PLR 200430013-Federal Credit Unions and 457

[Guest dietpepsi]

Any thoughts on PLR 200430013? This seems to be a very strange ruling to me. Also, in the IRS Priority Guidance Plan for 2004-2005 it says one of the priorities is guidance under sections 457(b) and 501©(1) on plans established by federal credit unions.

Did anyone even know this was an issue? I didn't until yesterday.

I know of several federal credit unions with tax exempt 457(b) plans.

[Guest chicago]

The PLR is quite straightforward. Because of the legal structure i.e., "United States instrumentalities..." of these institutions they must be treated as (federal) government employers for the Code 414(d) and ERISA. Does anyone have a different conclusion?

[mbozek]

Isnt the question whether the rules of IRC 457 would apply to any employer that wants to establish a deferred comp plan? Since 457(b) is a statutory form of constructive receipt for those non profits subject to section 457 which is more restrictive than the constructive receipt rules of IRC 451, why cant any employer adopt the more restrictive rules of IRC 457(b) for a deferred comp plan? A profit making er could limit deferrals to 13k a year and require that payments be made under the 401(a)(9) rules and claim deductions when the payments are included in the employee's income because these provisons do not violate IRC 451. If 457 does not apply to fed credit unions then what would prohibit a credit union from establishing a non qual plan that permits deferrals in excess of 13k under IRC 451?

[Guest chicago]

Federal employers are not eligible for 457 - see 457(f). Argueably, non qualified plans for a selct group might be established subject to 451. However, I would like to hear from people who deal in the other aspects of federal regulation of credit unions on whether other issues are raised. Loans? Can rabbi trusts be established?Also since apparently no one ever asked IRS for a ruling on the status of these plans have the plans ever been fully presented to the regulators for an opinion? I don't think anyone would be prudent to put in a non qualified plan for select group without a PLR. (I trust all the current plans reserved the right on the part of the employer to terminate unilaterally, otherwise contractual issues?)

However, executive compenation is only one issue impacted by the PLR and is probably not going to be the most important to the institutions.

What is the status of the ineligible 457(b) plans?

What about the qualified plans that are subject only to the IRS provisions applicable to government employers? Valid?

PBGC coverage?

ERISA health care provisons?

Should employees be informed of their changed status as covered employees under ERISA?

[mbozek]

Prior to the extension of IRC 457 to NP entitities in 1986 IRS permitted NPs to establish nonqualified deferred comp plans for employees- See Rev Rul 73-126. Since IRC 451 applies to taxation of employees who are not subject to 457 why cant an employer establish a nq plan under 451 which follows the requirements of 457(b) e.g., 100% vesting of all deferrals? The fact that an employer is not subject to 457 doesnt mean that it cant establish a plan that follows the requirements of 457 under the broader rules for establishing a plan under 451.

[Guest flogger]

I just got back from the Mountain States Benefits Conference where Martin Heffron (IRS) stated most clearly that 457's are not available to federal credit unions because they are an instrumentality of the federal government, per the afroementioned PLR. While we have known about this PLR for some time (came out in 4-2004), it is only a PLR. For the IRS to site this as authority is a little out of line, I believe, because it is a PLR.

If a 457 (and that would include both 457b and 457f) is not available to fed credit unions, then what is? I think you have to then look to 451, and those terms are more favorable than 457.

Our office really thinks there's a good chance that the guidance to be offered this year will in effect redact the PLR. If your office is concerned about this, you can always (and hopefully soon) comment to the IRS regarding this situation. We are continuing to market 457s to Fed CU with the caveat of the PLR info. (But it's a pretty tough sale!)

[mbozek]

There are only two possible options:

1. If the rules for 457 do not apply a fed credit unions then the rules of IRC 451 apply to the deferral of comp by employees e.g., no limit on deferrrals.

2. A fed credit union could establish a non qualified plan under IRC 451 which incorporates the requirements of IRC 457, e.g., deferrals cannot exceed 13k, distributions must be made under 401a9 rules, etc. without being established under IRC 457 because there is nothing in IRC 451 that prohibits a plan from substituting the more 457 stringent rules. A profit making er could also establish a nq dc plan which meets the requirements of IRC 457 (other than the provision permitting tax free transfers between 457 plans) since it would meet the requirements of IRC 451.

Other than stating that a fed CU could not establish a non qual plan labled as a plan established under IRC 457, the ruling dosent have any impact on nq DC plans of Fed credit unions.

