457(f) plan

[nachos31]

I'll be starting my first post-residency job in a few months and my soon to be employer has a 457(f) plan (in addition to a 403b and 457b), the details of which are as follows:

• 5% employer contribution.


• No employee contributions.


• Same access to funds from 403b/457b -- a few DFA and good Fidelity Spartan options.


• Contributions are tax deferred until distribution.  Distributions are fully taxable, including Federal, State and FICA.


• If age 67 or above, contributions are paid directly to employee on their paycheck each payroll.


• Each plan year has a minimum 2 year wait period before it can be paid out to employee.


• If hired 3.5.2016, earliest date to receive funds would be 4.1.2018 (first of the month after 2 years).


• Distribution elections are made during new hire employee benefits enrollment (within 30 days of hire date) and during Annual Enrollment for current eligible employees.  The default distribution election is 2 years from start of plan year if no distribution election is made by employee.


• Employee becomes ineligible if they drop below .5 FTE or terminate employment.  Once they become ineligible they start a 2 year non-compete period.  During the 2 year non-compete period, if they compete within a 10 mile radius for metro locations, and a 30 mile radius for regional locations, they will forfeit all remaining dollars in their account. This 2 year non-compete is different from their physician employment agreement non-compete clause and cannot be negotiated.


• If employee is involuntary-terminated without cause, distribution is made as soon as administrative feasible. (I'm guessing that means if I set a distribution date say at age 65 but retire before then that the distribution would still be made based on my selection?)

While I was stoked about free money, there are a lot of aspects of this that I don't like including:

1. works like salary deferral, employer retains control, subject to employer's creditors, etc.


2. the non-compete aspect of it


3. the distribution methods

It sounds like a majority of the physicians elect for the 2-year distribution (I'm guessing many of them make no election and thus fall into the default--ie the 2 year distribution).

It seems to make the most sense to do the 2 year distribution at least initially to minimize the amount lost if the 457(f) noncompete is violated (and to get the money into my control) as I suss out whether this is a place I'll stay long-term. That significantly limits the benefit of tax-deferral and compounding.

I was wondering if you all had thoughts on how to best use this type of account given the above stipulations?

[litovskyassetmanagement]

This is all employer money, so look at it as deferred compensation of sorts (this looks a bit like a 401a plan with non-governmental 457b features).  Does not sound like you have many choices here.  This becomes a bit of an issue if you stay in this plan over decades and then get one big fat distribution, but few docs will stay more than 5 years on average with an employer, so I wouldn't worry about it too much for now.

[TheGipper]

My wife (PCP, age 38), has a similar 457f account which is distributed as a full one time payout at age 55. It is sporadically funded when company has a good year and is forfeited if she leaves before age 55.

I have been keeping it off my net worth spreadsheet for now. As we approach age 55, I'll add it on with a .55 tax adjustment factor as we won't be able to avoid it being taxed at top marginal rate + state + FICA.

Only useful tax planning for us will be to make sure that we are maxing out my defined cash benefit plan and her 457b for the year it is paid out to lower tax hit.

[jfoxcpacfp]

nachos31 wrote:

It sounds like a majority of the physicians elect for the 2-year distribution (I’m guessing many of them make no election and thus fall into the default–ie the 2 year distribution). It seems to make the most sense to do the 2 year distribution at least initially to minimize the amount lost if the 457(f) noncompete is violated (and to get the money into my control) as I suss out whether this is a place I’ll stay long-term. That significantly limits the benefit of tax-deferral and compounding. I was wondering if you all had thoughts on how to best use this type of account given the above stipulations?

Click to expand...

A 457f is a nonqualified deferred comp plan offered only to a select group of highly-compensated executives. It sounds as if you have read the written agreement carefully; that is important because nonqualified plans don't have a set blueprint. A big difference from qualified plans is that you will owe FICA taxes when the benefits become payable or the substantial risk of forfeiture lapses. You should clarify this language with the TPA or HR department.

I am not sure how the non-compete matters. You are subject to that regardless of the plan, correct? Or is that somehow strictly tied to the 457f?

There is no reason that I know of not to accept this benefit. It is solely funded by the employer. At the worst, you have nothing out of your pocket to lose. You might want to have your financial planner and/or CPA review the agreement before you sign up to ensure you are making the best choices for your situation.

[jz]

Cudos to the employer for creating this incentive carrot/sticky fly tape.

[nachos31]

Johanna:

1. The 457(f) has its own separate non-compete that is 10mi 2yr. The general contractual non-compete is 3mi 1yr, which is great.

2. I was not planning on rejecting this benefit. Again, it's free money. I was just wondering if based on the plan description/limitations people had some unique views on how to utilize this account to maximize the potential benefit--eg whether to just take a distribution starting the 2nd year and then yearly thereafter or delay the distributions to allow for more compounding.

 

jz:

Yes, exactly! They are otherwise very reasonable in everything else otherwise I wouldn't have worked for them.

[jfoxcpacfp]

nachos31 wrote:

Johanna:

1. The 457(f) has its own separate non-compete that is 10mi 2yr. The general contractual non-compete is 3mi 1yr, which is great.

2. I was not planning on rejecting this benefit. Again, it’s free money. I was just wondering if based on the plan description/limitations people had some unique views on how to utilize this account to maximize the potential benefit–eg whether to just take a distribution starting the 2nd year and then yearly thereafter or delay the distributions to allow for more compounding.

 

jz:

Yes, exactly! They are otherwise very reasonable in everything else otherwise I wouldn’t have worked for them.

Click to expand...

1. I see - you're giving up a little flexibility to qualify for the extra incentive.

2. This is different from a 401k or IRA. You're going to pay taxes on the original contributions at your vesting points (when there is no longer a substantial risk of forfeiture), which means that you will have phantom income unless you withdraw $$ from the plan to pay the taxes. Yes, you can defer taxes on the growth by leaving the money in the plan, but you will pay taxes at ordinary income tax rates when you withdraw. imo, better to withdraw as you become vested every 2 years and invest yourself. Dividends and long-term growth will be taxed at favorable dividend and LTCG rates rather than ordinary income rates.