Carol V. Calhoun

There are really two ways to deal with this one, and a lot depends on what the plan document says. In some instances, a 457 plan will either be funded through an annuity contract, or will purchase a 10-year annuity. In that case, an insurance company or other contract issuer promises to pay a certain amount each year for 10 years in exchange for the total value of the account. At that point, there is no amount left after the 10 years are up, because the contract issuer's obligation is complete. The second, and more common, alternative is to have the contract pay out 1/10 of its total value in year one, 1/9 of its total value in year two, etc. In that case, 100% of the remaining value is paid out in year ten.

The plan will be subject to ERISA unless the hospital is a governmental or church entity as well as being a 501©(3) organization. And if it is subject to ERISA, you've undoubtedly got some pretty massive compliance issues if, as seems likely, no one realized that it was a nongovernmental plan. You can click here for a list of the Internal Revenue Code qualification rules which are different for governmental plans than for ERISA-covered plans -- and that list does not even include ERISA rules such as 404© which do not have counterparts in the qualification rules. The hospital is going to need to consult an attorney, pronto -- both to fix the plan and trust documents for the future, and to make decisions as to whether to participate in IRS and/or Department of Labor corrective programs. This is way too big an issue to be resolved through this board, but there are corrective programs which can at least cut down on the penalties.

The employer should be withholding Social Security taxes on those employees who are not covered by a safe harbor plan, and paying the employer's share of Social Security taxes on such employees. What to do if the employer does not meet its obligation in that regard is a major can of worms, which I don't think I can get into within the confines of a general message board.

They must be covered by Social Security. There are regulations which say that coverage is measured for each employee, rather than overall for the employer. Some employers are specifically adopting separate safe-harbor-only plans for employees not covered by the regular retirement system, in order to deal with this issue.

It may depend on which "they" we are talking about--the beneficiaries, the other children, or the plan's fiduciaries. Also, in general, a "mindset" is not legally binding, so a lot may depend on whether the beneficiaries want to accommodate the rest of the children. (Another lesson in why people should engage in estate planning...) If this is an ERISA plan, ERISA would preempt state law on wills, trusts, and pretty much everything else aside from the annuity contract itself. Thus, in the absence of a disclaimer, the plan would pay to the two beneficiaries who were named. It would then be up to them to share the money with the other beneficiaries, if they wanted to or were forced by a court to, but it would not be the plan's problem. If the plan is an ERISA plan, and the two beneficiaries disclaim their interests, you would have to look at the plan terms and/or the terms of the annuity contract to see who would take in the absence of a beneficiary. State law would still not apply to the plan. If the plan is a non-ERISA plan (governmental or church plan, or salary-reduction-only plan which meets DOL requirements for not being subject to ERISA), then state law could theoretically apply. However, although I have not examined the particular state laws here, state probate law is seldom applicable to insurance contracts which pay directly to a beneficiary anyway. Thus, you would probably still be looking at the contract terms. Of course, if the beneficiaries receive the money, and then pass it on to others, the beneficiaries would be taxable on the distributions. Presumably, this would be taken into account in figuring out the share of each beneficiary.

No. This requirement is imposed by Code sections 401(a)(11) and 417, which are inapplicable to governmental plans. Treas. Reg. § 1.401(a)-11(a).You can click here for a more thorough discussion of which qualification requirements do and do not apply to governmental plans.

I would agree with your reading of the federal statute. From my experience, the reason that 457 plans so often permit emergency withdrawals and employee elections of distribution forms has to do with an employee relations perspective that this is "the employee's money," rather than with any particular legal requirement. Of course, you would need to consult applicable state and local law, as well as federal.

If the defined benefit plan is being terminated, employees could be given a chance to take their benefits in the form of either cash or annuity contracts. Under Code section 401(a)(31), employees could then choose to have the cash directly rolled over to any qualified plan or IRA which permitted rollovers. Provided that the 401(k) plan permitted (or was amended to permit) rollovers, the employees could elect to have the money transferred there. However, a direct transfer without the employee's consent could raise some issues. In a nongovernmental context, the right to receive a defined benefit rather than an account balance is treated as a protected benefit under the section 411 regulations. That is not true with respect to governmental plans (since they are exempt from most of section 411 under section 411(e)(2)). However, you indicate that the hospital has already been bought by the for-profit. If the for-profit has taken over the plan, it would presumably have become subject to section 411. Even if it has not, the rules for what happens if a governmental plan transfers to a nongovernmental plan are murky indeed.

Prop. Treas. Reg. § 1.125-4(f)(2) permits a premium conversion section 125 plan to make adjustments under such circumstances in one of two ways. The plan can be set up so that the salary reduction agreements under the premium conversion plan are automatically adjusted to take into account the increase or decrease or cost. Alternatively, if the cost significantly increases, the employer can permit employees to make a choice either to have their salaries reduced by the new premium amount, or to revoke their elections and, in lieu thereof, to receive on a prospective basis coverage under another benefit package option providing similar coverage. The proposed regulations state, however, that these options are not available under a health FSA, but only under a premium conversion option. Thus, it is important to keep the premium conversion feature as a separate election, not as part of a general health FSA, if this option is to exist.

Yes. (Is that black and white enough for you? ) Code section 457(B) permits either a state or local government, or a tax-exempt organization, to maintain a 457(B) plan. However, the 457(B) plan of a tax-exempt nongovernmental employer's plan is required to be unfunded under section 457(B), while that of a governmental employer is required to be funded under 457(g). A tax-exempt organization will nevertheless often maintain a trust fund or annuity contract to hold 457 plan assets, but the trust fund or annuity must be set up in such a way as to be subject to the claims of the employer's creditors (e.g., a "rabbi trust"). Morover, because of ERISA restrictions, a nongovernmental 457 plan must be a top hat plan. By contrast, many governmental 457 plans cover rank and file employees.

