National Law Review

There has been a lot of buzz recently about the long-awaited proposed rules issued by the Internal Revenue Service under Internal Revenue Code Section 457. Section 457 only applies to non-profit and governmental employers and is unusual because Section 457(f) can result in an employee being taxed on compensation or benefits prior to actually receiving them! While Section 457(f) comes into play primarily with respect to deferred compensation, it also applies to benefits such as severance pay, disability pay, death benefits and sick and vacation leave.

What is Section 457(f)?

Section 457(f) applies to all “deferred” compensation except compensation that is deferred under a Section 457(b) “eligible” deferred compensation plan or a Section 457(e) “bona fide” severance, disability, death benefit, and sick leave and vacation leave plan.

Section 457(f) provides that an amount of “deferred” compensation will be taxed to the employee at the time it is no longer subject to a substantial risk of forfeiture. This is true even though the employee may not receive the compensation until a later year. Read More