Carol V. Calhoun

Is the employer a governmental or nongovernmental entity? If the employer is nongovernmental, the 457 plan cannot be funded. Thus, the payments from the disability plan would go to the employer, and would be treated the same as if the employer had made further deferrals under the 457 plan. Then the question was whether the disability payments themselves would be treated as Form W-2 compensation from the employer (which is part of includible compensation). I haven't looked at this lately, but my recollection is that sick pay paid directly from a third party insurer to an employee is treated as income to the employee but not as W-2 compensation from the employer. Rather, it would fall under separate "sick pay" withholding rules. This could cause difficulties in treating it as part of includible compensation. However, if the employer is governmental, the plan would be required to be funded. In that case, the disability insurance would be a plan asset. PLR 200031060 held that disability insurance was an appropriate investment of a 401(k) plan, subject to the incidental benefit rule, so I would assume that a 457 plan could also hold it. It also treated disability insurance payments as not being additional contributions to the plan, but rather as an investment return, which would mean that the employee's absence of includible compensation would not be an issue.

Thanks for your input, MWeddell! Obviously, this doesn't necessarily take care of any state law issues caused by late amendments, but it at least means that the IRS won't be knocking at the door of the late amenders.

It's the very fact that it is a new 401(k) arrangement that means it must be a money purchase plan. It could either be added to their existing money purchase plan, or adopted as a new money purchase plan. If it were old enough to be grandfathered, it would have to have been a profit-sharing plan, unless it were old enough to be a pre-ERISA money purchase plan. Don't ask me why rural cooperatives are required to format their new 401(k) plans as money purchase plans, while everyone else is forbidden from doing so! :confused:

For those whose browsers can't handle pdf, or who just prefer not to download large pdf files, Publication 571 is now available as a standard Web page. You can get to it by clicking here. Of course, the usefulness of this publication is somewhat limited by the fact that it does not include the EGTRRA changes effective in 2002. It does, however, include the EGTRRA changes that were effective for 2000 and 2001.

403(B) plans are not explicitly given a remedial amendment period. Thus, the safest course would be to amend them before the beginning of the period to which the changes relate. And in the case of governmental plans, even that may be a problem under applicable state constitutional provisions or statutes. I can foresee this becoming a big issue, and wonder whether the IRS is considering some relief in this area.

It is not clear that corrected W-2s need to be issued. See Technical Advice Memorandum 199903032, in which the IRS held that although accruals under plan would be includible in the participants' income under section 457(f), they would not be included in wages for withholding purposes before the participant actually received them. Of course, this seems to create a big mismatch between income tax withholding/W-2 reporting and personal income taxes.

Yes, a rural cooperative's 401(k) plan not only can but must be a money purchase pension plan if the rural cooperative does not have a grandfathered 401(k) plan. Code section 401(k)(1) reads as follows: Thus, although most employers can have a 401(k) arrangement only in a profit-sharing or stock bonus plan, a rural cooperative can have one in the context of a pension plan. Moreover, the definition of a "rural cooperative plan" is

Even if you did that, there is a serious question about whether existing money could be moved from the existing annuity or custodial account under the 403(B) plan to the trust under the 401(k) plan. See my note on this subject elsewhere on this board.

Even if putting new money into a 401(k) plan is permissible, it is not clear to me that you can modify a 403(B) plan with respect to the old money to make it into a 401(k) plan. Although the new law permits rollovers of money from a 403(B) to a 401(k), a rollover requires that there be a distributable event, and the termination of a 403(B) plan is not in itself a distributable event. That leaves the question of whether the money could be directly transferred from one plan to another at a time when no distributions/rollovers could be made. The only direct transfers permitted under the new law from a 403(B) to a qualified plan must be (a) to a defined benefit plan, and (B) for the purchase of service credit. Thus, a transfer to a 401(k) plan would not qualify.

Like many questions involving privatization, this one does not have a clear answer. Clearly, the hospital cannot go on making contributions to the 403(B) plan. However, because termination of a 403(B) plan is not a distributable event, the hospital may nevertheless have an obligation to go on holding the old money, unless it can structure the 403(B) contracts so that they are owned individually by the employees.

