a substantial risk of forfeiture) counts toward the $1 million threshold, but other types of plan contributions, such as qualified plans, 457(b) plans, and 415(m) plans for public employers, would not count as compensation.

Thus, if an employee or former employee subject to the excise tax vests in a 457(f) amount or receives a distribution from the 457(f) that, by itself or in combination with other compensation received in a tax year, will exceed $1 million, the employer would be responsible for an excise tax on the amount in excess of $1 million. If this is indeed the case for your institution, you should consult with an attorney well-versed in 457(f) plans to discuss how to address this issue.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.