457(b) plan termination

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Say a Non Profit has a 457(b) plan - only one participant. This participant is going to retire, or perhaps just has. I don't know. Question is: if employer decides to terminate the plan, as permitted in the document and regulations, (1.457-10(a)(1)) is there any way for the participant to avoid immediate taxation of all proceeds? There's no rollover option, and participant isn't transferring to another NP that has such a plan, so the transfer option isn't available... I don't see any way to avoid taxation of the entire amount, but maybe I'm missing something.

Is there such a thing as, prior to termination, the employer purchases an irrevocable annuity with the payee being the participant, under an annuity/installment option otherwise available under the plan?

Kind of a bummer for the one person who was counting on continued tax deferral - I realize they had the benefit of it while working, but still an unfortunate change in circumstances when he was planning based on something else...


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I don't think the irrevocable annuity option would work. A 457(b) for a nonprofit has to be unfunded. So unless the annuity was subject to the claims of the employer's general creditors, it would cause the plan to lose its 457(b) status.

Why is the employer terminating the plan? There aren't a lot of administrative issues in just maintaining the plan--it's a top hat plan, so no ERISA filing obligations, etc., and it's unfunded, so the employer doesn't have to worry about being responsible for a trust. I'm wondering whether the employee could assert some kind of contractual right to have the deferrals continue, even if the Internal Revenue Code would permit termination. Or whether the employee could simply point out to the employer that termination would cause onerous tax consequences to him, which the employer could avoid at minimal inconvenience by continuing the plan.

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