Carol V. Calhoun

Surely the 2009 amendment should have taken care of the PPA changes? Short answer is yes, PPA did make some changes to 403(b)s. Here's a link to a TIAA-CREF description of them. And there have been other changes since then, e.g., compliance with the Windsor decision, rollover rules, and HEART Act rules. Of course, this is all complicated by the fact that there is no determination letter program for individually designed 403(b) plans, and even the determination letter program for prototype plans was only established in 2013. However, it is now possible to make a VCP submission for a 403(b) plan. You might consider that in your situation.

Sorry, I'm here! The problem you've got is that there is no program similar to EPCRS for nongovernmental 457(b)s.So you really can't get an answer, until and unless there is an audit. The amount should have been reported on the W-2 in 2009. However, given that both the statute of limitations will have passed on both the employer and the employee, I don't know that you need to do anything about that now. One question is whether you now pay him only the amount that should have been paid in 2009, or some kind of earnings since then. Payment of the earnings could generate a new reporting obligation. As for the plan, in theory the IRS could go after it, but I doubt it would. It's not like a plan with a trust fund, in which tax benefits have been accruing to the plan all these years (due to untaxed earnings on account balances). In the case of a nongovernmental 457(b), the plan for each employee is more or less self-contained. (The tax consequences of one plan for each employee, or one plan for the whole group, would be identical.) So it wouldn't make sense to remove the tax benefits to current employees due to something that happened to a different employee back in 2009.

There is nothing comparable to 409A's change in control provision under 457(f), because the two statutes are structured quite differently. 457(f): Benefit is taxable in all events upon lapse of a substantial risk of forfeiture. 409A: Benefit is taxable upon lapse of a substantial risk of forfeiture only if the requirements of 409A are not met. Among the requirements of 409A is that the benefit be payable on one of several events, one of which is a change in control. So while the definition of substantial risk of forfeiture is similar (though not identical) in 409A and 457(f), the change in control rules in 409A (which have nothing to do with substantial risk of forfeiture) have no application to 457(f).

A 403(b) plan need not have participant investment direction. You're not finding authority on it only because 403(b) sets forth all the requirements, and doesn't include that one. So you're not going to get cases or authorities on the issue of whether it's required, because there is simply no basis for requiring it. That being said, there are two limitations. First, in a nongovernmental, nonchurch plan, there is an exemption from ERISA that applies only if certain conditions are met. See 29 C.F.R. §2510.3-2(f). Among the conditions for that exemption are that employer involvement in investment decisions must be limited to "limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances." So if there is no participant investment direction, the ERISA exemption would not be available to a nongovernmental, nonchurch plan. Second, if the employer makes all the investment decisions, it may have greater potential for fiduciary duty than if participants choose their own investments.

A top hat plan does not have "investments" as such; life insurance, etc. is used only to measure the amount payable from the employer's general assets. So long as the contractual requirements were complied with, there shouldn't be an issue. And I'm assuming that the employees who chose life insurance already know that they did, and that other employees already know that they can't. I'd be a little more concerned about a governmental. They have a formal trust, and cover a broad range of rank and file employees. You'd have to look at state law regarding what disclosure obligations they have. But I'd be inclined to put something in the plan at least saying, "Effective [date], no further investment in life insurance is permitted."

Yes. Regardless of whether they are treated as employer or employee contributions, they count toward the $53,000 limit.

We've got the same "substantial risk of forfeiture" standard in 457(f). And the new proposed regulations under that section impose conditions before a voluntary deferral or rolling risk of forfeiture works, but they allow it in at least some situations. Since 83(b) seems generally to be a more liberal standard than 457(f), you'd think it should also be allowed in 83(b) situations. But I can't find any guidance on the issue.

A hardship withdrawal stamdard is actually a more lenient standard than unforeseeable emergency. It allows for things like tuition, purchase of a home, etc., which are foreseeable. A governmental 401(a) plan can allow for the more lenient hardship withdrawal standard. If it wanted to, it could allow for only unforeseeable emergency withdrawals--nothing prevents you from not allowing withdrawals at all, or imposing a stricter standard than the law requires. It's just a question of them not wanting to.

I don't have a specific citation, but I know IRS officials have in the past been very negative about adding a single employee, as opposed to a class of employees, to satisfy coverage problems. The fear is that you add the lowest paid employee, then make the maximum contribution on behalf of that employee, and you've satisfied your tests at minimal expense, without actually giving meaningful benefits to lower paid employees. Allowing the inclusion of specific employees, as opposed to a class of employees, would also raise the concern that the employer could be quietly imposing, for example, age and service conditions in excess of those permitted, by picking and choosing specific employees to cover. If this is the case even in normal 410(b) testing, it's unlikely the IRS would accept it as a correction method.

Yep, sorry, I was referring to an old post, not old regulations. I've spent the last week mired in these regulations, and my brain is going.

Proposed 457 regs. And yes, I'd agree that anything (match or earnings) that increases the value by more than 25%, and meets the other conditions, would work.

No. A controlled group requires at least 80% ownership in the case of a taxable organization. In the case of a tax-exempt, common control exists between an exempt organization and another organization if at least 80 percent of the directors or trustees of one organization are either representatives of, or directly or indirectly controlled by, the other organization. So regardless of whether we're talking about stock ownership or interlocking boards, neither A nor B would be part of a controlled group with the JOC.

