457(f) Regulations Languish

On August 6, 2010, it will be three years since the IRS announced its intent to publish new regulations under Section 457(f).  We continue to wait.  In May, an IRS attorney said the regulations are “substantially done,” but that they are proceeding at a “governmental pace.”  That may indicate we still have a while before they see the light of day. Once published, the regulations are expected to:

  • Disallow noncompete restrictions
  • Limit voluntary deferrals (including rolling vesting dates)
  • Treat some severance payments as deferred compensation (requiring lump sum taxation at termination of employment)

Once the new regulations are issued, we will learn how and when deferral and severance plans must be modified to comply with the new requirements.  In the meantime, many organizations have retained their plans with noncompete restrictions and one-time opportunities to postpone the vesting date.  These plans will be positioned to take advantage of any favorable transition rules that may be offered.

There is also a steady stream of clients who, frustrated by the delay and uncertainty with the regulations, act ahead of the regulations and switch to cliff vesting for new deferrals. Each employer must choose its preference – the attractiveness of noncompete restrictions versus the certainty of cliff vesting.