Carol V. Calhoun

Basically, the way this is done is by using IRC section 414(h)(2), which provides that a contribution referred to in the plan as an employee contribution will nevertheless be treated as an employer contribution if it is picked up by the employer. Rev. Ruls. and 81-36 set forth the requirements for an employer pick-up within the meaning of http://frwebgate.access.gpo.gov/cgi-bin/multidb.cgi?WAISqueryString=26USC414&WAISdbName=1994_uscode_suppl_4+United+States+Code+(1994' suppl.+2)&WAISqueryRule=($WAISqueryString)&WAIStemplate=multidb_results.joel.html&WrapperTemplate=cong013_wrapper.html&WAISmaxHits=40">414(h)(2). Essentially, they state that an amount is considered to be picked up, even if the employee's salary is reduced by a corresponding amount, provided that (a) the employer designates the amount as picked up, and (B) the employee has no choice to receive the amount in cash as opposed to having it contributed to the plan. Various private letter rulings have ruled that a one-time irrevocable election on the part of the employee as to whether to have the amount contributed will not be treated as a choice within the meaning of (B). Hope this helps!

The New York City Police Pension Fund is part of the New York City Employees' Retirement System. (Just click on the link to go to its Web site.) The statutory section you want is Internal Revenue Code section 414(h), also found at 26 U.S.C. § 414(h). Just click on the button below to go to a page which will have a link to 26 U.S.C. § 414(h). Click on that link, and then scroll down to subsection (h).

This is not required by federal statute, but would be a matter of state or local law for your jurisdiction.

Also, contributions made pursuant to a participant's one-time election at the time of hire or first participation in any plan of the employer are treated as nonelective.

Do you have any idea of whether people have actually been permitted to modify their elections? Although not part of formal IRS policy, it has been our experience that IRS people are often willing to give governmental plans the benefit of the doubt if the plan document is deficient, but actual practice has been in accordance with the requirements. Also, remember that revocability of a pick-up is a tax issue, but not a qualification issue. Thus, the IRS could come back against you for past years, asserting either individual income taxes or employer withholding taxes. However, unlike a qualification issue, it does not have to be corrected retroactively in order to get favorable tax treatment for contributions made after an amendment which inserts the proper language.

I agree with Kirk. Maintaining the attorney-client privilege in employee benefits matters is often extremely difficult, and indeed its availability at all can often depend on which court you are in. I was just trying to emphasize that you definitely lose it, even if it would otherwise be available, if you are paying fees out of plan assets.

457 plan contributions do not count toward the 415© limit. However, there is a complicated interrelationship of 457 contributions to contributions under a 401(k) or 403(B) plan, which should be looked at if you have either of those types of plans.

Gee, Kirk, you are SO cynical! I would just add to this discussion that you have to make sure that the administrative expenses being paid by the plan are in fact expenses of the plan, not "settlor expenses" under the famous "Maldonado letter." (This part is, of course, NOT directed to Kirk, who can be assumed to be fully familiar with that letter. ) For example, recent ERISA Advisory opinions have held that expenses of amending a plan to maintain its qualification, or an audit of a plan's qualification, are in part settlor expenses, because having the plan qualified benefits the plan sponsor as well as the plan itself. Another consideration arises with respect to attorneys' fees. If the plan is paying attorneys' fees, any attorney-client privilege could not be asserted against participants and beneficiaries of the plan, because they would be the "client." Just a couple more issues to keep in mind.

Possibly. This requirement has been waived when plans are still within the period for updating the plan, but I haven't seen anything which would suggest that a plan which is never amended can just ignore this requirement.

The answers are no, no, and no. There really isn't a cite; it's just that the provisions requiring spousal consent are in Title I of ERISA and the qualified (401(a)) plan provisions of the Code, neither of which would apply in this situation.

I'm afraid that the entire amount is ordinary income. That is true even with respect to the part derived from long-term capital gains. The only advantages to taking three years to withdraw the funds are that (a) the tax is deferred with respect to the portion of the amounts as to which the distribution is deferred, and (B) this can in some instances prevent a spike in income from pushing you into a higher tax bracket.

It is not clear that the new 415(n) rules apply to a transfer or rollover between plans to purchase service credit, as opposed to using new money for the purchase. Under the regulations before 415(n), a transfer or rollover was not treated as subject to either the 415© or 415(B) rules, presumably on the theory that the amounts had already been subjected to the 415© limits at the time they were contributed to the original plan. Also, after-tax dollars cannot be rolled over, but they can be transferred directly from one plan to another. A rollover occurs only when someone could take a distribution from the plan, but instead elects to have the amount sent to a new plan. A direct rollover can occur even when the participant has no distribution right, and occurs pursuant to the action of the two plans involved. Finally, I would agree that new after-tax money will be subject to the new rules. The new rules basically permit purchases which fall within their terms to be subjected to either the 415(B) or 415(B) rules, so you would want to look to see which one is more advantageous.

