Termination of 457(b) Plan

[Guest John Nelson]

Are there reasons why an employer cannot terminate a 457(B) plan and distribute account balances to participants? The plan in question is not a governmental plan. I know that benefits under a 457(B) may not be distributed earlier than age 70-1/2, separation from service or unforeseeable emergency. But, it would seem that the employer ought to be able to terminate the plan and distribute benefits despite these restrictions. What am I missing here? Thanks.:confused:

[Guest Tom Geer]

There's just no coverage in the statute or regulations on terminating an eligible 457. In qualified plans, like 401(k) and money purchase plans, that bar in-service distributions, every body knows and understands that you can terminate them and distribute, as long as you don't have a new plan too quickly.

If the dollars are large, you should look at getting a private letter ruling from IRS on the issue.

[mbozek]

There are two options to consider :

1. Freeze the plan- no further accruals will be permitted but distributions will be made as each participant terminates service. An employer is not required to make contributions to 457 plan in order to maintain its tax deferred status.

2. Just terminate the plan and make distributions to all participants - the participants have taxation on the entire distribution.

Remember that since a 457 plan is a non qualified plan there is no consequence of termination other than taxation to the participants which is either immediate or deferred. There is no adverse consequence to the employer. As long the account balances are taxed there is nothing else to worry about. If the employer wants to defer immediate taxation then just stop deferrals and pay out the participants as they leave employment.

[Guest Tom Geer]

That's o good practical answer. If you want to take the direct route, I'd make one more suggestion. Amend the plan to authorize the termination and describe its effects. That way, if the IRS wants to try to disallow deferrals under the current plan document it will be a lot harder. It also would reduce potential participant claims by saying what is going to happen in the terms of the plan.

[Guest John Nelson]

Thank you both for your help. Much appreciated.

[davef]

Take a look at the new proposed 457 regulations that were issued today. They allow 457 plans to make distributions as part of a plan termination.