Carol V. Calhoun

The real issue is what the cost is of purchasing service credit--it's a financial decision, not a tax one. The cost to purchase service credit will vary, but in some instances will be the full actuarial cost of the additional credit given. In that instance, a participant has to figure out whether the additional benefit under the db plan is greater than the benefit that would have been produced, had the money been left in the 403(B) or 457 plan. Also, remember that 403(B) and 457 plans are permitted, but not required, to provide for transfers. Moreover, many 403(B) and 457 plans are invested in products that have stiff penalties for early withdrawals, and/or may not provide for in-service withdrawals at all. Thus, even if the plan provides for transfers, such transfers may be impractical or impossible, given the investments currently held.

Sorry, Dan, you are right. The special provision which permits in-service transfers from 403(B) or 457 plans to defined benefit plans to purchase service credit does not apply to IRAs. However, since most IRAs permit distributions at any time, you could use an IRA rollover to purchase service credit. I was actually thinking of this in terms of an IRA set up by an employer (which is now possible not only as a free-standing plan, but as part of certain other types of plans), in which case you might not (depending on the plan's terms) have a right to a distribution under the plan prior to termination of employment. Until you can get a distribution, you cannot have a rollover. This contrasts with the new rules for 403(B) and 457 plans, which can provide for in-service transfers to purchase service credit, even if an employee is not entitled to a distribution. However, to the extent that the IRA allows for distributions, you could use a rollover from the IRA to purchase service credit.

A number of private rulings have allowed one-time elections into or out of defined benefit plans that require employee contributions, or one-time elections as to the level of participation, so this should be acceptable if it is a one-time election. However, if it is more than one-time, it may well be treated as an impermissible cash or deferred arrangement, and thus the employee's contributions would be after-tax. Although a one-time election would appear to be permissible, provided that applicable state and local law allow it, I would be very careful with this one. Our experience has been that this causes so many employee relations/bad publicity problems that it may not be worth it. For example, suppose that an employee starts with a high contribution rate, then needs the money for urgent medical care of a seriously ill family member. Do you really want to be the one to tell the employee (and/or the local newspaper) that the employee cannot change his or her election due to an obscure tax rule? Also, an IRS official has indicated informally that the IRS is considering whether contributions under such arrangements may be subject to Social Security taxes in Social Security states, or to Medicare taxes, even if they are not subject to income taxes. No definitive word, yet, but it's something to keep in mind.

Your Plan Administrator is correct, assuming that you are a nongovernmental tax-exempt employer. The rule cited by Joel is correct for 457 plans maintained by governmental employers. (I'm assuming that he answered your question the way he did because this board deals primarily with governmental employers, but it sounded from your post as if the employer involved in your situation might not be governmental.) There is, unfortunately, no real way of fixing this situation. Some organizations use rabbi trusts (trusts which remain subject to the claims of the employer's general creditors), or insurance products which remain subject to the claims of general creditors of the employer, as a mechanism for ensuring that benefits will be paid even if there is a change of management at the organization. However, these mechanisms do not help if the employer becomes bankrupt. Other alternatives include having employees purchase insurance to cover them in the event of the employer's bankruptcy. However, such insurance must be purchased by the employee, not the employer, and may or may not be commercially available. If the employer pays the employee extra to compensate for the need to purchase such insurance, the additional amount paid is subject to tax. If an individual is employed by one (financially shaky) organization in a controlled group, it may be possible to have one rabbi trust for all employers in the controlled group, and have it subject only to the claims of one of the employers (presumably the most financially sound one). Private rulings have allowed this approach at least in the case of excess benefit plans under section 415(m), which are subject to somewhat similar rules, although it is unclear whether it would be extended to 457 plans.

It would appear that this situation should be dealt with under the rules in section 72 regarding recovery of after-tax contributions. If there is a pay-out in year 1, it would be taxable. If the participant pays the money back in years 2-3, the contributions would not (absent a pick-up arrangement), be deductible in years 2-3. However, if there were a further distribution in year 4, the distribution would include a component that would consist of previously taxed (and therefore nontaxable) amounts. The problem would be that the after-tax amounts would normally have to be recovered over the duration of the annuity distributions from the plan, rather than immediately from the next distribution.

Probably not. In most instances, such an entity would be treated as a governmental plan. Thus, unless that entity, or another entity treated as part of the same "employer" for federal tax purposes, had a grandfathered 401(k) plan, the entity could not start a 401(k) plan.

No, this is not included in the legislation. Section 647 of the legislation includes provisions for the direct trustee-to-trustee transfer of amounts from a 403(B) or 457 plan to a defined benefit plan to purchase service credit, but it does not mention IRAs. Of course, in some instances you might be able to do a rollover from an IRA to a plan, and then a transfer from that plan to purchase service credit in a defined benefit plan, but the normal statutory requirements for IRA rollovers would apply.

A governmental plan is never subject to ERISA, regardless of whether it is a severance plan or some other kind of plan. In the case of most other employers, ERISA Reg. § 2510.3-2(B) governs whether the plan is a severance plan or not. You can click on the link to see the regulation, then just scroll down to (B). By the way, for anyone who is not already aware, up-to-date copies of most ERISA and IRS regulations on employee benefits can be searched or browsed by going to http://benefitsattorney.com/regulations/.