I have not seen anything indicating that there is a specific regulations or rulings project in this area. However, I was told informally recently by an IRS official that there is some concern about the tax treatment of 403(B) arrangements in which employees are permitted to choose the level of contributions, but the maximum limitations of 402(g) are disregarded based on a theory that the participant's elections are one-time irrevocable elections not covered by 402(g). However, it appeared that the IRS is still at a very preliminary stage in considering that issue, so it is not clear what, if any, guidance will be issued in that area.

I'm afraid the reason that you are not getting responses is that there really is no law on this one. Also, the penalties for problems with a 403(B)(7) typically fall directly on the employer or the employees, not the custodian. Thus, whether the custodian had liability might depend in large part on the specific facts and circumstances as to what its contracts were with the employer and/or employees, and whether any argument could be made that it had agreed to indemnify them.

A 401(a) plan is typically for all employees, or all employees who are within a particular category (e.g., all teachers in a school). However, because state and local government plans are exempted from most nondiscrimination requirements by Code section 401(a)(5)(G), it is possible to have a 401(a) plan which covers only a single employee such as the superintendent. You can click here for a list of requirements which apply to governmental 401(a) plans.

Unfortunately, no. Code section 402©(4) defines eligible rollover distribution as one which, among other things, is made to the employee. Code section 402©(9) provides for treating a spouse who receives a distribution after the employee's death as if s/he were an employee for this purpose. But other beneficiaries of death benefits have no rollover rights. Of course, the beneficiary could defer tax by deferring actual receipt of the distribution, (a) if the plan so provided, and (B) so long as the limitations of Code section 401(a)(9) were met. However, since you specified that the beneficiary actually received the distribution, there would be no way to defer the tax.

There is an excise tax under Code section 4973 which applies to contributions to a 403(B)(7) custodial account (but not to a 403(B) annuity), to the extent in excess of the 403(B) and/or 415 limits. However, it does not appear to me to apply to contributions in excess of the 402(g) limits, unless they also violate one of the other limits.

The one circumstance in which the C election isn't a "no-brainer," other than having elected the A or B election in the past or wanting to hold open the possibility of doing so in the future, is if there are annual additions to a qualified plan of the employer. This could occur in one of two situations: if the employer has a qualified defined contribution plan, or if the employer has a qualified defined benefit plan which includes after-tax employee contributions. In that situation, the 403(B) contributions must be combined with the annual additions to the qualified plans if and only if a C election has been made.

The IRS has now announced the official limitations (at the URL shown in Harvey's message), but is still including the footnote. And in theory, they could still be changed if Congress acts on a tax bill this year. In reality, it seems highly improbable that Congress will do so, given the shortness of the remaining session and the fact that passing a budget will take priority.

My apologies, Harvey, for mischaracterizing your business! In any event, thanks for your informative contribution.

No. 457 contributions must be combined with 401(k) and 403(B) contributions, but not with 414(h)(2) pick-ups, in applying the 402(g) limits. 414(h)(2) pick-ups are not subject to the 402(g) limits at all, but only to the 415(B) limits (if made to a defined benefit plan) or the 415© limits (if made to a money purchase plan). For purposes of the 415 limit, only the 414(h)(2) contributions are deducted from gross wages. Code section 415©(3)(D). For purposes of the 457 limit, however, any plan contributions which are excludible from W-2 income (even contributions to the 457 plan itself) are deducted from gross wages. Code section 457(e)(5).

KFGO radio station in Fargo, ND, just reported that the IRS would not bring up the FICA/pick-up issue in its closing letter regarding the audit of one of the Fargo school districts. The audit had originally sought to impose FICA taxes with respect to non-salary-reduction pick-ups. This is good news. Also, it appears that the National Office of IRS has now dropped the idea of a field directive concerning the circumstances in which pick-ups are FICA-taxable. Instead, it will merely be concentrating on "informal guidance" reminding people that FICA is due on contributions picked up pursuant to a salary reduction agreement.

I haven't researched this one in depth. However, under Notice 99-40, nondiscrimination rules are scheduled to go into effect for governmental plans, other than state and local government plans, typically beginning in the plan year beginning in 2001. Although the current year's tax bill would have changed that result, prospects for any tax bill passing this year are looking dim. I would therefore be concerned about this arrangement, if it resulted in discrimination in favor of the prohibited group.

I have not come across any authority on this issue. However, given the degree to which the IRS is scrutinizing purported welfare plans to determine whether they are really deferred compensation plans within the meaning of 457, I suspect that it would not look favorably on a "vacation" plan in which vacation could not be taken currently, but only upon termination of employment.

My sense is that in this area, like so many others, Congress forgot to take the special situation of governmental plans (the fact that they are subject to 503(B) instead of 4975) into account. However, 503(B) is much more limited than 4975 in terms of what it prohibits, so I would not anticipate that it would be a problem in most cases.

Yes, if (a) s/he is entitled to a distribution which constitutes an eligible rollover distribution from the plan with the 414(h) provision, and (B) the401(k) plan accepts rollovers. A 401(k) plan is a type of 401(a) plan, so it can (if its terms so provide) permit rollovers from any other 401(a) plan.

The only situation in which a 403(B) plan with employer contributions (other than salary reduction contributions) would not be treated as subject to ERISA is if it is a governmental or church plan. This is true regardless of whether the employer contributions are a match for employee contributions.