Carol V. Calhoun

Here is a link to the full text of Revenue Ruling 90-24. As you will see, the ruling governs the tax consequences if a transfer is made, but does not give the employee a right to receive a transfer not permitted by the employer or by the relevant contract.

"Thrift plan" typically means a plan that provides for an employer match of employee pretax deferrals. As far as making transfers, it depends on the employer's policy, the terms of the relevant contracts, and (if the contract is an annuity contract, or the employer is a governmental entity) applicable state and local law. Although the Internal Revenue Code permits an employer to allow plan-to-plan transfers, it does not require an employer to make them available.

A for-profit company cannot have a 403(B). However, a not-for-profit can have a profit-sharing plan. Internal Revenue Code section 401(a)(27)(A).

I can vouch for that--she and I were on the same panel.

Hmm, are we supposed to be able to predict what Congress is going to do? The experience so far is that they will act sometime between 3 months and 5 years--or never. Certainly, the IRS is going forward with regulations on the assumption that any technical correction is not imminent.

Your employer can, but is not required to, offer an installment pay-out as an alternative to a lump sum payout. This would enable you to spread the payments (and the tax) over a number of years. Indeed, under the EGTRRA rules, you could be given an option to elect to take only the distribution you wanted each year after retirement, so long as you took at least the minimum required by Code section 401(a)(9). However, because none of this is mandatory, you'd have to speak to your employer about allowing it. The only other option for deferring taxes would be a direct transfer to another 457 plan, since rollovers from nongovernmental 457 plans are not permitted. However, a direct transfer is typically not a practical alternative, since it requires that you be covered under a new 457 plan that allows for direct transfers into it at the time you are entitled to receive your distribution under the old plan.

Without commenting on your specific case (particularly in light of the fact that I represent employers and plans, not employees), I will say that there has been an overall issue about how the new 457(g) rules apply to existing contracts. In 1996, 457(B) plans were required to be unfunded, so the exclusive benefit rules did not apply to them. Nevertheless, in many cases, benefits were measured by the performance of an annuity contract owned by the employer (or treated under tax rules as owned by the employer). On January 1, 1999 (the date on which the 457(g) rules began to apply to existing governmental 457(B) plans), employers were often faced with the choice of (a) removing money from existing contracts, which might well have involved incurring surrender charges at that point, or (B) leaving the money in the existing contracts, and removing the provisions that caused them to be treated as owned by the employer. Regardless of whether those contracts would have met the 457(g) standards had they been originally purchased after January 1, 1999, in many instances employers decided that it was better for employees to leave the money where it was (and let the surrender charges wear away with time) than to move money that was already in annuity contracts.

Why would the court order not be a QDRO? For a plan subject to ERISA, compliance with a court order that is not a QDRO is impermissible. Assuming that the court order is a QDRO applicable to an ERISA plan, or a domestic relations order applicable to a governmental or church plan, a spouse who is an alternate payee is treated as the distributee, and therefore permitted to make rollovers if the distribution is otherwise eligible for rollover. (Code section 402(e)(1)(B), as incorporated by reference in Code section 403(B)(8)(B) for QDROS; Code section 414(p)(11) for domestic relations orders applicable to governmental and church plans.)

The only thing I can really point you to is Internal Revenue Code section 403(B) itself, which says that the contract is to be owned by the employee.

The most common reason the employer would want to do this (assuming that the amount of contributions is fixed in the plan document) would be if the employer wanted to avoid the expenses often associated with purchasing a life annuity by providing only a lump sum distribution option. Whether this works may be open to some question. At one point, the IRS took the position that a plan could be a profit-sharing plan only if contributions were dependent on profits. The provisions of the Internal Revenue Code dealing with qualified (401(a)) plans have now been amended to say that this is unnecessary. However, no amendment has been made to the provisions governing 403(B) plans. However, this is a technical issue for the plan (one on which reasonable people can disagree). It is unlikely to make a significant difference to you. Very few people actually choose an annuity form of benefits under a 403(B) plan if a lump sum is available. Obviously, these are only general statements, not legal advice, since I don't know the specific facts of you, your employer, or this plan. If you want to know specifically what this plan provides, you might ask your employer for a copy of the plan document. If you want legal advice, you'd need to speak to a lawyer. In the interests of full disclosure, I am a lawyer myself, but I do not represent employees.

This is bizarre! I saw several responses up to this post, but they have now disappeared. In any event, I think the primary point that was made was that you have to look at the overall situation. If the only way to change investments is to jump vendors, you would probably want to allow people to change more than once a year if the plan is maintained by an ERISA-covered employer, for the following reasons: If the plan is intended to qualify for the exemption from ERISA for salary-reduction-only plans, you have to offer a reasonable choice of investments, and the DOL might look to ERISA section 404© regulations by analogy in determining what was reasonable. If the plan is actually subject to ERISA, ERISA section 404© would apply directly. And ERISA section 404© generally assumes that an employee must have at least a quarterly option to change investments (or more often in the case of more volatile investments). In the case of a governmental employer, you would want to look at applicable state or local law. However, many state courts have looked to ERISA-type standards in applying state and local law, if local law does not provide more specific standards. The situation is different if an employee has a reasonable variety of choices from each vendor. In that case, frequent options to change vendors might not be necessary. However, you would still want to make sure that there was some procedure for changing vendors if a particular vendor's products became imprudent, e.g., due to changes in the vendor's financial situation.

