Carol V. Calhoun

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.

I would agree with Harvey on this one. This is something of a trap for the unwary. Section 415© was recently amended so that most salary reduction contributions (e.g., 403(B) and 401(k) contributions) can be included in income for purpose of calculating the 25% of compensation limit of section 415©. Many people forget that the same is not true of 414(h)(2) ("picked up") contributions. Thus, the largest possible picked up contribution to a defined contribution plan is 20% of the compensation before the salary reduction. For example, if you start out with compensation of $50,000, the maximum contribution would be $10,000, because the contribution is at that point 25% of the compensation remaining after the contribution (%50,000 minus $10,000, or $40,000).

Historically, not great. But then again, as one whose college money got seriously diminished by fairly long-term declines in the stock market back before the dawn of time (late 60s, early 70s), I tend to take the cautious approach.

Here's a link to Rev. Rul. 2000-35, in case you are interested.

You might look at the 403(B) exclusion allowance regulations. They provide a mechanism for former employees to continue to have an exclusion allowance. Of course, in order to avoid section 415 problems, either the contributions would have to be made in the same limitation year in which the individual was last employed or the A or B election (if available) would have to be made. One issue with severance pay, however, is whether the pay was already earned at the time the salary reduction election was made--in which case, the election could not apply to it. A way around this is to have the superintendent greatly increase the salary reduction contributions while still employed, so as to reach the maximum before severance of employment. The severance pay could be counted as compensation, even if the contributions could not be made out of it.

Well, this is one of those questions which many people have debated, but which has no clear answer. We typically advise our clients that the safest approach is to assume that adding a match will trigger the ERISA requirements.

Yes. The profit sharing and matching contributions need merely comply with the nondiscrimination requirements of Code sections 401(a)(4),401(m),410(B), etc. The universal availability requirement applies only to salary reduction contributions. See Code section 403(B)(12).

You might want to try posting this one on the Church Plans message board. My former partner Danny Miller, who moderates that board, has a lot of experience with what is and is not compensation in the case of church 403(b) plans.

The authority is Internal Code section 403(B)(7). I don't have the exact date on which that was added to the Code, but it's at least 20 years ago.

I would be a bit cautious about using ERISA language in a governmental plan. First place, inclusion of such language is not necessary in order to get an IRS determination letter for a governmental plan. Over the past 20 years, I have gotten numerous determination letters for governmental plans which complied only with those Internal Revenue Code requirements which apply to governmental plans, and not with other Code or ERISA requirements which would apply to private plans. Second, in some instances, ERISA requirements may conflict with state law requirements. For example, routine ERISA language concerning vesting or termination of a plan may conflict with state court holdings that a governmental plan is forbidden by the state constitution from ever terminating or cutting back on future benefit accruals for existing employees. State laws concerning domestic relations orders may require a governmental plan to comply with an order that would not meet the requirements of a qualified domestic relations order. State laws concerning the investments of a governmental plan may forbid or require certain investments, in a way that would be incompatible with ERISA requirements.

Unless this is forbidden under applicable state or local law, it is perfectly permissible. Disability may be a distributable event, if the plan so provides, but is not required to be.

Governmental plans other than state and local government plans would include plans of federal government agencies and international organizations.

These sections (other than 401(B)) are definitely inapplicable to state and local governmental plans. However, they are technically applicable to governmental plans other than state and local governmental plans. (Technical corrections legislation is expected to extend the relief to all governmental plans.) Perhaps this is the source of the confusion?