Retain Key Executives in the Nonprofit Sector with 457 Deferred Compensation Plans

Posted on

Executive compensation continues to receive increased scrutiny from the IRS, Attorney Generals (AGOs), and in the court of public opinion.  This scrutiny is intended to ensure that executive compensation does not take away from the charitable mission of the nonprofit; however, the IRS and AGOs also recognize that large public charities are complex organizations that demand a high level of executive ability at least commensurate with that complexity.

Nonprofit boards are responsible for identifying compensation that is “reasonable and not excessive,” but that also is attractive enough to retain the best possible talent to lead the organization.

A variety of simple (and relatively inexpensive) deferred compensation techniques are available, including: 403(b) and/or 401(k) plans, and the lesser-known 457 plan.  A 457 plan is a type of non-qualified, tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the US.

Nonprofit organizations looking to maintain a competitive advantage in retaining key leaders may determine that these 457 plans may be a vital component to an attractive executive compensation package.  AAFCPAs believes these plans are often overlooked and therefor, underutilized.
Salary Deferral Arrangements

  • Participants may contribute a maximum of $18,000 into either a 401(k) or 403(b).
  • If over 50, participants may contribute additional catch-up amounts into each plan (up to $6,000 in 2015).
  • An additional $18,000 may be contributed into a 457(b) plan, along with the $6,000 catch up for eligible individuals.

457 plans are a popular solution for many nonprofits because they allow the organization to “discriminate,” and can be offered to only select key executives.  These plans are also simple, and relatively inexpensive to implement, so organizations of all sizes, and with all types of budget priorities and realities are able to benefit. 457 plans are designed to provide a home for tax-deferred compensation, with assets owned by the organization and flexibility in funding.  The plan can benefit both the executive and the organization as a whole: nonprofits can encourage a key employee to stay by paying a defined benefit on a specified date.

There is risk associated with 457 plans, as the organization must remain solvent in order to fulfill the deferred payout, and executives must meet performance benchmarks to collect.  With the right structure, 457 plans (or a combination of deferred compensation techniques) can provide an incentive that may make the difference in retaining an important leader.
If you have any questions about 457 plans or executive compensation, please contact your AAFCPA partner.