This is only indirectly about 409A, but I'm looking for guidance when both section 83 and 409A apply to a plan. Has anyone thought about whether an employee can voluntarily delay the lapse of a substantial risk of forfeiture under section 83? Regulations under 409A and 457(f) deal with this issue, but I can find nothing under section 83. Example: Jane is given restricted stock as part of her compensation. She must forfeit the stock unless she remains with the employer for at least five years. She does not make an 83(b) election. When the end of the five-year period is nearing, she decides that she would rather take the risk of forfeiting the stock rather than paying the income tax right now. She therefore agrees with her employer that the stock will be forfeitable unless she remains with the employer for at least another two years beyond the five-year period originally provided for. Does this work to defer the taxation? Obviously, if you did this, you'd want also to comply with the 409A rules governing second deferrals, but I'm just trying to figure out whether it's even possible under section 83.

I know this is old, but the proposed 457 regulations deal with this issue. They allow elective deferrals only if the election meets all of the following requirements: The present value of the amount to be paid upon the lapse of the substantial risk of forfeiture must be materially (at least 25%) greater than the amount the employee otherwise would be paid in the absence of the substantial risk of forfeiture. The substantial risk of forfeiture must be based upon the future performance of substantial services or adherence to an agreement not to compete. It may not be based solely on the occurrence of other types of conditions (for example, a performance goal for the organization). However, if there is a sufficient service condition, the arrangement can also impose other conditions. For example, the substantial risk of forfeiture could continue until the later of two years or when a performance goal was met. The period for which substantial future services must be performed may not be less than two years (absent an intervening event such as death, disability, or involuntary severance from employment). The agreement subjecting the amount to a substantial risk of forfeiture must be made in writing before the beginning of the calendar year in which any services giving rise to the compensation are performed. Special rules apply to new employees (but not to employees who are newly eligible to participate in a plan). Prop. Treas. Reg. § 1.457-12(e)(2).

Has anyone thought about whether an employee can voluntarily delay the lapse of a substantial risk of forfeiture under section 83? Regulations under 409A and 457(f) deal with this issue, but I can find nothing under section 83. Example: Jane is given restricted stock as part of her compensation. She must forfeit the stock unless she remains with the employer for at least five years. She does not make an 83(b) election. When the end of the five-year period is nearing, she decides that she would rather take the risk of forfeiting the stock rather than paying the income tax right now. She therefore agrees with her employer that the stock will be forfeitable unless she remains with the employer for at least another two years beyond the five-year period originally provided for. Does this work to defer the taxation? Obviously, if you did this, you'd want also to comply with the 409A rules governing second deferrals, but I'm just trying to figure out whether it's even possible under section 83.

Okay, back to your original question. Yes, a "person" includes a corporation. So if the JOC has control of all of C, D, and E, it will be in a controlled group with all of them.

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.

One of the interesting things about 457 is that the "elective deferral" limits apply regardless of whether the contribution is in fact elective. Even leaving aside the catch-up, the 402(g) limits apply only to elective deferrals in 401(k) or 403(b) plans, but to all contributions to 457(b) plans. In most instances, this is a down side to 457 plans. (For example, an employer match gets counted against the limit.) But it does suggest that the catch-up can be used even for nonelective contributions--assuming, as Peter says, that you have checked state law and it does not create a problem.

But if C, D, and E are 501©(3)s, they shouldn't have stock. No part of their net earnings can inure to the benefit of shareholders, so stock ownership would be meaningless. For that reason, the controlled group rules with respect to 501©(3)s are based on things like interlocking boards of directors, not stock ownership. See Treas. Reg. § 1.414©-5.

Picked up contributions are treated as employer contributions. So they could not be the subject of an in-service refund until the earlier of age 62 or normal retirement age. Merely transferring from a collectively bargained position to one that is not collectively bargained, or ceasing to be covered by the plan, wouldn't help.

Umm, how does JOC "own" 501©(3)s? It's rather in the nature of a 501©(3) that it can't be owned.

Are these picked up contributions, or after-tax employee contributions?

There really hasn't been any guidance issued. All they've said is, "under current guidance, a reasonable, good faith interpretation standard applies with respect to governments. See Notice 89-23, 1989-1 C.B. 654, and Notice 96-64, 1996-2 C.B. 229, see §601.601(d)(2) of this chapter." Announcement 2011-79. (The announcement deals specifically with Indian Tribal governments, but seems to be applicable to governmental plans generally.) Personally, I'd be a bit wary of treating a city and a board of education for that city as separate employers, and thus treating the teacher as having had a termination of employment. But you know your client's risk tolerance better than I do.

Are you talking about a 401(a) plan or a 457 plan? This is in the 457 topic, but appears not to relate to a 457 plan. Since you say it's a non-ERISA plan, what kind of plan is it? Governmental? Church? We have forums for both governmental and church plans, so you might want to post in the appropriate one.

Does anyone have experience with what IRS will accept as a correction when participants were offered investment options that the plan document did not permit? Situation is that participants were allowed to self-direct their own accounts. The trust document specifically said that they could not self-direct to a limited partnership. The trustee nevertheless permitted participants to do this. The failure is probably not "significant," and even if it were, we're probably within the time for correcting a significant operational failure, so we should be able to use SCP. However, even under SCP, we're supposed to correct the failure. And we have no idea how to do this. IRS guidance says that amending the plan to retroactively cause it to reflect what was actually done is available only in three specific situations, none of which is this one. So presumably, we're supposed to retroactively take these people out of the limited partnerships. But how would we even do this? Presumably, they would argue that but for being allowed to invest in the limited partnerships, they would have invested in whatever, with 20/20 hindsight, has proved to be the most favorable option. But if the employer makes a contribution equal to the income they "lost" by not being in the most favorable option, that contribution would go to the most highly compensated employees (because they were the ones most likely to choose the limited partnership option), which doesn't sound right. But if we retroactively put them in the default option, I'm concerned with a 404© or other ERISA violation (not to mention, severely ticked off employees if that is less favorable than the limited partnerships). Any other options? Or has anyone had a failure that was significant enough and had gone on long enough that they had to go in under VCP, and thus gotten some IRS guidance on how to fix this?