[davef]

You can also read about this in the Credit Union Times (http://cutimes.com/archives/default.asp?week=2), but I had the chance to talk with the IRS several weeks ago about the need for additional guidance on the PLR. This is on the IRS' Priority Guidance Plan, so something should be issued in the near future -- at least by 6/30/05. The IRS gave no indication that it would reverse its position in the PLR.

One point that the IRS made was that FCUs should not view the PLR as putting them on notice that they need to amend their exisitng 457 plans or can't set up a new one. Any transition rules will be on a prospective basis.

As far as FCUs having the option of applying the stricter 457 rules, the IRS noted that if the 451 rules apply to FCUs (they would not commit to that right now), then the more favorable deferral election rules under 457 could not be used. Deferral elections under 451 would need to be made further in advance than those permitted under 457.

[Guest flogger]

Here are some other issues that I believe are ignored by the IRS PLR. First it says that FCU are a federal instrumentality. What gives the IRS the authority to rule on this? This determination should be made elsewhere, like in the courts. I don't know of any promulgation that allows the IRS to dictate this.

Second, they are saying the FCU cannot have a 457(b). It says nothing about 457(f). And (f) only applies as exceptions--and only to ineligible plans for eligible employers with some exception therein.

So what's to prevent a FCU from having a DB type Plan, with a lump sum option at retirement? Nothing that I can see. However, what sections, if any, would apply to taxation rules?

[mbozek]

Since a taxpayer can always withdraw a request for a ruling before an adverse ruling is issued you have to assume that the clever lawyer who obtained the ruling wanted it as confirmation that the CU could establish a NQ plan that was not subject to the 457 rules, e.g., plan could have vested deferrals in excess of 13k or provide for a db type benefit under IRC 451 (a SERP). No client would go through the expense of obtaining a ruling just so executives can defer 13k a year.

Also only NP which are "governmental units" are not permitted to have 457 plans, not instrumentalities as defined in IRC 501©(1). A NP which is a govt unit has been understood to mean a 501©(3) entity e.g., a hospital, which is owned by a municipality.

[davef]

There are several court cases that have stated that FCUs are federal instrumentalities. See, for example, US v. State of Michigan, 851 F2d 803 and TIFCU v Delbonis, 72 F3d 921.

The PLR does not specifically apply to just 457(b) plans. It focuses on whether a FCU is an "eligible employer" under 457(e)(1)(A) or (B), and concluded that it is not an eligible employer. So, a FCU is not subject to either 457(b) or (f).

I've had conversations with the attorney who requested the PLR on behalf of the FCU. As mbozek correctly assumed, the PLR would not have been requested if the FCU had wanted to be subject to 457. You may have noted a reference in the first paragraph of the PLR to a ruling request that was withdrawn. According to the attorney, that ruling request asked what Code section would apply if 457 didn't. According to the attorney, the IRS requested that he withdraw that request, since they hadn't sorted through all the issues and it would have significantly delayed the issuance of the PLR.

In our conversations with the IRS, they said that when the recent 457 regs were being drafted, they added the word "instrumentality" to the definition of "eligible employer" with the intention of further defining what a "governmental unit" was. That's why the statute only mentions "governmental unit" whereas the regs include "instrumentalities."

[Guest flogger]

The court case you cited, Delbonis, states:

'We think it evident, based on this, that 11 U.S.C. § 101 encompasses federal credit unions as federal instrumentalities, but refrain from making a categorical holding to that effect at this juncture."

This hardly seems like authority.

Otherwise, I agree with you 100%.

[Guest LBBarr]

Two observations:

!. A 1989 Legal Opinion authored by the National Credit Union Association provides that, based upon a discussion with employees of the IRS, it is the informal opinion of the National Credit Union Association that for purpose of deferred compensation plans a federal credit union is not a federal instrumentality and that any plan offered by a federal credit union is not a government plan. Therefore, a federal credit union would be eligible to establish a qualified Code §457 plan. (The intent of the letter was to be able to state that a federal credit union is not a federal instrumentality because for purposes of establishing a qualified plan at that point in time a tax exempt organization could not set up a 401(k) plan and, therefore, would want to take advantage of Code § 457). The letter however qualifies itself by stating, “We strongly suggest that you obtain an opinion from the IRS on this matter. . . . we suggest that you consult with the IRS and a private attorney for a final resolution of this matter. You may wish to request a revenue ruling from the IRS.

2. If not covered by 457(b) presumably 409A would apply.

Any additional thoughts or news on this issue