Carol V. Calhoun

No, 457 plans cannot make loans to participants. In recent private letter rulings, the IRS has been requiring 457 plans to assert that they do not permit such loans. See, e.g., Private Letter Ruling 199932045 (August 16, 1999). ------------------ Employee benefits legal resource site

Yes, and yes. Is that clear enough? Seriously, plans of the federal government and Indian tribes are exempt from 457. Thus, they are subject to the same deferred compensation rules as private companies, except that since they are exempt from ERISA, their plans can cover rank and file employees as well as top management and highly compensated employees.

The problem with using voluntary employee contributions to meet the requirements is that Social Security must be paid on each employee who does not accrue the necessary benefit under the employer's plan. Thus, you would still have to contribute to Social Security for those employees who elected not to participate. Moreover, it may be difficult to persuade employees to continue to contribute if they realize that failing to contribute will result in their receiving the benefit of employer contributions toward Social Security which are higher than the employer match they could get in the plan. The 7.5% figure comes from Treas. Reg. § 31.3121(B)(7)-2(e)(2)(iii)(A). You can view Treas. Reg. § 31.3121(B)(7)-2 in text format by clicking here, and in PDF format (requires the free Adobe Acrobat Reader) by clicking here. (These pages take a LONG time to load!) ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 03-08-2000).]

For everyone who knows me from this board, and has my e-mail, etc., information in their Rolodexes, please note that an update is in order. (I've already updated the information on the board--this is an issue only if you're keeping a card on me somewhere else.) I just started my own law firm, Calhoun Law Group, P.C. New e-mail address is cvcalhoun@benefitsattorney.com . Other contact information can be found by clicking here. I'm very excited about being on my own (well, if you don't count the 7 attorneys in Sanders, Schnabel & Brandenburg, with which my firm has a mutual of counsel arrangement). But for those who have expressed concerns, my employee benefits site will be continuing as always. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 03-03-2000).]

For everyone who knows me from this board, and has my e-mail, etc., information in their Rolodexes, please note that an update is in order. (I've already updated the information on the board--this is an issue only if you're keeping a card on me somewhere else.) I just started my own law firm, Calhoun Law Group, P.C. New e-mail address is cvcalhoun@benefitsattorney.com . Other contact information can be found by clicking here. I'm very excited about being on my own (well, if you don't count the 7 attorneys in Sanders, Schnabel & Brandenburg, P.C., with which my firm has a mutual of counsel arrangement). But for those who have expressed concerns, my employee benefits site will be continuing as always. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 03-03-2000).] [This message has been edited by CVCalhoun (edited 03-03-2000).]

Gee, Kirk, after all that, will it be too much of a let-down if I actually agree with you? Seriously, I don't have a serious problem with arrangements of a limited duration, in which the employee maintains clear ties to the entity which leases the employee to another entity. My concern is more with the horror stories I've seen, in which employees go on for years in fact working for one entity, and theoretically working for a third party leasing agency. You're right that so long as the leasing arrangements are short-term and casual, not only is the risk of their recharacterization lowered, but the risks if they are recharacterized can also be small.

You'd have to look at the specific state's laws, including the terms of the state retirement system, to determine this. It's not a federal issue, but may well be an issue under applicable state law. ------------------ Employee benefits legal resource site

It was in the tax bill Congress passed and Clinton vetoed last year. It's now in both the House and Senate versions of the minimum wage bill. Maybe once the election is over, Congress and the President will be able to come up with compromises, instead of just passing bills sure to be vetoed, and/or vetoing bills if they are passed? By the way, how does everyone like this new format? I'm not sure I like it being known that this is my 356th post on this board!

The real question is whether the employees continue to be common law employees of the city, or whether they in fact become employees of the private agency. This depends not on who pays them, or what their contracts say, but on who actually has direction and control over them. And since that determination is now governed by a 300 million factor test which depends on the color of the moon over Aunt Minny's mimosas on the 23rd of August (okay, so maybe I'm exaggerating!), it's very hard to be sure that the employees remain true employees of the city when their day-to-day work is regularly, over a long period of time, being supervised by someone else. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 03-03-2000).]

