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What do we know about deferred comp/non gov 457b with new tax bill?

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  • What do we know about deferred comp/non gov 457b with new tax bill?

     

    I have been maxing this out for the last several years but recently found out there will be major changes.  Should I continue contributing for 2018 (pros and cons)?  What will happen to my current balance in the non gov 457b?

  • #2
    I've got an email draft ready to go to our plan representative. It's unclear to me, but the language makes it sound like we could get socked with a bunch of taxable income all at once. From Michael Kitces:

    "– Crackdown on Deferred Compensation. A proposal from the House GOP plan that remained in the final TCJA legislation will crack down on nonqualified deferred compensation plans, triggering taxation as soon as there is “no substantial risk of forfeiture” (i.e., when it becomes vested, regardless of when it is paid). And the new rules would extend to a wider range of stock options and stock appreciation rights under new “Qualified Equity Grant” rules. Expect to see a lot of revising to various deferred compensation plans in the coming year."

    I would argue there's still substantial risk of forfeiture since the money's at risk if the employer goes belly up in the future, but I don't know how the IRS will interpret things.

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    • #3




      I’ve got an email draft ready to go to our plan representative. It’s unclear to me, but the language makes it sound like we could get socked with a bunch of taxable income all at once. From Michael Kitces:

      “– Crackdown on Deferred Compensation. A proposal from the House GOP plan that remained in the final TCJA legislation will crack down on nonqualified deferred compensation plans, triggering taxation as soon as there is “no substantial risk of forfeiture” (i.e., when it becomes vested, regardless of when it is paid). And the new rules would extend to a wider range of stock options and stock appreciation rights under new “Qualified Equity Grant” rules. Expect to see a lot of revising to various deferred compensation plans in the coming year.”

      I would argue there’s still substantial risk of forfeiture since the money’s at risk if the employer goes belly up in the future, but I don’t know how the IRS will interpret things.
      Click to expand...


      Yikes, I did not see that.

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      • #4
        Somewhat related question:

        I vaguely remember reading that the new tax bill might make it so that you can't max contribute to both a 403b and a 457b.  Ordinarily I would contribute 18.5K to both.  Is there anything in the new tax bill that would prevent me from continuing to do that?

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        • #5
          At this point, it seems like we know very little.  Considering the bill is bouncing back and forth between the House and Senate with modifications, it seems that it would be best to wait until the bill is actually signed into law before making any decisions.

          I have a governmental 457(b) through the state which my academic university practice is in, and I emailed our benefits counselors this morning.  Their response to me was that in the most recent versions of the bill that they have been able to see (the one that passed the House, but before the Senate made modifications before sending it back to the house), it seems that our governmental 457(b) was NOT going to be affected.  But for now I remain skeptical.

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          • #6
            Don't want to get anyone's hopes up, but got an email back from spouse's benefit coordinator saying their current interpretation of the bill is that non-governemntal 457b plans would not be impacted.  And that deferred periodic payment arrangements would qualify as maintaining substantial risk of forfeiture.  (he said that prior house bill versions would have been more of a problem).  Please don't take this as gospel.  I'd like to hear from others as well.

            As a bonus, I also learned they are considering allowing post-tax 401k contributions and in-plan roth conversions (Mega bakdoor roth) for 2018.  Woo-hoo.

             

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            • #7
              I don't understand the basis for this claim on 457 plans.

              There is only one place that the words "deferred compensation" exist in the entire Conference Report bill.

              • It is on page 301 of the bill, under SEC. 13603. TREATMENT OF QUALIFIED EQUITY GRANTS.


              The phrase “no substantial risk of forfeiture” only exists in the conference report explanation of House/Senate/Conference.

              • It is on page 348 of the document under, I. Compensation, 2. Excise tax on excess tax-exempt organization executive compensation (sec. 3802 of the House bill, sec. 13602 of the Senate amendment, and sec. 4960 of the Code)

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              • #8
                I have researched this issue and do not find any immediate concern for nonqualified deferred compensation plans. Like the Rothification of retirement plans, elimination of such plans was under discussion but appears to not have been included in the final bill.

                It is worth noting that when the government needs to feed the beast in the future, this is one pot of money that could be at risk...down the road.

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                • #9
                  My best friend’s sister’s boyfriend’s brother’s girlfriend heard from this guy who knows this kid who’s going with a girl who heard 457 plans are going to get hit up for taxes. I guess it’s pretty serious. 

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                  • #10
                    I posted this in a new thread on the topic:

                    I’ve read a couple articles now that suggest the 457(b) is unchanged:

                    https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/how-tax-bill-alerts-employee-benefits.aspx

                    https://www.benefitnews.com/news/breaking-down-retirement-provisions-in-the-tax-reform-bill

                     

                    There was some language in the Kitces’ article that sounded scary, but I found the same language in the bill under “Present Law” on page 352 ofthe bill:

                    “Compensation is generally includible in an employee’s income when paid to the
                    employee. However, in the case of a nonqualified deferred compensation plan, unless the
                    arrangement either is exempt from or meets the requirements of section 409A, the amount of
                    deferred compensation is first includible in income for the taxable year when not subject to a
                    substantial risk of forfeiture (as defined), even if payment will not occur until a later year.”

                     

                    So I think we’re OK, but I will hold off on contributing for a little while until it is confirmed that there are no changes impacting those of us who invest in governmental or non-governmental 457(b)s.

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                    • #11
                      I also think we’re ok now.

                      I blame the usually faultless Michael Kitces on this one, particularly his in parentheses interpretation that all NQDC plans would become taxable when vested, not when paid out. This does not seem supported for 457b at least in final text.

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