457(b): Current limitation on deferral and/or contribution limits is $13,000 in 2004 ($14,000 in 2005, $15,000 in 2006) Section 451 would allow unrestricted deferral opportunities, thus the cap of $13,000 would disappear. 457(f): Current regulations require substantial risk of forfeiture, which usually says the executive must remain for some period time to receive his/her benefit. When this date arrives and the risk of forfeiture is gone, the executive is required to take a lump sum distribution and be taxed on the total accumulated value. Section 451 would allow a vesting schedule that would vest the executive to some part of the benefit over time. The executive would also have the option to take a distribution in the future as a lump sum or as periodic pay outs over time and only be taxed at the time money is received and only on the amount of money received. Tripalin added that “we need to make sure credit unions understand there are specific legal steps they need to take to amend their plans to implement these changes.” Example of How Change Affects a $500,000 Payout This real-world example shows why CUs may want to move from the current common CU 457 deferred compensation model to a for-profit 451 model. This example looks at a $500,000 package. Assumptions: 1) The lump sum is paid out with a tax rate of 35% 2) Periodic distributions have a tax rate of 28% 3) Money left in the account grows at 5% 4) The periodic distribution will be over 10 years 457(f): Current CU Deferred Compensation Model * Lump sum of $500,000 pay out, $175,000 in tax, net distribution of $325,000 * $325,000 grows over 10 years to $529,000 (without considering tax on growth) 451: For-Profit Model CUs May Be Able to Use Depending on IRS Status * 10 pay outs at $50,000 per year, $14,000 tax on each distribution leaving $36,000 to invest. * $36,000 grows over 10 years to $475,500 (without tax on the growth) plus approximately $125,000 still in the fund from growth (this means that each time there is a $50,000 pay out there is money left in the fund to continue to grow before the next pay out) for a total of $600,500. Thus, in this comparison $35,000 is paid out more in tax under the 457(f) and the executive ends up with $71,000 more under the 451 approach.
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