Supplemental Executive Retirement Agreement
(Tax-Exempt Employer 457(f) Plan)

Summary

This is a supplemental executive retirement agreement for employees of governmental or tax-exempt organization may (also known as a 457(f) plan). This template contains practical guidance, drafting notes, and alternate clauses. A 457(f) plan is a nonqualified deferred compensation (NQDC) and incentive agreement used by governmental and tax-exempt organizations, which are subject governmental and tax-exempt organizations, but also the more stringent restrictions on tax deferral under I.R.C. § 457. With the exception of eligible Section 457(b) plans (which are limited to relatively small amounts), amounts deferred under compensation arrangements implemented by these organizations generally become taxable upon vesting (i.e., cessation of a substantial risk of forfeiture). I.R.C. § 457(f). While this tax treatment precludes many types of NQDC plans used in the for-profit sector to defer tax on vested amounts until payment is made, Section 457(f) plans are frequently used as a retention tool where continued service is required as a condition to receiving the deferred amount at a future time. Governmental and tax-exempt entities must ensure, however, that their arrangements do not violate Section 409A, whose rules apply concurrently with the Section 457 rules, to avoid Section 409A's significant tax penalties for non-compliance. This plan is drafted to comply with the proposed regulations for Section 457(f) plans. See Prop. Treas. Reg. § 1.457-12, 81 Fed. Reg. 40,458 (June 22, 2016).rules of I.R.C. § 457 and the excise tax on excessive compensation under I.R.C. § 4960 (introduced by the Tax Cut and Jobs Act (Pub. L. No. 115-97, § 13602)). Governmental and tax-exempt organizations that desire to provide nonqualified deferred compensation (NQDC) benefits to their employees must consider not only the NQDC rules under I.R.C. § 409A, but also the more stringent restrictions on tax deferral under I.R.C. § 457. With the exception of eligible Section 457(b) plans (which are limited to relatively small amounts), amounts deferred under compensation arrangements implemented by these organizations generally become taxable upon vesting (i.e., cessation of a substantial risk of forfeiture). I.R.C. § 457(f). While this tax treatment precludes many types of NQDC plans used in the for-profit sector to defer tax on vested amounts until payment is made, Section 457(f) plans are frequently used as a retention tool where continued service is required as a condition to receiving the deferred amount at a future time. Governmental and tax-exempt entities must ensure, however, that their arrangements do not violate Section 409A, whose rules apply concurrently with the Section 457 rules, to avoid Section 409A's significant tax penalties for non-compliance. This plan is drafted to comply with the proposed regulations for Section 457(f) plans. See Prop. Treas. Reg. § 1.457-12, 81 Fed. Reg. 40,458 (June 22, 2016). For information on Section 457(f) plans and other compensation arrangements for non-taxable entities, see Executive Compensation Arrangements for Tax-Exempt Organizations. For additional background, see Substantial Risk of Forfeiture under the IRC, Section 409A Fundamentals, and Nonqualified Deferred Compensation Rules for Tax-Indifferent Entities (Section 457A).