457 Plan termination

[Guest Steph]

I have searched around in old posts, but am somewhat afraid to rely on these because of all the changes in the 457 area.

I am looking at a situation with a hospital who was a public entity with a 457 plan for employees. Effective 12/31/2001 the hospital is now a tax-exempt organization and is providing a 403b for employees and paying Social Security.

With plan termination they are allowing rollovers, if desired. There has been much debate and I have a few questions. This is not a strong point for me.

Would the original entity still exist? The hospital district no longer exists. Do the participants have a separation of service or are we talking same desk rule?

The 457 plan has a provision waiving all surrender charges, if there is a separation of service. Would the hospital have to distribute all assets under the plan with the loss of governmental status?

Thank you for any information / help --

Stephanie

[Guest Tom Geer]

Stephanie:

The first thing you need to do is find out what the legal structure of the change was. There are a variety of alternatives possible, including transfer of control of a pre-existing entity by amendment of its governing documents (likely, that is, its articles of incorporation and/or bylaws), a merger into a different entity, or a transfer of assets to a new entity.

Second, I'm not sure I understand why they are looking to terminate the 457 plan. The hospital is likely a 501©(3), and therefore allowed to maintain a 457 plan as long as it is primarily for a select group of management and highly compensated employees.

By the same token, as long as the hospital was previously a separate entity that did not have or exercise governmental powers such as eminent domain, taxing, and police powers, it could have had a 403(B) before the reorganization.

The phrase primarily for the purpose of providing deferred compensation for a select group of management or

highly compensated employees" leaves open what non-primary purposes a plan can have. Given that there is nothing I can find in the 457 regulations allowing a distribution on plan termination, I would be tempted to go to the DOL with a plan that continues in effect for a "select group" and is frozen as to the other former particpants, and argue that the plan is "primarily" for the select group since all current and future accruals are for that group.Also, note that the rollover and direct transfer provisions of EGTRRA apply to 457 plans only when they are governmental. That means that if the plan is now maintained by a non-governmental entity, it might be a good idea to get a ruling that those provisions apply. Fortunately, the fact that the reorg was done on 12/31/2001 has no effect since those changes apply to distributions after 12/3/1/2001 rather than to distribution events.As to the surrender charges, there is unlikely to have been a separation in the pre-EGTRRA sense, since that encompasses the same desk rule, so there may not be a waiver of surrender charges. In dealing with this kind of situation, you need to have someone with ERISA and incurance law knowledge review the contract in detail to find the best way out. Some contracts, for example, may trigger a charge becoause of the plan's termination or freeze; I once had a client accidntally trigger a 40% market value discount by accident. Messing this aspect up is a good way to get sued, so tread carefully.