Nonprofit Report - August 2015

Date: August 31, 2015

Mind Your B's and F's: A Primer on Deferred Compensation Plans for Tax Exempts

By: Mary Claire Chesshire, Esq.

This article appeared in Association TRENDS, June 2015, and is reprinted with permission of the publisher.

Retirement programs for employees of tax exempt associations are similar in many ways to retirement programs sponsored by a for-profit business enterprise.  Both types of organizations may offer generally all of their employees qualified retirement plans (401(k) plans for both, 403(b) plans only for tax exempts) and deferred compensation plans for a “select group of management or other highly compensated employees.”  However, the tax treatment of deferred compensation arrangements is where the similarities between tax exempt and for-profit organizations end.  

Tax exempt associations may sponsor both “eligible” and “ineligible” deferred compensation plans.  These arrangements are also referred to as “457(b)” and “457(f)” plans, respectively, referencing the governing sections of the Internal Revenue Code.  457(b) plans offer the employee the opportunity to defer pay in addition to contributions made under a traditional qualified retirement plan such as a 401(k) plan.  Contributions to an eligible 457(b) arrangement are limited in 2015 to $18,000.  However, by layering a 457(b) plan with a traditional 401(k) plan, an employee could choose to defer up to $36,000 of pay ($42,000 if age 50 or older).  Deferrals under a 457(b) plan are not taxed until paid to the participant.  Contributions may also be made to a 457(b) plan by the association rather than as an employee elective deferral or as a combination of employer and employee contributions.  

Many associations also wish to further incentivize an executive-level employee to commit to a tenure of employment by offering a deferred compensation program providing for contributions in excess of the contributions that may be made to a qualified retirement plan and an eligible 457(b) program.  Such an arrangement is referred to as an “ineligible” 457(f) plan.  The associations typically will provide for vesting in the account if the executive remains employed with the association for a specified period of years.  

In the private sector, deferred compensation accounts are generally not includible in the executive’s gross income until the amounts are received by the executive.  However, ineligible 457(f) plan accounts are includible in the executive’s gross income when the accounts are no longer subject to a “substantial risk of forfeiture.” For these purposes, if the executive could voluntarily terminate employment and collect his or her account, there is no substantial risk of forfeiture.  The fact that the 457(f) accounts remain subject to the claims of the association’s creditors also does not put the account at a substantial risk of forfeiture.

For this reason, ineligible 457(f) plans are rarely, if ever, funded with the employee’s own contributions.  Accordingly, care needs to be taken when negotiating an employment contract with an executive, particularly one who is transitioning from the for-profit sector, who desires to have the ability to defer income in excess of deferrals that may be made under qualified plans and a 457(b) plan.

Check Your Policies To Ensure They Are In Compliance With Current D.C. Employment Laws

By: Jennifer S. Jackman, Esq. and Tiffany M. Releford, Esq.

This article appeared in Association TRENDS, June 2015, and is reprinted with permission of the publisher.

There have been several recent changes in D.C. significantly affecting wages, employer notice requirements, and records maintenance as well as changes providing more protection to pregnant employees.

Wage Theft Prevention Amendment Act:

The Wage Theft Prevention Amendment Act (“the Act”) became effective February 26, 2015.  Under this new law, employers are required to provide written notice of wages to all employees, regardless of exemption status.  The notice must be provided to all new hires upon hiring and to all current employees by May 27, 2015.   For non-exempt employees, the notice must be re-issued whenever there is a change in wages.  For exempt employees, the notice must be re-issued whenever there is a change in pay or in exemption status.  The Notice must be provided in the employee’s primary language.   Notably, this Act has penalties for violations such as fines of $500 per employee.

The Act also requires employers to keep records reflecting the precise time worked by non-exempt employees – not just the hours worked.  Employers are further required to maintain a record of all paid leave taken by employees for at least three years and requires non-exempt employees to be paid at least twice per month.

D.C. Protecting Pregnant Workers Fairness Act of 2014

The D.C. Protecting Pregnant Workers Fairness Act of 2014 (“the PPWFA”) became effective March 3, 2015.  Under the PPWFA, employers are required to provide accommodations, when requested, to employees when they are needed due to pregnancy, childbirth, related medical conditions or breastfeeding.   Examples of such accommodations include, but are not limited to, more frequent or longer breaks, time off to recover from child birth, temporary transfers to less strenuous positions, providing modified work schedules and providing private non-bathroom space for expressing breast milk.  In addition, the Act prohibits discrimination and/or retaliation against such employees.  

In addition, the Act requires employers to issue a notice of employee rights to all new hires and current employees in their primary language.  The notice must also be posted in English and Spanish.  Finally, any employee who notifies the employer of her pregnancy, or other condition covered by the Act, must receive notice within 10 days of notification.

The PPWFA includes stiff penalties for non-compliance that can include lost wages, reinstatement and attorney’s fees as well as fines for willful violations.   In addition, an employer who fails to provide and post the required notice may be assessed daily civil penalties. 

D.C. Minimum Wage Act:

The D.C. Minimum Wage Act was amended and provides for an increase to the minimum wage by $1.00 each July.  As a result, on July 1, 2015, the new minimum wage in D.C. will be increased to $10.50. Employers who violate this provision may be found guilty of a misdemeanor and assessed fines.  Willful violations may result in fines up to $10,000.00 or imprisonment.