Page 259 - Washington Nonprofit Handbook 2018 Edition

• An employer can create an arrangement, either in a separate plan
document or as a provision of an employment agreement, agreeing to
pay compensation to an executive at some future date or upon the
occurrence of a future event, such as retirement. Such an
arrangement is subject to rules under section 409A of the Code
regarding the timing of deferrals and distributions. Section 409A of
the Code also precludes an employer from setting aside assets to pay
the deferred compensation benefits in a vehicle protected from the
claims of the employer’s creditors. In addition to the rules under IRC
section 409A, when such an arrangement is implemented by a
nonprofit employer, it is subject to additional rules under section

457(f) of the Code. Among other requirements, section 457(f) of the
Code provides that the amounts credited to an executive’s account
under the plan are includable in the executive’s taxable income when
they are vested. This provision results in the plan providing a “golden
handcuff” in the sense that the executive has an incentive to keep
working for the employer in order to ensure receipt of the deferred
compensation, but also results in uncertainty for the executive as the
assets are not protected in a trust and remote from the employer’s
creditors.

• These executive compensation arrangements are subject to certain
provisions of ERISA, but are exempt from many of the more

burdensome provisions.

WASHINGTON NONPROFIT HANDBOOK -248- 2018