457 conversion to IRA

[Guest ron farrar]

We are a non-profit organization and are in the process of discontinuing a 457 Plan and switching to an IRA.

The Plan Administrator is saying that funds from the Plan are the property of the Organization and cannot be removed from the Plan until retirement. They are also saying that the funds in the individuals account are the property of the Organization and could be lost if the Organization files bankruptcy or goes out of business with outstanding debts. Most of the funds have been contributed by the employee with some matching funds by the Organization.

Can anyone help with this issue.

Thanks

Ron

[jlf]

Ron...the Small Business Job Protection Act of 1996 repealed what your Plan Administrator states is still in force.

The individual's account balance must be used for his/her exclusive benefit. It is no longer the property of the employer subject to the potential claims of creditors of the employer.

Check to see if the plan remains qualified. If it changed to non-qualified then your Administrator is correct.

Best wishes,

Joel L. Frank

[Carol V. Calhoun]

Your Plan Administrator is correct, assuming that you are a nongovernmental tax-exempt employer. The rule cited by Joel is correct for 457 plans maintained by governmental employers. (I'm assuming that he answered your question the way he did because this board deals primarily with governmental employers, but it sounded from your post as if the employer involved in your situation might not be governmental.)

There is, unfortunately, no real way of fixing this situation. Some organizations use rabbi trusts (trusts which remain subject to the claims of the employer's general creditors), or insurance products which remain subject to the claims of general creditors of the employer, as a mechanism for ensuring that benefits will be paid even if there is a change of management at the organization. However, these mechanisms do not help if the employer becomes bankrupt.

Other alternatives include having employees purchase insurance to cover them in the event of the employer's bankruptcy. However, such insurance must be purchased by the employee, not the employer, and may or may not be commercially available. If the employer pays the employee extra to compensate for the need to purchase such insurance, the additional amount paid is subject to tax.

If an individual is employed by one (financially shaky) organization in a controlled group, it may be possible to have one rabbi trust for all employers in the controlled group, and have it subject only to the claims of one of the employers (presumably the most financially sound one). Private rulings have allowed this approach at least in the case of excess benefit plans under section 415(m), which are subject to somewhat similar rules, although it is unclear whether it would be extended to 457 plans.

[Guest Brent Rowell]

I'm a little confused by your reply.

Are you saying that 457 funds held by a governmental entity can be rolled over to an IRA?

Thank You

Brent Rowell

[jlf]

Brent, Yes, but not prior to January 1,2002