Nonqualified 457(b) Distributions

[Guest tschwab]

Under the 2001 EGTRRA my employer now qualifies for and is offering a 457(B) plan beginning 2002 through Fidelity Retirement Services.

We have a pre-exisitng 403(B) retirement plan and a defined benefit retiurment plan.

My employer is a not-for-profit organization and a NON-governmental organization.

Our staff offered this plan are highly compensated employees and participate in NONqualified retirement plans.

I understand the IRS has not yet provided guidance regarding rollover of 457(b)distributions for NONgovernmental employers.

Therefore, this plan is written such that at retirement or termination of employment the 457(B) account balance is distributed in a LUMP SUM to the employee...a taxable event.

I compared 457(B) PRE-tax dollar investment accrual vs. AFTER-tax dollar investment accrual over 15 years with an 8% return.

Because we will be in the highest income tax bracket (assuming current 2001 rates) the tax on the 457(B) LUMP SUM distribution will essentially wipe out any tax advantaged savings of the plan when compared to investing PRE-tax dollars.

Therefore, enrolling in this new 457(B) plan does not make sense unless distributions can be spread out throughout retirement assuming my income tax bracket falls.

What are the prospects for NONgovernmental 457(B) plan distributions to be either spread out over retirement or rolled over to other plans (ie. 403b) to avoid LUMP SUM pay outs?

Thanks.

[Carol V. Calhoun]

Your employer can, but is not required to, offer an installment pay-out as an alternative to a lump sum payout. This would enable you to spread the payments (and the tax) over a number of years. Indeed, under the EGTRRA rules, you could be given an option to elect to take only the distribution you wanted each year after retirement, so long as you took at least the minimum required by Code section 401(a)(9). However, because none of this is mandatory, you'd have to speak to your employer about allowing it.

The only other option for deferring taxes would be a direct transfer to another 457 plan, since rollovers from nongovernmental 457 plans are not permitted. However, a direct transfer is typically not a practical alternative, since it requires that you be covered under a new 457 plan that allows for direct transfers into it at the time you are entitled to receive your distribution under the old plan.

[Guest tschwab]

SINCE MY ORIGINAL POST IN DECEMBER 2001:

"Under the 2001 EGTRRA my employer now qualifies for and is offering a 457(B) plan beginning 2002 through Fidelity Retirement Services.

We have a pre-exisitng 403(B) retirement plan and a defined benefit retiurment plan.

My employer is a not-for-profit organization and a NON-governmental organization.

Our staff offered this plan are highly compensated employees and participate in NONqualified retirement plans.

I understand the IRS has not yet provided guidance regarding rollover of 457(b)distributions for NONgovernmental employers.

Therefore, this plan is written such that at retirement or termination of employment the 457(B) account balance is distributed in a LUMP SUM to the employee...a taxable event.

I compared 457(B) PRE-tax dollar investment accrual vs. AFTER-tax dollar investment accrual over 15 years with an 8% return.

Because we will be in the highest income tax bracket (assuming current 2001 rates) the tax on the 457(B) LUMP SUM distribution will essentially wipe out any tax advantaged savings of the plan when compared to investing PRE-tax dollars.

Therefore, enrolling in this new 457(B) plan does not make sense unless distributions can be spread out throughout retirement assuming my income tax bracket falls.

What are the prospects for NONgovernmental 457(B) plan distributions to be either spread out over retirement or rolled over to other plans (ie. 403b) to avoid LUMP SUM pay outs?

Thanks."

AND CAROL CALHOUN'S REPLY:

"Your employer can, but is not required to, offer an installment pay-out as an alternative to a lump sum payout. This would enable you to spread the payments (and the tax) over a number of years. Indeed, under the EGTRRA rules, you could be given an option to elect to take only the distribution you wanted each year after retirement, so long as you took at least the minimum required by Code section 401(a)(9). However, because none of this is mandatory, you'd have to speak to your employer about allowing it.

The only other option for deferring taxes would be a direct transfer to another 457 plan, since rollovers from nongovernmental 457 plans are not permitted. However, a direct transfer is typically not a practical alternative, since it requires that you be covered under a new 457 plan that allows for direct transfers into it at the time you are entitled to receive your distribution under the old plan."

.....my employer tells me the IRS has still not provided guidance to my NONgovernmental employer regarding the allowability of an installment type payout from its 457(B) plan....therefore, my employer is interpreting the regulations conservatively and our plan still offers only a LUMP SUM PAYOUT OPTION.

Is there any new news on this front that I can pass a long to my employer?? Hopefully some guidance will be forthcoming soon.

Thanks.

[mbozek]

TSchwab: The rollover options is only available to govt plans. However, there are alternatives for ncdp called SERP swaps in which the employee gives up the rights to nq plan benefits prior to distribution in exchange for payments to another program, e.g., split $ life insurance which can minimize the income tax on the proceeds. This is not a rollover but ee has the option of using income tax free LI proceeds to fund a family trust. Serp swap is not a recommended option until ee has significant amount of deferral in nq plan.

[MGB]

tshwab:

I don't understand what guidance they are waiting for. It is very clear under the law that you cannot rollover the lump sum and that the plan can have installment payouts.

The IRS is about to issue omnibus proposed regulations on all aspects of 457 plans...but there is no reason to wait for these. The rules that you are concerned with are very clear.