Has anyone seen/heard anything about IRS regulations or the IRS' position currently on whether a covenant not to compete will work as a substantial risk of forfeiture in a 457(f) plan?

Notice 2007-62 said that they IRS will release guidance on this issue. As of 2011, the IRS hasn't explicitly repudiated their use, so until such time there is an argument that they can be used, given previous PLR rulings.

Given that the IRS has stated that 457(f) arrangements are subject to 409A and the the principles of 409A will be reflected in the 457 regulations, it is risky to use a coventant not to compete, not to mention scumbag behavior that that was part of the reason we got section 409A. But scumbags can probably still take some refuge in audit and policy roulette.

I don't know that I would lump in the ambiguities of 457(f) with scumbag behavior. 457(f) is more difficult than corporate nonqualified deferred compensation, because taxation is dependent on the substantial risk of forfeiture. In addition to a substantial risk of forfeiture, corporate nonqualified deferred compensation can defer compensation if the arrangment is an unfunded promise to pay, regardless of whether a substantial risk of forfeiture exists. Tax-exempts don't have this option, because 457 requires a substantial risk of forfeiture.

Without the use of rolling risks or forfeiture, or covenants not to compete, tax-exempt entities are much more limited with the types of deferred compensation they can offer their highly compensated employees than their corporate counterparts.

The IRS "tsk, tsking" without offering a viable alternative and without explicitly repudiating its prior guidance leaves employers scratching their heads with what to do. I don't think it's shady to regard an approach as possibly still viable because the IRS says that will one day in the future it will be unacceptable. Especially if there is explicit authority to the contrary.

Bottom line, it's clear that the IRS disfavors rolling risks of forfeiture and covenants not to compete, but they are still used by many tax-exempts because it has been 4 years since the IRS said they were going to expressly repudiate them and give guidance, but we're still waiting. Meanwhile, employers want to provide benefits to their employees within the IRS's guidelines. Sometimes those guidelines are not crystal clear.