If there is only one participant left in the contract, probably the simplest thing to do would be to transfer the contract into the name of that participant. There would be no impermissible "distribution," because the assets would stay in the contract. However, the employer would have nothing left to administer, because the participant would own the contract.

Any 457 or unfunded deferred compensation plan of an ERISA-covered employer must cover only a top hat group. That includes an unfunded deferred compensation plan of a private corporation (which would not be a 457 plan), or a 457 plan of a nongovernmental, nonchurch tax-exempt employer. Even though a nongovernmental, nonchurch tax-exempt employer is an "eligible employer" for 457 purposes, section 457 prevents such an employer from funding the 457 plan, and Title I of ERISA prevent the employer from extending an unfunded plan to anyone outside of the top hat group.

Internal Revenue Code section 457(e)(1) defines an "eligible employer" as follows: Internal Revenue Code section 457(e)(13) provides the following exception: An "ineligible employer" would be any other employer, e.g., a church, a federal government agency, or a for-profit corporation.In order to be an "eligible plan," a plan needs to meet all of the requirements of Internal Revenue Code section 457(B), including the requirement that the employer be an eligible employer.

If the two employers have now become related, they could clearly share one plan. Even if they have not, sharing one plan would merely mean that it would be a multiple employer plan--still probably not a legal problem.

It would appear to me that you would not really need a rollover, so long as the carrier would agree to separate the group annuity contract into individual contracts. This would appear to be more like a plan-to-plan transfer, which is permissible even without a distributable event so long as all of the 411 rights are preserved. And once the individual contracts have been transferred to the employees, the Form 5500 obligation should go away, as it would in the case of a terminated qualified plan after the benefits had been provided for through annuities. However, as with so much in this area, there is no definitive guidance.

Thanks for the clarification! I'm also dealing with a statewide plan that is in the same situation, and that has specifically flagged this issue in its determination letter request. As far as I am concerned, this should be a question of interpreting what state law requires, and the IRS is not in a position to change that. But the issuance of this figure does leave governmental plans with some tough choices to make.

My major concern would be whether there are any state legal or constitutional issues in amending the plan, particularly retroactively. Many state courts have held that a plan may not be amended in such a way as to disadvantage existing employees, even with respect to accrual of future benefits. To the extent that a change was retroactive, and unfavorable to any existing employee, this could be an issue. Of course, under a strict interpretation of this rule, even a change that was made before 2002 could create a problem, if it applied to individuals who were already employed at the time of the change. Fortunately, few of the recent changes have been unfavorable, so this has not been much of an issue in this set of changes. In the past, depending on the state, we've used various arrangements (e.g., excess benefit plans or simultaneous changes to 401(a) plans to restore lost benefits) to deal with these issues.

Hmm, last year the numbers (including the number for grandfathered governmental plans) all came out in News Release IR-2000-82 (November 20, 2000). The year 2000 limits (including that for grandfathered governmental plans) came out as News Release IR 99-80 (October 20, 1999). The year before that, all the limits were in News Release IR 98-63 (October 26, 1998). Is there a reason to believe the limits will come out separately this year?

Obviously, a lot depends on individual circumstances (e.g., what providers are available for each type of plan, and what their fees are). However, in general, for most small 501©(3)s that already have a 403(b) plan, switching to a 401(k) does not make sense. (Have I put enough lawyer weasel words in there yet? ) With regard to SEPs, I deal mostly with larger employers and plans, and none of my current clients have SEPs. Thus, I haven't looked at the rules recently enough to even hazard a guess. However, perhaps someone else here will have a response. Or you could try the SEP, SARSEP and SIMPLE Plans board. Good luck!

You might find the chart available by clicking this link helpful. The main reason for considering a 401(k) plan over a 403(B) plan would be if the 501©(3) organization were part of a controlled group with one or more organizations that were not 501©(3) organizations, and wanted to be able to have one plan for all members of the controlled group. This would be particularly true if some individuals worked for more than one member of the controlled group, since allocation of compensation (and by extension, contributions to a 403(B)) can be complicated in such cases. However, there is no provision for transferring or rolling over money from a terminating 403(B) to a 401(k). Thus, if you want to keep old and new money in the same plan, you'd need to just continue the 403(B).

I would agree that this technique is permissible. Indeed, I recently did an outline in which, among other things, I described this technique, and the reasons for using it. (See Section III of the outline.)

Thanks for the update, MGB! Has your firm (or anyone else you know of) calculated the amounts unofficially, even though IRS has not yet issued them officially?

As a practical matter, I always urge even non-ERISA 403(B) plans to try to comply with ERISA section 404© to the extent possible. This is because the exemption from ERISA in ERISA Reg. § 2510.3-2(f) for section 403(B) plans applies only if employer involvement is limited to certain specified actions, including "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." In the absence of much specificity in the regulation as to what a "reasonable choice" is, the conservative course would be to try to come up with a choice of investments that would meet the 404© guidelines if they applied.

Noidy, that is what I'm saying. I'm not saying it makes sense, just that this appears to be the state of the law.