Plan Doc

A governmental 457(b) plan excludes from participation employees regularly scheduled to work fewer than 36 hours per week. The plan also provides that an employee will enter the plan on the first day of the calendar quarter next following the later of the employee's (i) completion of 6 months of service during which the employee is regularly scheduled to work at least 36 hours per week, or (ii) attainment of age 21. Anyone see a problem with these eligibility and entry date provisions? Also, must a governmental 457(b) plan allow long-term part-time employees to make elective deferrals? How, if at all, might state law (specifically, Colorado's) affect the answer to these questions?

Thanks, Peter Gulia/Bruce1, for these suggestions!

Litigation involving a number of adult children and stepchildren of the owner of a single IRA account, who died in 2023, are now resolving their dispute by a settlement allocating a share of the IRA to each of them. The IRA owner had been taking RMDs but died without having taken her 2023 RMD, which still has not been distributed. My understanding is that the 2023 RMD could have been taken by any one of the beneficiaries in the year of the IRA owner's death. Is there any way the missed 2023 RMD can now be distributed to only one of the beneficiaries so that just one Form 5329 needs to be filed or must the 2023 RMD be allocated among all of the beneficiaries in proportion to their respective shares of the IRA to be received under the settlement and a Form 5329 be filed by each of them for a corresponding share of the 2023 RMD?

How is that even possible? You think of everything!

Thanks, Peter Gulia. In my situation, there isn't any question as to whether the plan sponsor is a church. It is a church. Does the fact that a church is not an eligible employer under Section 457 mean that a NQDC plan sponsored by a church escapes the rule that benefits are taxable upon vesting, which rule applies to deferred compensation plans of non-church tax-exempt organization plans governed by Section 457(f)? In other words, can a church NQDC plan that isn't covered by Section 457, including presumably Section 457(f), be treated the same as a for-profit company NQDC plan in allowing benefits to vest without those benefits being taken into income upon vesting?

Thank you, Tom Veal. As a follow-up, my understanding is that churches are not subject to Internal Revenue Code Section 457, which I believe implies that the rule governing 457(f) plans of non-church tax-exempt organizations requiring that deferred compensation is taxable upon vesting does not apply. Is it then safe to say that for a church NQDC plan, vested benefits are not taxed until the compensation is paid or otherwise made available to a participant?

Can a church offer a nonqualified deferred compensation plan, subject to Code Section 409A, to all employees or must participation be limited to a top-hat group?

A U.S. based tax-exempt organization 457(b) plan sponsor wants its new CFO, an Australian citizen who does not have a social security number, to participate in the plan. I'm only guessing, but I would think that a non-U.S. citizen earning compensation within the U.S. from a U.S. employer would need a social security number unless the individual is exempt from U.S. taxes, most likely pursuant to a tax treaty between the two countries, although I'm no subject matter expert. If so exempt, then presumably there is no advantage to the CFO participating in the plan (other than perhaps receiving an employer match if the employer decides to make one). Anyone with other thoughts concerning this situation? Absent a social security number, I'm not sure our systems will even allow us to establish a plan account for this individual.

Peter Gulia, The document I'm working from is under the heading, "Adoption Agreement for Great-West Trust Company, LLC Non-Standardized Governmental 401(a) Pre-Approved Plan," and includes the following language applicable to any exclusion of part-time, temporary or seasonal employees: "If option 4. - 6. (part-time, temporary and/or seasonal exclusions) is selected, when any such excluded Employee actually completes 1 Year of Service, then such Employee will no longer be part of this excluded class. For this purpose, the Hours of Service method will be used for the 1 Year of Service override . . ." So, it appears the document drafters, anyhow, assumed that a governmental 401(a) plan is subject to the requirement that part-time, temporary and seasonal employees not be excluded from the plan upon meeting the fail-safe. Do you think otherwise? I don't believe there is a problem with the 457(b) plan not providing a similar fail-safe, per se, except that it does have the effect of negating the operation of the fail-safe under the 401(a) plan, since contributions under the 401(a) plan depend entirely on an employee's participation in the 457(b) plan.

A governmental 401(a) plan excludes part-time, temporary and seasonal employees, subject to a 12-month, 1000 hour fail-safe, which makes the exclusion inapplicable if satisfied. The only plan benefit is an employer contribution equal to 5% of plan compensation to the account of any participant who defers at least 3.5% of compensation under the employer's 457(b) plan. The 457(b) plan excludes part-time, temporary and seasonal employees but does not grant an exception for employees who complete 12 months of service and 1000 hours. The exclusion under the 457(b) plan, therefore, has the effect of depriving part-time, temporary and seasonal employees who meet the 401(a) plan's fail-safe from receiving any benefit under the 401(a) plan, as these employees are not able to defer under the 457(b) plan. This circumstance appears to me to present a tax qualification issue for the 401(a) plan. Any thoughts?

Thanks, all. I sense that making the nonelective contribution discretionary with the employer will work, rather than having the contribution based upon x% of compensation or some other formula that would appear to base the contribution on services performed before the participant entered the plan.

Fiscal year 6/30 organization wants to contribute funds in June, 2024 to a 457(f) plan being adopted on June 1, 2024. I am told the employer has been "setting aside" funds to contribute on behalf of the executive for past services for the organization. This sounds to me like a 409A, if not a 457(f) violation, as I don't believe contributions can be made for services performed before the executive has become a participant. Nor do I believe it permissible to make the plan retroactive to a date before its adoption such that the executive could become a participant as of an earlier date, July 1, 2023, for example. Am I right? If so, can a contribution be characterized as something other than for past services to enable the contribution in the current fiscal year even though the plan didn't exist for the first 11 months of the fiscal year?