The Idaho ruling actually dealt with treating the state of Idaho and all of its subdivisions as a single employer for purposes of the 401(k) grandfather rules. You can click on this link to see a copy. However, note that it involved a situation in which the state chose to go for single employer status. The individuals at the IRS involved with the ruling stressed that the situation might well be different if the entities chose to treat themselves as different employers.

Anyone who wants to see the bill language and revenue estimates can click on this link.

Thanks for posting this, Rick--and glad to see you found this board! For anyone interested in reading the California Attorney General's opinion, you can click here to see it. (If you don't already have the Adobe Acrobat reader, a free download, you'll need it to read or print this document.)

Yes, a 457 plan must follow the minimum distribution rules of 401(a)(9). See 457(d). However, the only requirement of 401(a)(9) with respect to defined contribution plans (which virtually all 457 plans are) is that distributions not be made more slowly than permitted by the statute. Thus, if the plan so provides, distributions can be made under a form (such as over a single life expectancy) which is always at least as fast or faster than the statutory requirements.

jlf, you are correct. I was making the assumption that the school, although private, was tax-exempt under 501©(3), rather than being a for-profit entity.

Only state and local government plans are subject to 457. Thus, a governmental plan which is not a state or local government plan (e.g., a federal government plan, a plan of an international organization, or a plan of an Indian tribe) is not subject to 457.

A one-year period for the profit sharing contributions should not be an issue. A two-year hold-out for matching contributions would be an issue under Code section 410(a)(1)(A)(ii) unless the employer contributions were immediately 100% vested.

This seems to be a common misconception, but it is absolutely not true. We have gotten numerous determination letters for governmental plans over the years. In certain instances, an examiner has initially requested that some provision applicable only to private plans be added. However, in each case the examiner dropped the request as soon as we pointed out that the requirement was not applicable to governmental plans. You can click here for a list of the qualification requirements which do and do not apply to governmental plans.

The normal rule under section 451 is that amounts from a nonqualified plan are not taxable to a participant until they are paid or made available. However, two exceptions apply. First, if the money is put into a nonqualified trust (other than a rabbi trust), the amount would be taxable under 402(B). Second, if the amount is deferred under a plan maintained by a state or local government or nonprofit entity, it would be taxable under 457(f). Because neither of these rules would apply to a rabbi trust (or unfunded arrangement) of a federal government agency or an Indian tribe, the normal rules of section 451 would apply.

There is actually a very old revenue ruling, Rev. Rul. 63-46, 1963-1 CB 85, which permits contributions by a party other than the employer or the employees. You might look at Code § 170©(1) with regard to the deductibility of a contribution to a state or local government as a charitable contribution. And of course, the donor might also argue that the contribution was a business expense, if the intent was to promote the business' name or secure other business advantages. As for prohibited transaction problems, the federal rules for governmental entities (under § 503) are looser than those for private entities under § 4975. A donation of stock would probably not violate § 503. However, if the stock could be recharacterized as debt, there might well be an issue. The question of whether UBIT applies to a governmental plan is too complicated to go into here. (You'll have to wait until my book comes out. ) However, suffice it to say that the answer is a resounding, "maybe." Finally, as always, you need to consult applicable state and local law to determine whether there is any problem with the arrangement.

The statute states in the case of 457 plans (though not in the case of 401(k) plans) that taxation occurs when the amount is "made available." Thus, if a participant who had already begun receiving annuity payments were given the option to take the commuted value right away, s/he would be taxed on the commuted value, even if s/he decided to continue receiving annuity payments. It is this statutory language which would have to be changed before participants who have begun annuitization would be able to take the commuted value as a rollover. For the one who did not begin annuity payments yet, the issue is whether the election period has passed. An amount is not considered "made available" if the participant is given a right to elect annuity forms while still employed, or for a brief period after termination of employment. But if the individual has already terminated employment, s/he cannot be given a new election without creating the problems discussed above.

Do you have the number of the PLR? It had been my understanding that at least for a long time, the IRS wouldn't allow 401(k) or 403(B) contributions out of money which had already been earned, notwithstanding the "made available" language in the statute. I'm happy to hear that they have reversed themselves on this, which never seemed justified in the first place.

Since Brent specifically asked for my comments, I figure that's my clue to join in. The problem is that an election of a 457 distribution option is irrevocable after you cease to be employed. So if you elect an annuity option now, you are stuck with it for the future. And annuity payments (from any kind of plan) cannot be rolled over. So if you elect an annuity now, you will not be able to roll it over later even if the law is changed to allow rollovers from 457 plans.