Feb 23, 2018

2016 Proposed Section 457(f) Regulations – Planning Opportunities for Non-profit Organizations


In 2007 the IRS has promised future guidance under Section 457(f) for non-profit organizations with respect to compensation planning techniques that were commonly used at that time:

  • Severance pay arrangements
  • Non-compete agreements,
  • Extension of a risk of forfeiture (so-called, “Rolling Risk of Forfeiture”) and,

In June 2016 (after only 9 years), the IRS issued Proposed Section 457(f) Regulations that provide helpful guidance, and even some surprisingly good news. The Regulations are effective for years beginning after the publication of the Final Regulations; however, taxpayers can rely on the Proposed Regulations now.


The Proposed Regulations provide needed clarification, and indicate that a severance pay arrangement is exempt from Section 457(f) if it meets certain requirements:

  • Separation from service must generally be involuntary
  • However, a voluntary separation from service may qualify for exemption if:
    • For “good reason,” as defined in the Regulations
    • Or during a window period
  • The payments must be made by the end of the second year following termination
  • The amount must not exceed 2 times the annualized rate of pay for the prior year:
    • Note 457(f) / 409A difference: There is no limit under the Proposed Section 457(f) rules with respect to the amount of severance pay that is exempt, whereas the limit under Section 409A is 2 times the compensation limit ($550,000 for 2018).


Under the Proposed Section 457(f) Regulations, a non-compete agreement may represent a “substantial risk of forfeiture” and defer the timing of taxation if the agreement is:

  • In writing
  • Enforceable under applicable law
  • There is a bona fide interest for the participant and the employer to enter into the agreement
  • And there is compliance with on-going requirements for monitoring by the organization and written verification from the participant

This clarification of the rules creates an opportunity to defer the taxation of compensation beyond separation from service, and provides the employer non-compete protection.

  • Note 457(f) / 409A Difference: This is another case of inconsistency with Section 409A, which does not recognize a non-compete agreement as a “substantial risk of forfeiture.” Therefore, the deferral of compensation after separation from service under Section 457(f) must be coordinated with the Section 409A distribution rules.


In 2007, the IRS’s position was that it would be irrational for an employee to voluntarily defer compensation that was already earned and vested to a substantive risk of forfeiture and, therefore, it would not recognize elective deferrals.

However, the 2016 Proposed Section 457(f) Regulations provide that the voluntary deferral of compensation will be recognized if the employee has an opportunity to earn a “materially greater” amount of compensation at the end of the vesting / deferral period. More specifically;

  • The deferral election must be made before the beginning of year of service during which the compensation will be earned,
  • The minimum amount of the benefit payable at the end of the vesting / risk of forfeiture period that would meet the “materially greater” test is 125% of the amounts voluntarily deferred, on a present value basis and,
  • The minimum period of extension of the vesting / risk of forfeiture period is 2 years, during which substantive services are provided and/or an enforceable non-compete agreement is in place.


The vesting / risk of forfeiture period may be extended using the same 125% test. In addition:

  • The agreement to extend the risk of forfeiture period must be made at least 90 days before the original vesting date and,
  • The period of extension must be at least 2 years.
  • Note 457(f) / 409A difference: If the agreement to extend the risk of forfeiture period is based on a non-compete agreement, the arrangement comply with the subsequent election rules under Section 409A (12 months prior election / 5+ year extension).


The 2016 proposed Section 457(f) regulations provide helpful guidance and a number of planning opportunities; subject to strict compliance with the new rules.


The following example illustrates a one possible planning concept under the Proposed Section 457(f) Regulations:

  • Problem / Issues:
    • A non-profit organization would like to encourage the CEO to:
      • Continue working for 2 years past his normal retirement date,
      • And to enter into a consulting / non-compete arrangement for 2 years after the extended retirement date.
    • The CEO needs additional retirement savings.
  • Possible solution:
    • The CEO agrees to voluntarily defer $100,000 of his $300,000 annual salary for each of the two years of extended full-time employment, and 100% of the $150,000 annual consulting fee paid for the 2-year consulting / non-compete period.
    • Amounts deferred are credited to a deferred compensation account in the name of the CEO as is interest at the 10-year Treasury Bond rate.
    • The Organization promises to credit to the CEO’s account a retention bonus in the amount of $150,000 at the end of the 2-year consulting / non-compete period.
  • Result:
    • The CEO would continue to work full-time for two more years and part-time during a 2-year consulting / non-compete period, during which he would provide substantive consulting services and assist with the transition to the new CEO.
    • The CEO will earn an above market rate of return on the compensation voluntarily deferred to compensate for the voluntarily assumed risk of forfeiture, and add significantly to his retirement savings.

Caveat: This example is intended to illustrate a possible planning concept under the Proposed Section 457(f) Regulations. Any such arrangement must also be compliant with Section 409A, and take into consideration the new Section 4960 21% excise tax on excessive compensation – a subject for a later blog.

Oct 23, 2017

InsMark and Executive Benefit Solutions Form Joint Venture


October 11, 2017 – Boston, MA – In a strategic move to open new markets for its 25,000 producers, InsMark, market leader in illustration software and strategies for the upscale personal and business insurance market, today signed a joint venture agreement with Executive Benefit Solutions (EBS) to serve as InsMark’s exclusive resource for executive benefit plans and programs, slated for large-privately held companies.

In this value exchange, InsMark enters the $160+ billion executive benefits’ nonqualified deferred compensation (NQDC) market for the first time; EBS gains a new and robust distribution channel for its products and services. EBS will provide plan design, funding, administration and consulting services for such benefits as NQDC plans, supplemental executive retirement plans, phantom stock and performance plans, and more.

“EBS offers InsMark a turnkey solution to executive benefits at a level of credibility and expertise sought by our producers for some time. Now, our producer-clients will be even better positioned to serve their clients’ broader needs with high-quality resources and benefit programs previously unavailable to them,” says Donnelly L. Prehn, CLU, ChFC, Board Member and Senior Adviser, InsMark, Inc.

William L. MacDonald, Managing Director of EBS, says “By InsMark opening its prized distribution channel to EBS on an exclusive basis, we can now reach a coast-to-coast insurance market and make a difference in the lives of thousands more executives and their families planning for retirement.”

Executive benefit programs address the corporate challenge to recruit, reward and retain key executive talent; these programs enable highly compensated executives to meet retirement needs by raising the savings ceiling placed on qualified plans by legislation. Further, individual life insurance policies, annuity contracts, or both, often fulfill the funding requirement for executive benefit plans.


Founded in 1983 by insurance leader, Robert B. Ritter, Jr., InsMark provides illustration software and related marketing services for the insurance and financial services industries. InsMark serves triple the number of client companies as its nearest competitor, with some 25,000 producers using its products, of which 15,000 actively subscribe to the service. InsMark’s national headquarters is in San Ramon, CA. www.insmark.com.