Thanks, CuseFan; the pastor will be pleased with this earthly offering!

A church, which is recognized as a 501(c)(3) organization, sponsors a 403(b) plan and wants to establish a nonqualified deferred compensation plan for its senior pastor. The NQDC plan will be designed to comply with Internal Revenue Code Section 409A. Are contributions to the church's NQDC plan taxable upon vesting, as typically occurs with non-church tax-exempt organization NQDC plans?

Thank you, Lou S. and CuseFan; it looks like a discriminatory compensation problem more than it does a coverage issue.

Controlled group members Company A and Company B have some non-highly compensated employees who receive wages from both companies ("dual employees"). Company A sponsors a 401(k) plan. Company B does not sponsor a plan, and is not a participating employer in Company A's plan. Owners do not want to cover any Company B employees or to count Company B wages as plan compensation of dual employees. Dual employees participate in the plan to the extent of their compensation from Company A only. For purposes of coverage testing, is each dual employee treated as one employee of Company A who is participating and as one employee of Company B who is not participating? This seems counterintuitive if a controlled group is deemed a single employer for plan purposes. Is each dual employee instead treated as a single employee of the controlled group, thereby helping pass the ratio percentage test on the basis of their participation in the plan, even though their Company B wages are excluded, but presenting a likely discriminatory definition of compensation problem because of that exclusion?

Thanks, Peter G. Appleby, I need to get more info, but I believe the mentioned automatic waiver of the 2023 RMD penalty could be applicable here. Thanks for the tip!

Thanks, Appleby. Does it make a difference if the beneficiaries of the IRAs are not the same?

In the case of an owner of multiple IRAs who was receiving RMDs from her IRA accounts before death, can the IRAs be aggregated after death, as allowed during lifetime, so as to permit payment of the total RMD amount for all the IRAs to be made from a single IRA account?

An IRA owner who had begun receiving required minimum distributions (RMDs) during her lifetime died, following which a dispute ensued among beneficiary claimants to the IRA. Litigation commenced in 2023 under an interpleader action by custodian bank, involving the decedent's 3 children on the one hand and her late husband's 2 children from a prior marriage on the other. The latter had earlier in the IRA owner's lifetime been designated as co-beneficiaries of the IRA along with decedent's children. However, husband's 2 children were removed as co-beneficiaries in an asserted "deathbed" change to the IRA owner's beneficiary designation wrought by alleged undue influence of her daughter at a time when the owner supposedly lacked capacity to make such a change. Custodian bank advised the feuding beneficiary claimants that payment of the 2023 RMD needed to be made by 12/31/2023, suggesting the claimants work out an agreement under which the RMD would be distributed to one or more of them so as to avoid a missed RMD, with the distribution amount being reapportioned later, once the litigation concluded and the rightful beneficiaries were determined. No agreement was reached, so the RMD wasn't paid. Trial is scheduled for late 2024, and it appears probable that the case will not be resolved before 2025, raising the prospect of a missed RMD for 2024. For the missed 2023 RMD, does it seem likely that the IRS will grant relief from any penalties on the basis of reasonable cause? Is it possible/advisable to seek a private letter ruling from IRS for the anticipated failure to distribute the 2024 RMD, as the beneficiary claimants again will probably not agree on the disposition of the RMD? Any other thoughts about how to resolve this RMD conundrum?

I think the problem lies with now having provisions for both a basic safe harbor match and a fixed, non-discretionary, non-safe harbor match, as a result of adding the safe harbor match effective 1/1/2024 and failing to remove the existing non-safe harbor fixed match at that time. With both these provisions in place, the sponsor is arguably on the hook for contributing up to 8% of compensation (4% under the basic safe harbor match and another 4% (50% of 8%) under the fixed match), when the intent was to limit their exposure to 4% of compensation. That's the impetus for wanting to remove the non-safe harbor match provisions.

Plan sponsor's calendar year, non-safe harbor 401(k) plan provided a fixed match of 50% of deferrals up to 8% of compensation in 2023. Plan was amended effective 1/1/2024 to add a basic safe harbor match intended to satisfy ADP and ACP safe harbors. Due to an apparent oversight, the fixed match was not removed when the safe harbor match was added. Sponsor indicates its intent was to replace the fixed match with the safe harbor match, and to discontinue the non-safe harbor fixed match after 2023. Can the non-safe harbor fixed match be removed mid-year without adversely affecting the plan’s safe harbor status? If removed, would the fixed match nevertheless have to be funded at least through the date the amendment removing it is adopted, especially as there are no allocation conditions on the fixed match and the contribution presumably would already have accrued? Even if removing the fixed match would not violate the rules governing mid-year changes to a safe harbor plan, would removing it prospectively for the balance of 2024 still leave the plan subject to ACP testing for the 2024 plan year (e.g., because the fixed formula is outside the ACP matching safe harbor)?

Thank you Peter/Tom. These are all great insights!

Thank you, Peter Gulia. Any thoughts on whether vesting under a 501(c)(3) church NQDC plan is a taxable event as it is for tax-exempt NQDC plans under Code Section 457(f)?