Carol V. Calhoun

Yeah, at least in the 457 context, the rule is that an employee cannot delay the vesting of a voluntary deferral unless the new vesting date is at least 2 years after they original vesting date and the employee gets at least a 25% premium for delaying the vesting. The theory seems to be that no one would voluntarily defer an amount that they could get right away unless they got something extra for it. And if the delay in vesting were not recognized here, then the short-term deferral rule would not apply and we would need to ensure that the agreement met the 409A conditions. I'm not sure that the assumption that no one would delay vesting really applies here, in the sense that if the person got the money right away, it would be subject to the clawback. But it would seem prudent to comply with 409A. However, I'm not sure how one would comply with 409A. A particular issue in this regard is that Treas. Reg. § 1.409A-2 in general requires a deferral election to be made by December 31 of the year before the compensation is to be earned. There is an exception upon initial participation, but it requires that the election be made in the first 30 days of employment and apply only to compensation earned after that date--which would seem not to work in this case, since the compensation would be earned on the first day. There is another exception for an initial deferral election with respect to certain forfeitable rights, but it would apply only if the IRS were to recognize the delay in vesting (i.e., that the rights were forfeitable).

The California "stay or pay" rule effective January 1, 2026 will in general prohibit clawbacks when an employee leaves employment. However, under limited circumstances, the rule does not apply to a signing bonus. Among the conditions for it not applying is that the employee must have the option to delay the signing bonus until the end of the retention period. Has anyone thought about the taxation of the signing bonus if it is deferred? Presumably, if it is considered "made available," it would be taxed immediately upon hire, even if the employee elected to defer it until the end of the retention period. And a signing bonus that is actually paid is taxed upon payment, even if it has to be returned if the employee doesn't stay until the end of the retention period, so presumably the same rule would apply to a bonus that is made available. In the 409A context, presumably in order to avoid this issue, a deferral is recognized only if it is made within the first 30 days, and only if it relates to compensation earned after the election. But a signing bonus is earned upon signing, so that wouldn't work here. Any thoughts?

Thank you, @John Feldt ERPA CPC QPA!

@Peter Gulia, oh, I know we won't have the official figures for a while. But in past years, people have been able to use @Tom Poje's spreadsheet to project the limits once the BLS came up with its numbers. @John Feldt ERPA CPC QPA, are you yet able to do that?

Any update on this, given that we're now into October?

Section 409A applies only if it is a deferred compensation arrangement. A short-term deferral is defined as not being a deferred compensation arrangement. And the short-term deferral rule applies so long as the amount under a 457(f) arrangement is paid within 2½ months following the year of vesting. So a normal 457(f) arrangement in which amounts are paid on vesting isn't a deferred compensation arrangement, and can follow just the 457(f) rules, not the 409A rules. The only time you have to worry about the 409A rules in the context of a 457(f) arrangement is if there is deferral beyond the year of vesting. I have seen this most commonly in situations in which the employer wants to provide an annuity payment. What you'd typically do in that situation is to provide that only an amount necessary to pay the 457(f) tax (which is the tax on the present value of the annuity) is paid in the year of vesting. Thereafter, the person receives the annuity payment each year. The annuity is taxable under section 72, meaning that most of each payment is nontaxable (the tax already having been paid in the year of vesting). In that situation, you have a deferred compensation arrangement. So if, for example, you wanted to delay the start of the annuity payments, you'd have to follow the 409A rules. But if you're just talking about delaying vesting (and still paying out in the year the amount finally vests), you don't need to worry about the 409A rules.

Yes, it can be. But the existing benefit forms must be preserved, at least with respect to the portions of people's accounts derived from contributions made prior to the change. So even though the plan is now a PSP, it will be paying life annuities/joint and survivor annuities.

You can't merge a 401(a) plan such as a money purchase plan with a 403(b) plan. You could leave the money purchase plan in place for the old money and just have the new money go into the 403(b) plan, but that would involve a lot of administrative hassles. Or you could terminate the money purchase plan and allow people to take their money, potentially with an option to roll it over into the 403(b) plan.

I'm trying to figure out the rules when a plan is terminated just before the employer is acquired, and its employees are thereafter covered by the acquirer's plan. Let's call the acquired company A and its plan, Plan A. The acquiring company's plan is Plan B. The IRS site says that the 415 limit is prorated for a terminating plan, but not in the case of an individual who joins a plan late in the year. And of course, plans of a single employer are combined. In this case, presumably Plan A must apply a prorated 415 limit to contributions made before its termination. But because the employees of A have been employed by the same entity all year, and Plan B did not have a short plan year, presumably Plan B must combine its benefits with those of Plan A in calculating the 415 limits for Plan B. But does the reverse apply? Must Plan A combine its benefits with those of Plan B in calculating the 415 limits for Plan A? Common sense would seem to say no. Plan A had a short plan year, and no contributions were made to Plan B on behalf of A employees during that short plan year. But I haven't found authority directly on point.

Absolutely! The money in a 457(b) plan is technically part of a "rabbi trust," which is treated for tax purposes as if it was owned by the employer. So if the money gets paid out of that trust, it's still the employer's obligation to report it on the W-2 at the end of the year. No need to have it make a pit stop in an account of the employer on the way out of the rabbi trust before going to the participant.

Thank you, @EBP! That is very helpful.

We represent a company that is about to acquire all the assets of a company that has been a pre-approved plan provider. Our client would like to continue that business. Obviously, our client is not so far on the list of entities with pre-approved plans. And waiting until they could their own opinion letter (presumably Cycle 4 at this point) would mean losing a lot of potential business. What do entities in this situation do? The existing plans shouldn't be any less qualified due to the change in provider. But a) is there any procedure under which an employer which adopted such a plan as provided by our client would have the protection of the opinion letter issued to the former provider, and b) as a business matter, what has people's experience been concerning the willingness of employers to adopt a plan from an entity not on the IRS list of approved pre-approved plan providers?

For some definition of "fun"... 🤣

Alas, I haven't looked at that issue. The governmental plans I represent tend to be larger ones, with different benefit structures for different job classifications, different benefit structures for people hired during certain time periods, sometimes different contribution options to be chosen at initial hire, different interrelationships with corresponding DC plans, etc., so they would not be amenable to a pre-approved structure.

Unfortunately, it has not. I have said for years that this is something that needs to be changed. It's one thing to push employers to use pre-approved plans for their standard 401(k) plans. But no one is developing pre-approved governmental defined benefit plans, if only because the plans have such differing terms and often Constitutional barriers to any changes. And I have seen governmental plans whose determination letters date from before the Internal Revenue Code of 1954. Obviously those letters can't exactly be relied upon now, but governmental entities really have no choice.