But that strategy has pitfalls. For instance, if the executive quits the organization before becoming vested, he or she must forfeit the entire sum of unvested deferred compensation. To find a way around those and other limitations of Section 457 plans, the accounting firms have looked to a different part of the tax code, Section 83, which governs stock options and other property given to employees in connection with services that they perform. While most option plans distribute an employer's own stock, Section 83 does not prevent organizations from granting options on other assets, such as shares in mutual funds. What is more, when an executive decides to exercise the options, he or she can do it over several years to avoid incurring a big, one-time tax bill.
Charities carry out their option plans in several ways.
Some charities may buy the stock or mutual-fund shares and hold onto them until the executive exercises the option. Buying the shares ahead of time can save the charity money in periods when stock values are rising. Other charities, however, wait until an executive exercises an option before acquiring the shares in the open market. Accounting executives say they discourage charities from using stock from their endowments for the option plans. But many charity officials are wary of the option idea, partly because they fear that adopting it would cause a backlash from donors.