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Plans Benefiting Only Key and Highly Compensated Employees

For employees who cannot benefit sufficiently from a Qualified 401(k), Profit Sharing, or Defined Benefit Plan, a Non-qualified plan can provide the benefits they need to reach their retirement goals.

409A Plans

A 409A plan is a non-qualified deferred compensation (NQDC) arrangement governed by IRC Section 409A, which allows certain key employees of for-profit businesses to defer income to future years, often for retirement. These plans offer no contribution limits beyond what the employee can afford and must strictly follow IRS rules regarding when deferrals are made and when payments are distributed, typically upon separation or a fixed date.

Key Aspects of 409A Plans

  • Taxation
    Deferred amounts are generally taxed as ordinary income only when received, not when earned, allowing for tax-deferred growth. Payouts to the participant are made in the form of W-2 income after the retirement or performance date has been attained.
  • Compliance and risks
    Non-compliance with strict 409A regulations regarding payment schedules and election timing can lead to severe penalties, including a 20% additional tax, immediate taxation of all deferred amounts, and interest penalties.
  • Election deadlines
    Election forms generally must be signed by December 31 of the year prior to making deferrals.
  • Distribution rules
    The plan cannot permit acceleration of payments (moving up a payment date), and changing payment schedules is difficult, usually requiring a five-year delay on the original payment date.
Peery & Associates, Inc. helps your organization design and implement 409A plans and helps your participants stay in compliance with regulatory requirements.

457(b) Top Hat Plan for Nonprofit Organizations

A 457(b) plan is a tax-deferred, employer-sponsored retirement savings plan available to certain non-profit employees. It operates similarly to a 401(k), allowing pre-tax contributions up to the annual limit (as indexed).

Key Elements of 457(b) Plans

  • Non-governmental (non-profit)
    Nonqualified plans are generally only for highly compensated employees and/or management, and assets technically remain subject to the claims of the employer’s creditors.
  • Independence from 401(k)/403(b)
    Employees who participate in both a 457(b) and a Qualified Plan (401(k) or 403(b)) can contribute the maximum to both plans, essentially doubling their potential tax-advantaged savings.
  • Catchup contributions

    Unlike in a governmental 457(b) no catchup contributions are allowed, but the contributions can be made as either employee or employer contributions. The limit remains $24,500 for all contributions combined in 2026.

    • These nonqualified plans can be used for the Highly Compensated Employees’ Matching contributions when the Match test is failing.
    • To the extent the limit has not been met with employer contributions, the employee can also make tax-deferred contributions.
    • No Roth contributions are allowed. For those Highly Compensated employees who would prefer to make Catch up contributions with pre-tax dollars, the 457(b) plan offers an alternative to the new Roth catchup rules, if the employer affords that opportunity.
    • Distributions are reported as W-2 income. No rollovers to an IRA or qualified plan are available.
Peery & Associates, Inc. can design and implement these plans and help the sponsor and employees comply with all relevant regulations.

457(f) Plans for Key Employee of a Nonprofit Organization

A 457(f) plan document is a legally binding, nonqualified deferred compensation agreement used by tax-exempt or governmental organizations to retain key executives. It outlines specific vesting conditions — typically a “substantial risk of forfeiture” — and triggers taxation upon vesting, allowing for uncapped contributions.

Key Elements of a 457(f) Plan Document

  • Parties involved
    Identifies the employer and the specific executive (no nondiscrimination rules apply).
  • Vesting schedule (risk of forfeiture)
    Defines the “substantial risk of forfeiture,” often a required number of years of service, after which the benefit becomes taxable.
  • Benefit amount
    Specifies either a defined benefit (fixed dollar amount or percentage) or defined contribution (indexed to investment).
  • Payment terms
    Outlines how and when funds are paid upon vesting (often lump-sum).
  • Compliance with IRC 409A
    Must adhere to IRS Section 409A rules regarding deferred compensation to avoid immediate tax penalties.

Common Characteristics

  • No contribution limits
    Allows for substantial amounts, unlike 457(b) plans.
  • Tax treatment
    Taxed as income upon vesting, not when distributed, making timing crucial.
  • Not rollover eligible
    Funds cannot be rolled over into an IRA. Payouts are reported as W-2 income.
  • “Top Hat” filing
    Often requires a one-page “top hat” filing with the Department of Labor to avoid ERISA reporting rules. This applies to all Top Hat plans.

Peery & Associates, Inc. can administer these plans, which require careful monitoring and special distribution instructions when the employee is no longer subject to a substantial risk of forfeiture. We often refer the client to an ERISA attorney for document design. Please contact us for more information.