Using a 457(B) plan to satisfy the requirements should not be a problem. Of course, to the extent that deferrals under the 457(B) plan are elective, an employee would in effect be able to elect into Social Security by declining to make contributions.

Using a 457(B) plan to satisfy the requirements should not be a problem. Of course, to the extent that deferrals under the 457(B) plan are elective, an employee would in effect be able to elect into Social Security by declining to make contributions.

That's the way I read it.

The "unforeseeable emergency" rules of section 457(B) are actually tougher than the "hardship" rules of 401(k) and 403(B). For example, payment of college tuition or purchase of a principal residence could give rise to hardship distributions from a 401(k) or 403(B) plan, but would not be treated as an unforeseeable emergency in the case of a 457(B) plan. In the case of a 401(k) plan, the participant is not actually required to stop making deferrals. Rather, cessation of deferrals is treated as a safe harbor with respect to the requirement that the participant not have other resources to meet whatever immediate and heavy financial need the participant has. No such safe harbor exists in the case of a 457(B) plan.

Christine, you are correct.

Could I ask that you have the original poster post here? That way, he can elect to be notified when there are new messages here, rather than having to have e-mails sent to him. One of the advantages of the message board format is that everyone, not just the original poster, can benefit from any replies. Thanks!

So long as a governmental entity is maintaining the plan, and it is only for governmental employees, it is exempt from the Form 5500 regardless of whether it contains employee salary reduction contributions, employer contributions, or both. The more important question, though, is whether there is a 403(B) plan for non-administrative employees that at least permits employee salary reduction contributions. (The plan for the other employees need not provide for the match.) If not, the plan for administrators would violate the "universal availability" rule of Code section 403(B)(12), which is the only nondiscrimination rule that still applies to state and local government plans.

If it is an agency or instrumentality of the state, the "top hat" analysis doesn't apply. The "top hat" rules are used to determine whether a plan is subject to ERISA, and a governmental plan isn't subject to ERISA regardless of whether it is "top hat."

That is exactly the issue to which there is no answer. If pick-ups to a defined contribution plan are treated as employee contributions, the employee would have to make them in order to get any benefit. But if they are treated as employer contributions for USERRA purposes (as they are for tax purposes), the employer could have to make them up without reimbursement by the employee. (Because it is a defined contribution plan, the employer would not have to make up earnings and forfeitures, but would have to make up the contributions themselves if they were treated as employer contributions.)

There was an earlier, and quite detailed, discussion of this issue on the Church Plans message board. You can get to it by clicking on this link: http://benefitslink.com/boards/index.php?showtopic=2055

It would appear not, since section 457(B) does not list a plan termination as a distributable event. Of course, this leaves the question of what to do with the assets if a plan does terminate.

No problem! In fact, this was one of the reasons for Code section 414(h)(2) in the first place--to permit an entity to treat a contribution as an employer contribution for income tax purposes (and therefore as pre-tax) even if it was treated as an employee contribution (and therefore not deducted from compensation) for plan purposes.

The individual is no doubt referring to the "parsonage allowance" under IRC § 107. There have been some rulings to the effect that if a portion of the distribution (not exceeding actual housing expenses) is specified to be a parsonage allowance, the exclusion may be available under certain circumstances. (I spent some time advising rabbis myself, and was always amused at having to cite a provision for "parsonage allowances" for "ministers of the gospel," but that's life!)

No remedial amendment period is provided for 457(B) plans. Thus, at least in theory, all amendments have to be made before the period to which they relate. Also, determination letters are not available for 457(B) plans. In some instances, a 457(B) plan will apply for a ruling on its status, but this is much less common than getting a determination letter on a qualified plan. You'd have to look at individual state and local laws, but I am not aware of any that require obtaining a ruling on a 457(B) plan.

Everett, I'm sorry, I misstated that one, and I've edited my prior post to eliminate that statement. Employers do have to make up contributions to DC plans. They clearly do not, however, have to make up any voluntary employee deferrals, even if such deferrals are treated as "employer" contributions for tax purposes. (They also do not have to make up earnings and forfeitures.) The situation is somewhat less clear in the case of involuntary deferrals that are treated as employer contributions, i.e., picked-up contributions.