I suspect that combinations of plans will become more common, since the new law will permit each of those plans to get up to the limit, instead of combining them.

It will include information on the new tax bill, although in some instances we may have to do it in the form of a summary at the end of a chapter, rather than being able to fully incorporate it into the chapter itself. (First the new 401(a)(9) rules, now this--is it any wonder it's taking longer than anticipated?)

It will include information on the new tax bill, although in some instances we may have to do it in the form of a summary at the end of a chapter, rather than being able to fully incorporate it into the chapter itself. (First the new 401(a)(9) rules, now this--is it any wonder it's taking longer than anticipated?)

On further reflection, I think you are right, Everett. I was initially focused on the part that says: I was interpreting this as meaning that the election, although irrevocable, would apply only to a single plan year. (There have been prior rulings that have clearly taken a similar approach in the area of purchased service credit--allowing an employee to make separate "irrevocable" elections with regard to each year purchased, for example.) But I think yours is the more reasonable interpretation.

By the way, I love the new feature! Twice today, I've had to refer to private letter rulings which were not available online. In each case, the ruling was too long to fit into a message, and besides, it would have taken up a lot of space on the board. But by attaching it as a text file, I make it easy for people to view, without distracting those who aren't interested.

Here's a copy of the ruling Everett mentioned, in case you need it:

It appears that the IRS has gone even farther than that, at least in private rulings. PLR 200118056 (February 9, 2001) permitted employees to make annual 414(h)(2) elections under a defined contribution plan. Note, however, that the IRS declined to rule on the FICA tax consequences of this arrangement. Because this ruling does not appear to have been published on the IRS Web site, I am including the text of it in an attachment to this message. You should be able to see it just by clicking on the link below. If you have troubles, and are in Windows, you can try right-clicking on the link, and choosing "Save As," then opening the document after it is downloaded to your computer.

The rules could be the same or different, depending on the plan document. Most commonly they are the same, but unfortunately, you really have to check.

In states which have not elected in to Social Security, employees of state and local governments must nevertheless be covered by Social Security unless the employees are covered by a retirement plan that meets certain requirements ("FICA alternative plan"). Treas. Reg. § 31.3121(b)(7)-2 gives the details. So long as certain minimum benefit, etc., requirements are met, the plan can be any type of retirement plan -- 401(a), 403(b), 457, etc. The rules which would apply to a FICA alternative plan, once the money was in it, would be identical to that of any other plan of a similar type. Thus, for example, a FICA alternative 403(b) plan could make a 90-24 transfer, if one was otherwise available, but a FICA alternative 401(a) plan could not. Also, you have to look at the specific terms of the plan and contract involved. Rev. Rul. 90-24 merely governs the tax consequences of a transfer, if one is permitted. However, the plan document, applicable state or local law, or the contract involved may prohibit such transfers.

Definitely! I was responding to Denise's question, which specified that it was a calendar year plan.

Typically, governmental plans are embodied in, or at least are pursuant to, a state or local statute. The legislative body would be the legislature (state or local) which had authority to amend that statute.

This depends on the legislative session. For example, suppose the legislature meets only every other year, and did not meet in 2000. If it meets from January 15 through March 15, 2001, "the 90th day after the opening of the first legislative session beginnining after December 31, 1999" would be about April 15, 2001. The first plan year beginning after that would be calendar year 2002. And the last day of that plan year would be December 31, 2002.

None under federal law. However, applicable state or local law may require a summary. Even if it does not, it's probably a good idea to provide one, to lessen the possibility that employees will not understand their rights, and may later claim contractual rights based on other documents or alleged oral statements.

One thing to watch out for here is that legislative history indicates that church retirement income income accounts described in 403(B)(9) are subject to exclusive benefit rules. I understand that there is some question as to whether any 403(B) plan run by a church might be held to be a 403(B)(9) plan. Exclusive benefit rules have in other contexts been held to impose fiduciary standards. Thus, if you allow only one provider, you would want to make sure that there had been adequate due diligence to make sure that the choice of that provider was an appropriate choice, bearing in mind both risk and reward, from a fiduciary perspective. As for the idea of employees having their own 403(B) plans, they cannot establish such plans on their own (independent of an employer). They might have 403(B) plan from another concurrent or past employer, but a 403(B) plan requires employer involvement.

It can under federal law, although you need also to look at applicable state and local law. Barring some problem in state or local law, the usual problems you run into are more political than legal. Because the deferred amount will be shown as current W-2 income, you have to consider whether the total amount shown on the individual's W-2 will trigger news stories suggesting that s/he is overpaid, that the employer is wasting money, etc. In that sort of environment, the difference between current compensation and deferred compensation shown on a current W-2 may not be obvious to the general public.

Withdrawals would be taxable, but why make them? If the account pays the fees directly, they should be considered an administrative expense of the account itself, not a withdrawal.

http://www.benefitslink.com/boards/index.php?showtopic=2265 Just confirming what I said in my other post, you might also want to check out the link above for a lengthy prior discussion of the extent to which a Native American tribe's plan is or is not subject to ERISA.