The real question here is whether the plan will automatically become subject to ERISA when the tax-exempt entity takes it over. There have been some recent favorable Department of Labor rulings regarding a situation in which a governmental entity continues to hold assets for the benefit of employees who have now been transferred to a private employer. But as far as I know, they have not dealt with the situation in which the plan itself is transferred to the private employer. ------------------ Employee benefits legal resource site

Yes, a governmental plan can obtain an IRS determination letter on its qualified status. We have obtained determination letters for many governmental plans. The reason to do this is that if a governmental plan is not qualified under I.R.C. § 401(a), participants are taxed on contributions to the plan as they become vested -- even though benefit distribution would typically not take place for many years after vesting. Moreover, vested employer contributions are also subject to income and FICA tax withholding. The employer is liable for the taxes which should have been withheld, even if the employer was unaware of the need for withholding and therefore did not actually withhold anything from the participant's pay. Of course, qualified status under 401(a) is available even without a determination letter, if the plan meets the 401(a) requirements. (You can click here for a chart of which IRC requirements do and do not apply to governmental plans.) Thus, a determination letter is just extra insurance that the plan has not made a mistake in interpreting the qualification requirements, and that the plan will not be required to make retroactive modifications if the IRS later changes its mind regarding what a particular provision means. Depending on the circumstances, this protection may or may not be worthwhile. ------------------ Employee benefits legal resource site

I've got one online, which Art Tepfer and I wrote. It's at http://www.benefitsattorney.com/ria.html. ------------------ Employee benefits legal resource site

It's not clear to what extent you might be able to stop the Form 5500 filings on the theory that the 403(B) plan had been terminated, at least if you converted the 403(B) plan to individual annuity contracts. This topic has been discussed before on this board; you can click here to see the older discussions. ------------------ Employee benefits legal resource site

The only thing I'd warn you about here is that you need to look at your state's law to determine whether it permits such a vesting schedule. Because governmental plans are not subject to either the vesting rules (other than vesting on plan termination) or the nondiscrimination rules of federal law, such an arrangement would not be prohibited by federal law. Also, do make sure that you define the affected classes of employees carefully, so that there will be no question later as to who is in which group. ------------------ Employee benefits legal resource site

Essentially, the limit on the employer's contributions to the 401(a) plan is the 415© limit--the lesser of 25% of compensation or $30,000. The limit on the employee's contributions to the 457 plan would be the normal 457 limit--the lesser of 25% of compensation before the contribution, or $8,000. Employees could make after-tax contributions to the 401(a) plan, if the employer set things up so as to permit this. However, in order to make pretax contributions to the 401(a) plan, they would have to make the irrevocable election called for by 414(h)(2) and the rulings thereunder, unless the employer was grandfathered for purposes of the rule that normally prohibits governmental entities from maintaining 401(k) plans. And of course, either pretax or after-tax employee contributions would be counted against the 415© limits under the 401(a) plan, thereby reducing the amount the employer could contribute. ------------------ Employee benefits legal resource site

JWK, you're right in this instance, since the employer is a municipality. But people should bear in mind the possibility of 401(m) being applied to governmental plans other than those of state and local governments (e.g., plans of the federal government or international organizations). See Notice 99-40. Obviously, you wouldn't need to worry about 457 matches in such situations, since those types of governmental units are not subject to 457. However, you do need to take into account the general issue of 401(m) and other nondiscrimination rules eventually applying to such plans. ------------------ Employee benefits legal resource site

Your subject line got a bit garbled. But if you are trying to figure out whether a municipality can match contributions to a 457 plan, the answer is yes. This can be done within the context of the 457 plan itself, but that is usually not a good idea. The reason is that all contributions, employer and employee, to a 457 plan are counted in computing the 402(g) limit. To maximize contributions, the employer can set up a 401(a) defined contribution plan. The employees can then make their contributions to the 457 plan, and the employer can put its match into the 401(a) plan. ------------------ Employee benefits legal resource site

Actually, you've got two different questions here. The first is what the plan itself says. Even if a particular form of distribution would be legal, a plan is not required to offer it. Second is the restrictions on distributions imposed on 457 plans by the Internal Revenue Code. Under those rules, distributions cannot be made earlier than (i) when the participant attains age 70½, (ii) when the participant separates from service, or (iii) when the participant faces an unforeseeable emergency. They must begin by the later of the April 1 of the year following the year (i) when the participant attains age 70½, or (ii) when the participant retires. There are additional, sometimes quite complicated rules regarding how fast the distributions must be made, and what happens in the event the participant dies. The primary penalty for failing to make distributions when required is I.R.C. § 4974, which imposes a 50% excise tax on the participant for failure to take required distributions. Although in theory the plan could also lose its 457(B) status for failure to make required distributions, such loss of 457(B) status would apply only if the plan failed to correct its procedures after the IRS notified it of the problem. Treas. Reg. § 1.457-2(l). ------------------ Employee benefits legal resource site

