Carol V. Calhoun

Under 457, "deferrals" includes employer nondiscretionary contributions, as well as salary reduction contributions. This is different from the situation for 401(k) or 403(B) plans. As Everett says, the big issue is plan interpretation; the IRS imposes few constraints.

In my earlier post, I had obviously made the opposite assumption, primarily because use of the term "executives" is pretty rare among governmental plans. (Since there is no separate 457 board, this one tends to get all the 457 questions.) However, I just got an e-mail from John, saying that the plan he is discussing is a governmental plan. Given that fact, the definition of compensation is regulated by the Internal Revenue Code only for very limited purposes (e.g. the 100% of compensation limit of section 415©), the 415(B) percentage of compensation limit would not apply, and the nondiscrimination rules would not apply. Thus, you could include section 457(B) deferrals in the definition of compensation for purposes of calculating benefit accruals under a defined benefit plan.

Definitely not! Deferrals under a nongovernmental section 457(B) plan are not part of compensation for purposes of the nondiscrimination rules of Code sections 401(a)(4), 410(B), etc. Treas. Reg. § 1.415-2(d)(2); incorporated by reference in Code section 414(s). And because a nongovernmental 457(B) plan must be limited to highly compensated or management employees, adding in the deferrals would favor such employees as compared with nonhighly compensated employees, thereby creating problems under the nondiscrimination rules.

Does anyone find it a little scary that there are two people who spend New Year's Day discussing employee benefits?

I haven't seen one that offers training solely on 457(B) plans. ALI-ABA does an annual conference focused on plans of tax-exempt and governmental organizations, which is available either in-person (unfortunately, only in Washington, DC) or through audiotapes and course materials. It is normally given in September, although the one for 2001 was delayed until December due to the September 11 events.

Okay, I got a bit tangled up in terminology here. What I meant was just that a direct transfer between 403(B) plans, or from a 403(B) plan to a defined benefit plan to purchase service credit, should be allowed, even when there has been no distributable event. This has, apparently, been a point of controversy among those drafting the regulations dealing with transfers to purchase service credit. Because a rollover requires a distribution, it can occur only when a distribution is otherwise permissible. I'll leave it to Joel as to whether this was what he meant.

The authority for this would be Treas. Reg. § 1.402©-2, Q&A-9. This in turn is based on section 402© of the Internal Revenue Code of 1986, as added by sections 521 and 522 of the Unemployment Compensation Amendments of 1992, Public Law 102-318, 106 Stat. 290 (UCA). The rule would therefore apply to distributions from 401(a) plans. Section 403(B) also incorporates this rule by reference.

Hey, I'm convinced--I just wish IRS didn't seem to be having such trouble with this.

It could be the plan document, or it could be the contracts for the investments (e.g., mutual funds or annuity contracts) in which the plan invests. However, Rev. Rul. 90-24 would not by its terms prohibit such transfers.

The 457(B) trust fund cannot be part of a 401(a) pension fund. However, it is very common for a board of trustees of a state pension fund also to serve as the board of trustees of a statewide 457(B) plan, provided that applicable state law allows this. And in fact, if state law permits, the two plans can both invest in a group trust described in Rev. Rul 81-100, as modified by Code section 401(a)(25), if it is desired to have them invest as a unit. (Of course, you would want to look at state laws to determine whether the combined trust would be an appropriate investment for each of the participating plans.)

Compensation for purposes of applying section 401(a)(17) to nondiscrimination rules is determined on a plan year basis. Treas. Reg. § 1.401(a)(17)-1(B). Thus, in your example, the person would accrue $170,000 in compensation (i.e., the actual compensation for the first 6 months of 2001) for the plan year ended June 30, 2001, then would accrue another $170,000 (the 401(a)(17) maximum for the last plan year beginning before December 31, 2001) for the plan year ended June 30, 2002. However, there are different years used for different limits. For example, in applying the section 415 limits, the compensation used is the compensation for the limitation year set forth in the plan, or if none, the calendar year. Treas. Reg. § 1.415-2(B). Thus, you always need to look at the rules for the specific type of limit you are applying.

In the case of a private (nongovernmental, nonchurch) 501©(3) organization, a 457(B) plan must be limited to a select group of highly compensated employees. Thus, if you wish to cover all employees, you would have to use either a 403(B) or a 401(k) plan. (You could, however, use a 457(B) plan in addition to a 403(B) or 401(k) plan to allow for higher deferrals by management or highly compensated employees.) The two major advantages of a 403(B) plan, in the case of your organization, would be (a) employees could move the existing money into the new contracts, rather than having to have separate plans for old and new money, and (B) a 403(B) plan is not subject to "actual deferral percentage" (ADP) testing. ADP testing in effect limits the contributions of highly compensated employees to a 401(k) plan based on the percentage of compensation that lower-paid employees choose to contribute. While there is a safe harbor that allows a 401(k) plan that has employer contributions to avoid ADP testing if certain requirements are met, it is more easily avoided by just using a 403(B) plan. A 401(k) plan would typically be used only by a larger organization, which had more than one type of employer involved, e.g., a 501©(3) university with a 501©(4) HMO, or by an organization in which a substantial number of employees had balances in 401(a) plans of prior employers that they wanted to be able to roll over. (And even that second advantage will go away in 2002, when rollovers among various types of plans will become permissible.) You can click here for a chart with more extensive information about choosing among 401(k), 403(B), and 457(B) plans.

The only thing I can think of is that among private (not governmental or church) employers, employer involvement is typically a lot less in the case of a pretax-employee-contribution-only plan than in the case of a plan that has an employer match. (An exemption from ERISA is available in the case of certain pretax-employee-contribution-only plans with limited employer involvement.) Thus, while Revenue Ruling 90-24 is available for either type of plan, a plan with an employer match is more likely to have transfer restrictions.

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.