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457(b) Plan Distribution Elections


austin3515

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So for a regular 409A Deferred Comp Plan, participants must elect the timing and form of distribution before the beginning of the applicable taxable year - any similar requirement for a 457 Plan? Or can the participant decide upon the form of distribution after becoming eligible for a distribution?

Austin Powers, CPA, QPA, ERPA

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The short answer is that a nongovernmental plan can allow a change in the time and form of distribution when the participant becomes eligible, but there is some restrictive regulatory language to navigate. Sorry I missed the reference in the title. Once I go down the rabbit hole I don't look up.

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Start with Section 457(a)(1)(B) and then go to Section 457(e)(9)(B). I think an amount is made available if the participant could get it by request (e.g. a request after termination of employment). A nice way to avoid interpretation questions is to provide that distributions will start a month after termination of employment. That postpones inclusion for a month. The plan can provide for an election within that month to defer to something else. With that in mind, my answer is that a participant cannot make an election when eligible if the plan simply says the participant is eligible at termination of employment. Section 457(a)(1) (B) will include amounts in income at eligibility. A participant needs to make an election under Section 457(e)(9)(B) before the payment date. I don't know why the wording has to appear to prevent an election simply before or at eligibility, or even a reasonable time after eligibility. And I may be interpreting the statute incorrectly, except that my approach should work.

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  • 2 months later...

We have a 457(b) plan. Participants are allowed to make elections after they terminate employment, at whatever point they desire. They is no timeframe dictated in terms of when they need to make an election. They can leave the funds in the 457 plan for years until mandated RMD withdrawals.

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  • 3 weeks later...

I think there's perhaps a distinction between a 457(b) for a governmental plan and a 457(b) for a tax-exempt. For a tax-exempt, under 1.457-7©, amounts are generally included in gross income when paid or made available. Under ©(2) there are provisions for two (2) additional deferral elections, to a "fixed or determinable future time." But once elected, the payment date may not be ACCELERATED. This makes sense - if acceleration were allowed, then the funds are essentially "made available" and thus taxable, which would negate the deferral election.

This brings up a question as to the practical effects of a mistake. Suppose terminated employee makes a valid deferral to, say, 2018. Then requests the money in 2013, and the plan representative and the fund company mistakenly approve it and pay it out. What are the "real life" consequences?

Obviously it would be taxable. Does it "disqualify" the plan retroactively so that previously deferred amounts become taxable retroactively, including interest and penalties? It seems that just saying it is currently taxable provides no disincentive for ignoring the rules. Thoughts?

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