austin3515

Volunteer Firefighter Plan (457(e)(11)(B))

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austin3515    210

I'm being told:

a) If they allow in-service distributions at age 65 then everything is taxable when someone turns age 65 due to constructive receipt rules;

b) If the Plan says you can take your distribution when you become an inactive volunteer, then everyone is taxable when they become inactive for the same reason.

Is this right?  I'm having a hard time finding a good article on the mechanics of how these things work.  Frankly it seems totally unworkable and I'm just curious if I'm missing something...

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I'm assuming that what we are talking about is a nonqualified unfunded plan for volunteers, exempt from section 457 due to Code section 457(e)(11).  In that case, it is subject to the same tax rules that would apply to a nonqualified unfunded plan of a nongovernmental organization, except that it is exempt from Code section 409A.*/ Thus, a distribution is taxable when actually or constructively received.  26 CFR § 1.451-1.  And it is constructively received when it is "made available" to the employee.  26 CFR § 1.451-2.

*/ The 409A exemption is found at Proposed 26 CFR § 1.409A-1(a)(4).

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austin3515    210

So essentially, everything is taxable when they can request a distribution?  It just seems that this is going to be a train wreck to administer for us.  People with taxable income with no money/no withholding because they never responded to our paperwork.  Does that sound right?  Also, what about the gains accrued after the deemed distribution due to constructive receipt?  Do we need to issue a 1099 each year??  What a mess!! Is there a plan design feature that I'm not thinking of? 

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You might look at PLR 200918007 (May 1, 2009) for an example of a plan design.  In that case, monthly benefits started automatically when someone attained a particular age and service.

Another alternative would be to give the volunteers a one-time irrevocable election upon first participation in the plan as to when their benefits would be distributed.  Or to give them an election each year as to when the benefits accrued in that year would be distributed.

You could also pay out just enough to pay the tax at the point at which benefits were first made available.  However, as you say, this would involve a lot of administrative complexity in handling the gains.

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My 2 cents    254

I presume that if one is talking about a qualified plan (DB or DC), the ability to claim in-service distributions at Normal Retirement Age would never be considered to constitute constructive receipt.  The idea strikes me as ridiculous.  Are the rules different in 457 plans?

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6 minutes ago, My 2 cents said:

I presume that if one is talking about a qualified plan (DB or DC), the ability to claim in-service distributions at Normal Retirement Age would never be considered to constitute constructive receipt.  The idea strikes me as ridiculous.  Are the rules different in 457 plans?

Not under 457(b) plans.  But other nonqualified deferred compensation plans of  governmental and tax-exempt organizations are subject to a host of special rules.  In many cases, such a deferred compensation plan will actually result in taxation when benefits become vested, even if there is no constructive receipt at all.

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