Beneficiary distributions on 457 plans

[Guest Karens]

I have a governmental client who has a 457 plan for employee deferrals. One of the 457 providers requires that upon the death of a participant the account balance must be paid to the City instead of a named beneficiary. The service provider is quoting IRC 457(g) as the authority for this. When I review 457(g) it indicates the requirement of a trust, custodial account, or annuity for the exclusive benefit of plan participants. Paying the account balance to the City seems to violate this requirement. Is the service provider correct? If not, is there any additional guidance you can direct me to?

Thanks for your help and I look forward to receiving the Govt Answer book that I have on order!

[Carol V. Calhoun]

The service provider is absolutely incorrect. As you suggest, the exclusive benefit requirement would prohibit, not require, payment of the benefit to the City.

I'm a little bewildered as to how to counter the service provider's argument. It's sort of like someone who reads a sentence saying, "The sky is blue," and interprets this as meaning that the sky is orange--how do you prove the common meaning of words? In this case, how do you prove that a requirement that there be a trust for the exclusive benefit of employees does not mean that trust assets must be paid to the employer? However, you might at least cite some recent private letter rulings, e.g., Private Letter Rulings 200205007 (October 23, 2001), 200145006 and 200144007 (July 31, 2001), and 200131011 (April 26, 2001) for the proposition that it is permissible to have a benefit paid to a beneficiary in the event of the employee's death.

And thanks for the kind comments about the Governmental Plans Answer Book!