Your annuity contract is required to be fully vested. Thus, failing to pay further premiums will not cause it to lapse, or you to lose what is already in it. With respect to your questions regarding availability of and penalties for early withdrawal, you've got two different questions here. The first is what the annuity contract itself says. Even if a particular form of distribution (e.g., a hardship distribution, or a distribution upon separation from service) would be legal, a plan is not required to offer it. Similarly, an annuity issuer can impose surrender charges on early withdrawals from an annuity contract, even if the Internal Revenue Code does not. Thus, it is important to read the contract itself to determine what it says. Second is the restrictions on distributions imposed on 403(B) plans by the Internal Revenue Code. Under those rules, most distributions of salary reduction contributions cannot be made earlier than (i) when the participant attains age 59½, (ii) when the participant separates from service, (iii) when the participant dies, (iv) when the participant becomes totally and permanently disabled, or (v) when the participant faces a hardship. Moreover, only the original contributions, not the earnings thereon, can be distributed in the event of a hardship. Thus, since you have separated from service, you need not worry about the hardship distribution rules. Rather, the only issue in terms of your ability to get a distribution is whether your plan or annuity contract allows for distributions upon separation from service. If you have not attained age 55 when the distribution is made, you will be subject to an additional 10% tax on the taxable amount distributed. This additional tax would be in addition to (a) any surrender charges imposed by the annuity issuer, and (B) ordinary income taxes. However, this rule merely imposes an additional tax on a distribution, it does not preclude one. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 01-26-2000).]

For any of you who missed the RIA article on 403(B) Plan Audit issues, it is available online by clicking here. ------------------ Employee benefits legal resource site

The one difference between 403(B)(7) contracts and 403(B) annuity contracts is that excess contributions to 403(B)(7) contracts may trigger the excise tax under I.R.C. § 4973, if they exceed the maximum exclusion allowance and/or the section 415 limitation (as opposed to just the 402(g) limitation). ------------------ Employee benefits legal resource site

Well, if you are a student of all of those things, you're probably in a better position to have an opinion on this than I am! I've always had mixed feelings on governmental immunity at all, and certainly as applied to governmental plans. On the one hand, it can be hard to get governmental employees to serve as fiduciaries at all at the rates of pay that governmental entities usually provide if the employees believe that they are potentially subject to billions in personal liability. On the other, if fiduciaries believe that they have no liability whatever, they may have little motivation to act in a manner to preserve and increase retirement fund assets. I would love to know what you think, since you've obviously spent far more time considering these issues than I have. ------------------ Employee benefits legal resource site

A federal District Court case just issued in December, Walker v. Board of Trustees, will be of interest to any members involved with collectively bargained plans. It held that governmental immunity would NOT apply to a board of trustees of a collectively bargained governmental plan, or to the board members in their individual capacities. This was true even though the court held that the board's actions would constitute "state action" for purposes of applying federal Constitutional provisions to the board. --------------------------------------- Employee benefits legal resource site

No. I.R.C. § 457(e)(5) and Treas. Reg. § 1.457-2(e)(2) define "includible compensation" for purposes of 457 plans to include only compensation which is includible in the employee's income (for tax purposes). Thus, amounts which are not includible in the participant's income (including amounts contributed to the 457 plan itself, as well as the contributions to defined benefit plans you mention) cannot be included in includible compensation. --------------------------------------- Employee benefits legal resource site

Well, there is no problem with having a plan funded in part by contributions of someone other than the employer and the employees. Rev. Rul. 63-46, 1963-1 CB 85; Revenue Ruling 68-223, 1968-1 CB 154; Rev. Rul. 65-178, 1965-2 CB 94. Thus, I wonder whether it would be possible either for the union itself make contributions to the fund (I'm assuming this is not a labor law problem in the case of a governmental plan, though I'm no expert on the labor side), or to have members of the public make direct contributions to the trust fund? ---------------------------------------- Employee benefits legal resource site