Alternative Option for 457(f)

Although 457(f) plans are available, many organizations have found them to be overly restrictive and limiting in plan design flexibility. The fact that there is no vesting other than 0% or 100% makes the retention aspect of 457(f) overly restrictive.

Additionally, lump sum taxation, double reporting on form 990 and IRS Code Section 4960 excise tax payments of 21% on amounts over $1 million also may not make 457(f) plans fiscally attractive.

Loan regime Split Dollar insurance has become a viable alternative. Under this approach the executive is the owner of a life insurance policy that is focused on cash accumulation. The organization pays the premiums going into the policy which are considered a loan to the executive and not currently taxable. Either at retirement or death the employer is repaid these loan amounts plus interest at the applicable federal rate (AFR). Since these are loans to the executive the P&L is neutral from an expense standpoint. The policy is assigned to the organization in order to protect their interest. Vesting is very flexible along with provisions for change in control, early retirement and disability or death. The cash that accumulates within the policy can be invested in mutual funds and is available to the executive as retirement income and if designed properly will not be taxable when received.

Read more about Split Dollar Programs.