Carol V. Calhoun

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.

This is one of those totally unanswered questions that employee benefits lawyers like to speculate on. It could be argued that because the original exemption of governmental plans from funding requirements reflected the fact that the governmental entity would back up the plan's promises even if the plan itself lacked adequate funding, the exemption should apply to the whole plan, not just the portion derived during the period of governmental status. However, there simply is no authority as to what happens when a plan changes status, either from nongovernmental to governmental or the reverse.

I think a lot of states are going to want to pass legislation reflecting EGTRRA. The problems include the one you mentioned, plus laws limiting rollovers to amounts derived from other plans of the same type (e.g., a 401(a) plan might limit rollovers into the plan to those directly or indirectly from another 401(a) plan). In many instances, EGTRRA did not require plans to make changes, but those which do not may discover they are unnecessarily limiting employees' options.

I would agree with Kirk in general. However, PLR 200108010 (November 17, 2000) states that, "Health coverage provided to a domestic partner who is a dependent of the employee within the meaning of section 152 of the [internal Revenue] Code is not included in the employee's gross income and is not wages for employment tax purposes." In order to qualify as a dependent, (a) a domestic partner must derive more than one-half of his or her support from the employee, and (B) the relationship must not be in violation of local law. There is a more lengthy discussion of this issue available in Section III of the outline available at this link.

This is probably the correct interpretation, at least if the new annuity is not one available under the original plan. The existing authorities that have allowed a housing allowance in the context of a 403(B) plan have relied on some action taken by the plan sponsor. If the retiree is dealing directly with a provider without plan sponsor involvement, it would be harder to make the claim that a nontaxable housing allowance was available.

There are definitely a lot of ERISA 403(B) plans out there using individual TDA contracts. Typically, the contracts themselves will define things like distribution, hardship withdrawal and loan rights. However, it then becomes a question of how much you trust the product issuer to be complying not only with the IRS requirements for 403(B) status, but also thosee ERISA requirements that have to be imposed at the level of the individual investments. Also, it has always been unclear to me just how the fiduciary requirements operate in the context of a 403(B) plan, since the contract must be owned by the employee. Should we assume for Form 5500 purposes that the plan never holds any assets, because the contracts are in effect being distributed to employees immediately on their purchase? How can a fiduciary ever engage in prudent fund management if the contract is owned by the employee? What happens if, as is often the case, one employer contributes to a TDA started by a prior employer? Some have suggested that in the context of a 403(B) plan, fiduciary duties should apply only to the original purchase. However, the whole subject is pretty murky.

The official limit is not out yet, although I understand that some consultants have calculated what the new limit will be, based on the cost of living figures. If anyone has a definitive guide, let me know. I try to keep updated information on my site, but it's very late in coming this year.

Here is the IRS answer, at least with regard to 403(B) plans: This is from "Frequently Asked Questions regarding Tax Sheltered Annuities." Of course, it would not apply totally for purposes of section 457, because the definitions of includible compensation are different. However, it appears based on this that the IRS might argue that sick leave accrued in prior years was not deferred before it was earned, as would be required for a 457 plan.

You may want to click on this link to see an outline of new developments for governmental plans, including 457 plans.

For what purpose do you want to know the original effective date? If you are restating the documents for the plan, you would normally put that the initial effective date was the date the prior plan was adopted, but that the restatement effective date was the date as of which the employer began making contributions. However, the initial date upon which ERISA became effective as to the plan would not be before year the plan became subject to ERISA. Memorializing the terms of the arrangement would not make it subject to ERISA, if it was otherwise exempt.

Section 415(n) by its terms deals only with after-tax employee contributions to purchase service credit under a defined benefit plan. However, direct transfers from one 401(a) (including 401(k)) plan to another for any purpose have always been allowed, if both the transferring and receiving plan allow such transfers. They are rare in nongovernmental plans, mostly because the plan must preserve all of the rights protected by Code section 411(d) (including, for example, the right to receive the accrued benefit as a defined contribution account) with respect to the transferred money. However, because governmental plans are not subject to Code section 411, they can more readily provide for transfers. The real limitation on this practice, clearly, is that state and local governments that do not already have 401(k) plans are not allowed to adopt new ones. That is why the opportunity to transfer money from 403(B) or 457(B) plans, rather than just qualified plans, to purchase service under a qualified defined benefit plan, will be so important.

My favorite story was the one I was told by staff of a governmental retirement system when they were discussing my doing some work for them. They said that they had also considered another firm. To try to figure out which firm would be best, they had posed a hypothetical question of law. They were able to rule out the other firm when its representative's answer started with, "The first thing you would have to consider is whether the employer would get a tax deduction for its contributions to the plan." Yikes!

If the employer is one subject to ERISA (e.g., not a governmental or church entity), a 403(B) plan to which nonelective contributions are made will be subject to Title I of ERISA. Lots of books have been written about this, but there is not really anything that could be summarized within the confines of a message board. If the employer is a governmental or church entity, the requirements are much simpler (especially starting in 2002, when the complicated "maximum exclusion allowance" rules of section 403(B) go away), the rules are much simpler. However, the benefits must still be provided through an annuity contract, or through a custodial account wholly invested in mutual funds. Usually, whatever provider you select for the annuity contracts and/or as the custodian can also provide you with plan documents that set forth the rules.