For many years, the IRS has promised to issue regulations for Sec. 457(f) plans, largely because taxpayers and practitioners sorely needed detailed guidance addressing certain issues. Finally, the IRS issued proposed regulations (REG-147196-07) in June 2016, and they provide helpful guidance and even some welcome news. The regulations are effective for calendar years beginning after the date the IRS publishes final regulations, but taxpayers may rely on the proposed regulations in the interim.

A Sec. 457(f) plan is a deferred compensation plan sponsored by a state or local government or by a tax-exempt entity. The rules regarding Sec. 457(f) plans get a lot of attention because an employee's benefits are subject to income tax upon vesting, even if they are paid later, a situation that usually is viewed as unfavorable. Employers and employees that do not realize they have a Sec. 457(f) plan or do not realize that the amounts have vested and are therefore currently taxable can be in for a shock. Besides taxes on the vested amounts, employees can be subject to interest and penalties for not paying the taxes on time. READ MORE