[Update] Final 457(f) Regulations Postponed

Last year, the IRS proposed 457(f) regulations which may affect schools, cities and counties sick leave and unused vacation payouts at retirement. It was unclear whether these plans would be considered “bona fide” or a type of non-qualified deferred compensation. If the plans were deemed deferred compensation, employees would be subject to tax liability equal to the value of the unused leave.

At this time, the IRS has not been able to reach an agreement regarding a safe harbor provision on whether a leave plan is bona fide under the proposed tax-exempt deferred compensation regulations. An agency official stated that the final 457(f) regulations will most likely not be out this year. They hope to release this guidance simultaneously with other related guidance at a later date.

The agency official stated that “the IRS will develop guidance providing employers peace of mind if they want a program that allows employees to exchange their leave for cash. We don’t want to ban this; we recognize that it’s a very attractive recruiting tool to states and nonprofits that are not awash with cash to compensate their employees highly.” It is unknown yet what form of guidance the safe harbor provision will take. It will either be proposed regulations or a notice followed by proposed regulations offering more opportunity to comment.

Stay tuned to the NIS Benefits blog to keep abreast of any updates to this legislation. If you are not already receiving our newsletter, you can subscribe here. In the meantime, National Insurance Services (NIS) and our partner, MidAmerica will continue to monitor the situation.