IRS Announcement of Anticipated Changes in the Substantial Risk of Forfeiture Rules

The Internal Revenue Service and Department of Treasury on August 6, 2007 published a notice announcing that they are anticipating issuing guidance, likely in the form of Treasury Regulations, that will penalize tax-exempt and governmental employers and their employees by in essence:

• Prohibiting any elective deferral of compensation by such employees to any non-qualified deferred compensation other than a section 457(b) plan which is limited to $15,500 for 2008 [most of your hospital members have such plans which are generally known as "SERPs" or 457(f) plans]; and

• Providing that non-competition and similar covenants will be disregarded for purposes of determining what constitutes a substantial risk of forfeiture for these arrangements.

Many executives and highly-compensated employees of tax-exempt and governmental employers are making elective deferrals to plans known as 457(f) plans or participate in non-qualified excess benefit plans or SERPs. The guidance announced by the IRS and Treasury would in essence be a flat prohibition of such elective deferrals and of use of non-competition and similar covenants to avoid current taxation of such plans as excess benefit plans and SERPs.

Pursuant to a request by the IRS and Treasury for comments, Bricker & Eckler submitted comments on behalf of the Ohio Hospital Association and several tax-exempt organizations that issuance of any such Treasury Regulations will further widen the gap between tax-exempt and government employers, on one part, and taxable employers, on the other, because taxable employers will not be subject to this guidance or any resulting Regulations. Bricker & Eckler’s comments on behalf of the Ohio Hospital Association also recommended a facts-and-circumstances test, similar to the test applied to taxable entities in connection with stock options and transfer of property, rather than the flat prohibition announced by the IRS and Treasury in its notice. Several other national association of tax-exempt entities concurred with these comments.

To date, the IRS has acknowledged receipt of these comments, but has not made any further substantive announcement regarding the status of its anticipated guidance except to state that the effective date of any guidance would be “prospective.”

Tax-exempt and governmental employers should not adopt new non-qualified elective deferral arrangements, excess benefit plans, or SERPs without first consulting with tax counsel as to the status of the announced.

For additional information contact John P. Beavers or Christine M. Poth.