Section 457(b) and 457(f) plans are the most common supplemental retirement accumulation plans utilized by tax exempt organizations. While many provisions apply to both models, the rules applicable to 457(f) plans are particularly onerous. Here are 8 ugly facts about Section 457(f) plans.
- Not able to be vested – funds forfeited if employment is terminated before time or event specified in the plan document. The stay or its gone trap.
- No access – loans from plan not permitted. Once in, funds and earnings are locked in for the duration. The “gee I thought it was my money” trap.
- No access – no “hardship” distributions permitted. The no rainy day funds trap.
- Taxation – full value of account must be taxed at time of vesting; lump sum distribution generally taken. The no spreading of taxation at a lower rate trap.
- Public disclosure – annual contribution and account growth disclosed through form 990 – a front page opportunity. The fishbowl trap.
- Public disclosure – even though contributions and growth have been disclosed, the lump sum distribution is disclosed when paid, a larger opportunity for the front page. The bigger fishbowl trap.
- Contributions and earnings are posted as an increasing liability on the employer’s financial statement. The lender/banker questions and limitations trap.
- The plan assets (whether employer or participant contributed) are subject to the claims of the employer’s creditors. Could be the really bad news trap.
Its time to ask about an alternative.
If you would like more information on this subject, or have a client who might benefit from a discussion about it, please contact Barry Koslow at email@example.com or (781) 939-6050.
To ensure compliance with requirements imposed by the IRS, we inform you that any federal tax advice contained in this communication, including any attachments, was not intended or written to be used, and cannot be used, for the purpose of avoiding federal tax related interest or penalties. Securities offered through Advisory Group Equity Services, Ltd., member FINRA/SIPC. 444 Washington Street, Suite 407, Woburn, MA 01801. 781-933-6100.