Funded Nongovernmental 457(b) Vesting Options

[Rob P]

I hopefully have some basic questions that maybe someone could shed some light on.

A client sponsors a nongovernmental 457(b) plan which they have funded and established individual accounts for each of the plan's participants. The plan only allows employer contributions.

In general, how does vesting under a nongovernmental 457(b) plan work? Must it be specified in the plan's document? In this particular plan's document, there is no mention of vesting or forfeiture.

This is a new takeover for us. A participant is going to be terminated for "cause" and the sponsor is insisting that they can take back the money that has been funded and not pay anything to the participant.

Any input would be appreciated.

[J Simmons]

I hopefully have some basic questions that maybe someone could shed some light on.

A client sponsors a nongovernmental 457(b) plan which they have funded and established individual accounts for each of the plan's participants.

In whose name and how are the accounts titled? It's been a while, but I believe nongovernmental employers that sponsor 457(b) plans cannot have a trust or separate fund earmarked for paying these benefits to the employees.

In general, how does vesting under a nongovernmental 457(b) plan work?

Basically the same as under a 401(a) plan, but only because of provisions in ERISA section 203 that mirror those in the IRC.

Must it be specified in the plan's document? In this particular plan's document, there is no mention of vesting or forfeiture.

There should be--ERISA section 402.

A participant is going to be terminated for "cause" and the sponsor is insisting that they can take back the money that has been funded and not pay anything to the participant.

I don't think a "bad boy" clause is allowed.

[Kevin C]

John has it right that a nongovernmental 457(b) must be unfunded. Those accounts should be titled in the name of the employer.

There is one other wrinkle with vesting for 457(b)'s that makes doing anything other than 100% immediate vesting a potential problem. Contributions, whether employer or employee deferrals, do not count as annual deferrals until they are vested. See 1.457-2(b)(1) & (2). 1.457-4(c)(iv) Example 3 has a plan with a 5 year cliff vesting and a $3,000 per year contribution. When the participant becomes vested, the plan exceeds the annual deferral limit.

Example 3. (i) Facts. Beginning in year 2002, Eligible Employer X contributes $3,000 per year for five years to B's eligible plan account. B's interest in the account vests in 2006. B has annual compensation of $50,000 in each of the five years 2002 through 2006. B is 41 years old. B is not eligible for the catch-up described in paragraph (c)(2) or (3) of this section, participates in no other retirement plan, and has no other income exclusions taken into account in computing includible compensation. Adjusted for gain or loss, the value of B's benefit when B's interest in the account vests in 2006 is $17,000.

(ii) Conclusion. Under this vesting schedule, $17,000 is taken into account as an annual deferral in 2006. B's annual deferrals under the plan are limited to a maximum of $15,000 in 2006. Thus, the aggregate of the amounts deferred, $17,000, is in excess of B's maximum deferral limitation by $2,000. The $2,000 is treated as an excess deferral described in paragraph (e) of this section.

[Rob P]

Thanks guys, I appreciate the input.

The person assigned to this case (our only 457 person) is out this week and I unfortunately took the client’s phone call. 457’s are not my specialty and I may have mis-spoken when I said the plan was “funded”. I can only confirm that an account was established at a financial institution in the name of a participant (at this point I will assume that owner of the account is actually the employer).

I was concerned when the employer insisted that they didn’t owe any money to a particular participant that they’re about to terminate (the employer wants me to liquidate the account and send them the proceeds). I checked the plan’s document and there is no mention of vesting, forfeiture, or “substantial risk of forfeiture”. The document simple states under the distribution provisions that a participant is entitled to the account balance being maintained on their behalf. I interpreted that as 100% vested. I will make sure their ERISA attorney reviews the document before I process any transactions.

Again, thanks for your help.