Executive Compensation Planning for Nonprofit Professionals
Deferred compensation and other executive benefits each carry their own rules and their own tax consequences.
Our advisers can work with you to understand this additional layer of compensation and how it fits into your larger retirement strategy.
Executive Compensation Planning
Executive compensation can be complex, often involving multiple arrangements, each with its own rules. For leaders at nonprofits and associations, these often include 457(b) and 457(f) plans, among others, each carrying its own vesting schedule, tax treatment, and decision windows. Evaluating investment decisions within these plans calls for a view of your full financial picture, since the timing of each decision interacts with your broader investment, tax, and retirement situation.
Our team works with leaders across nonprofits, associations, and other organizations on the investment decisions these plans require, and on how each plan fits within their broader retirement income strategy. Because these arrangements typically involve multiple professionals, our advisers may coordinate with your CPA, attorney, and any others already involved as a part of the planning process.
Common Considerations in Deferred Compensation Planning
Deferred compensation arrangements such as 457(b) and 457(f) plans are complex and involve carefully balancing multiple decisions with your existing investment strategy and retirement strategy. A few of the most common considerations include:
Deferral Decisions
Distribution Timing
Vesting and Forfeiture
Coordination with Qualified Plans
Investing Plan Balances
Employer & Plan Risk
Our Approach to Executive Compensation Planning
Executive compensation planning is an ongoing process. Elections come up, balances vest, and distribution dates approach, and the strategy is reviewed as your circumstances change. Our approach typically includes the following:
Understanding Your Compensation and Goals
The starting point is a complete picture of how you are paid and what each arrangement is meant to support. Your adviser reviews your deferred compensation elections, vesting schedules, and distribution windows together with your qualified retirement plans, investment accounts, and other assets, as well as your broader goals and timeline. The result is a comprehensive understanding of how each arrangement fits alongside the rest of your investments and financial life.
Evaluating Your Options and Decisions
Deferred compensation comes with decisions that are often difficult to reverse, from whether to participate and how much to defer, to when to schedule distributions. Your adviser will work with you to understand your options and evaluate which is most aligned with your financial situation and long-term goals. Your adviser can also offer insight into the tax impact of these decisions and flag when it is beneficial to involve your CPA.
Connecting Deferred Compensation to Your Retirement Income
Deferred compensation is only one aspect of your retirement income, which may also include qualified plans, personal savings, Social Security, and other sources. Your adviser can assist with retirement income planning to coordinate distributions, manage your tax impact, and see how each decision affects the broader picture.
Investing Deferred Compensation Balances
Balances in a deferred compensation arrangement are typically invested ahead of distribution, within the options and rules each plan allows. Your adviser will work with you to evaluate those options to develop an investment approach that considers your time horizon, risk tolerance, and long-term goals. This investment approach is then reviewed as your timeline and circumstances change.
Coordinating with Your CPA, Attorney, and Plan Administrator
Decisions on deferred compensation tend to require more than one professional. Your adviser can coordinate with your CPA, attorney, and plan administrator, sharing income summaries and projections and keeping communication clear during major events such as a job change, a separation agreement, or a beneficiary update.
Knowledge is Meant to be Shared
Raffa Insights & Resources
Sample Investment Policy Statement
Download our Sample Investment Policy Statement to use as a reference point when evaluating your own policy or starting the conversation with your board.
What's Normal For Nonprofit Reserves?
Learn how to think about reserve structure, investment allocation, and what peer benchmarking data can tell you about where your organization stands.
FREQUENTLY ASKED QUESTIONS ABOUT EXECUTIVE COMPENSATION STRATEGY
What is non-qualified deferred compensation?
Non-qualified deferred compensation is an arrangement in which an executive agrees to set aside a portion of current compensation to be paid in a future year. At nonprofits and associations, these arrangements commonly take the form of 457(b) and 457(f) plans, which let a select group of leaders defer compensation beyond the limits of a 403(b) or 401(k). Because deferred balances remain part of the employer’s general assets until paid, the value of the benefit depends in part on the future financial condition of the employer.
What is the difference between a 457(b) and 457(f) plan?
A 457(b) plan lets eligible executives at a nonprofit or association defer compensation on a tax-advantaged basis, often alongside a 403(b) or 401(k). A 457(f) plan is built around a vesting schedule and a substantial risk of forfeiture, which means the deferred compensation becomes taxable to the executive when it vests rather than when it is paid. For an executive participating in either, the structure of the plan drives when income is recognized and how the arrangement should fit into the rest of the financial picture.
What happens to my deferred compensation if I change employers?
What happens to deferred compensation at a job change depends on the plan’s terms. A 457(b) balance at a nonprofit or association is generally paid out on a schedule set by the plan and your distribution election, and it cannot be rolled into an IRA the way a qualified plan can. A 457(f) arrangement is typically tied to continued service, so leaving before the vesting date often means forfeiting the unvested amount. For an executive considering a transition, reviewing these terms ahead of time helps avoid surprises.
Can I roll a 457(b) plan into an IRA?
A 457(b) plan at a nonprofit or association generally cannot be rolled into an IRA. Distributions are paid according to the plan document and the election the executive made, and they are taxed as ordinary income in the year received. This is a key difference from qualified plans such as a 403(b) or 401(k), and it makes the original distribution election an important decision to get right.
How does deferred compensation fit with my other retirement savings?
Deferred compensation is one piece of a retirement income picture that usually also includes qualified plans, personal savings, and Social Security. For an executive, the question is how and when each source pays out, so distributions are coordinated across years rather than concentrated into the same ones. As deferred balances carry employer risk that qualified plans do not, it is important to consider that risk when evaluating your retirement income strategy.
Can I contribute to both a 457(b) plan and a 403(b) or 401(k) plan?
Yes. A 457(b) plan has its own contribution limit separate from a 403(b) or 401(k), so an eligible executive at a nonprofit or association can defer up to the annual limit in each. This is one reason 457(b) plans are offered to a select group of leaders who have already reached the contribution limit on their qualified plan and want to set aside more on a tax-deferred basis. The combined deferrals can add meaningfully to retirement savings in higher-earning years.
What are the risks of deferred compensation?
The main risks of deferred compensation come from the fact that the balance is not yet in your hands. For an executive at a nonprofit or association, deferred compensation balances generally remain part of the employer’s general assets until paid, so they are exposed to the employer’s financial condition. In a 457(f) plan, leaving before the vesting date can also mean forfeiting the unvested amount. Weighing these risks against the tax-deferral benefit is important when deciding how much to rely on a deferred compensation arrangement.
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Disclosures:
Raffa Wealth Management, LLC dba Raffa Investment Advisers (“Raffa”) is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Raffa and its representatives are properly licensed or exempt from licensure. All investing and financial planning strategies involve risk, including the possible loss of principal. There can be no assurance that any strategy will be successful.
This material is provided for informational purposes only and should not be construed as personalized investment, tax, or legal advice. The information presented is general in nature and may not be appropriate for all individuals. You should consult your financial adviser, tax professional, or attorney regarding your specific situation. Any coordination with third-party professionals, such as CPAs or attorneys, is conducted only with client authorization and does not imply responsibility for the advice or services provided by those professionals.
References to specific financial plans, including 457(b) and 457(f) arrangements, are provided for educational purposes only and do not constitute a recommendation or solicitation to implement any specific strategy.
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