Carol V. Calhoun

Hmm, I'm interpreting this a bit differently. It seems to me that a self-employed minister is always treated as if s/he were employed by a tax-exempt organization and therefore eligible for a 403(B) plan. (Paragraph 2 of the eligibility rules for ministers.) A minister who is employed, rather than self-employed, is eligible for a 403(B) plan under one of two circumstances: [*]If the minister is employed by a 501©(3) organization, s/he can participate in the 403(B) plan of that organization. (Paragraph 1 of the eligibility rules for ministers.) [*]If the minister is employed by an organization that is not a 501©(3) organization, s/he can set up his or her own 403(B) plan if s/he functions as a minister, and does not share common religious bonds with the employer. (Paragraph 3 of the eligibility rules for ministers.)[/list=1] The question here is the definition of the word "employed." You refer to a self-employed minister who is employed by an organization that is or is not a 501©(3) organization. However, someone who is self-employed is, by definition, not "employed" by anyone other than him/herself.

One of many questions regarding transition of entities between governmental and private status to which there is no clear answer. I also wonder whether it makes any difference whether the entity had the plan as of the grandfather date, even if it wasn't governmental as of that date? We've seen it go the other way, too--a governmental entity becomes privatized, and the question is whether the plan then becomes subject to ERISA.

Currently, only transfers (no rollovers) are permitted between 457 plans. However, that will change next year, due to the recent tax bill.

A 401(k) plan is currently (with very limited exceptions) unavailable to employees of a state or local government unless the "employer" sponsored one before a transitional date set forth in the statute. A local governmental entity can sponsor a 457(B) plan. If it is a public school or university, or a governmental instrumentality that has obtained status as a 501©(3) organization, it can sponsor a 403(B) plan. And in some instances, it can sponsor a simplified employee pension ("SEP"). There are other types of plans available (e.g., a defined benefit plan, a profit-sharing plan, or a money purchase pension plan. But the ones set forth above are the primary ones that allow employees to make elections as often as annually to make pretax contributions.

Rollovers are not optional for the distributing plan. Section 641 of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGATRRA") imposes the Internal Revenue Code section 401(a)(31) rules on section 457(B) plans. However, they are optional for the receiving plan. If the individual's new employer plan does not accept rollovers, the individual can still roll 457 money to an IRA, but cannot force the new employer's plan to accept the rollover.

Hmm, but that would exclude all governmental plans, even those that are qualified within the meaning of Internal Revenue Code section 401(a). ..

See my other message on this. A lot depends on whether the plan sponsor elects to amend the plan to permit new elections, which it is under no obligation to do. Moreover, as a practical matter, you are right that an employer likely cannot get the money back if it has purchased a life annuity, and therefore is not going to amend the plan to permit changes of elections in those instances.

That is a good question. We've had some discussions in my office about it. The issue is that all elections on termination of employment in the past under 457 plans have been irrevocable. The question is whether their prior irrevocable elections have now become revocable, or whether the new rules apply only to new elections. Although the statute is not entirely clear, it appears to us that after the effective date of EGATRRA, an employer could amend the plan and allow an employee to revoke the old election and make a new one. However, the employer is under no obligation to do so. Thus, a lot depends on what employers decide to do.

You're right, a transfer from a 403(B) to a 401(k) can take place only if it is in the form of a rollover, which means that there must be some distributable event first. However, a 403(B) contract is typically owned by the employee. So unless the plan provides otherwise, an employee could elect to have money directly transferred from the existing 403(B) to another 403(B), without a distribution, even before termination of employment or other distributable event. Also, money in a 403(B) plan can be directly transferred, even during employment, to a defined benefit plan for the purchase of service credit, assuming that both the 403(B) plan and the defined benefit plan permit such transfers.

Yes, but the IRS really has no statutory basis to object to differing rules for part-timers in the case of governmental plans. State and local governmental plans are now completely exempt under Code section 401(a)(5)(G) from all of the rules prohibiting discrimination in favor of highly compensated employees, other than the universal coverage rule for salary reduction contributions under 403(B) plans. Other governmental plans are exempt from the minimum coverage rules, and will be exempt from other nondiscrimination rules until at least 2003. (See Notice 2001-46.)

It is not subject to Internal Revenue Code section 411, which contains the anticutback rules for private plans. However, the impairment of contracts language of Article I, Section 10 of the US Constitution has been held by many courts to impose an even more stringent anticutback rule on plans maintained by the federal government, or the government of any state or locality. Under this standard, not only must benefits already accrued be protected, but an employee may have a protected right to continue to accrue benefits in the future under at least as favorable a method as the most favorable one used for earlier periods of employment. Obviously, this is merely a general statement, and different facts or different courts may result in differing interpretations.

There is no specific maximum on pick-ups, as such. Rather, the limit is that if the pickup contribution is made to a defined benefit plan, the benefit generated by that plan cannot exceed the 415(B) maximum. If the pickup contribution is made to a defined contribution plan, the pickup contribution plus all other annual additions cannot exceed the 415© maximum.

The original question asked about HR 1836. The provision allowing for direct transfers of money from 403(B) or 457 plans (even without a distributable event) is in Section 647 of HR 1836, which reads as follows: The Conference Report contains the following language with respect to this provision: Thus, under the new law (effective for transfers after December 31, 2001), direct in-service transfers will be permissible for the limited purposes specified by HR 1836. This should be distinguished from the separate provisions in HR 1836 for rollovers from 403(B) or 457 plans to 401(a) plans (or vice versa), which do require a distributable event.

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.