Change in 457 Employer Status

[Guest Frankie]

Under the May 8, 2002 proposed 457 regulations I am a little unclear on two issues and would welcome any insight anyone may have.

1. If a tax-exempt eligible employer becomes a for-profit employer and does not terminate their plan how does that affect the taxation on amounts previously deferred by plan participants.

2. If a tax-exempt eligible employer becomes a governmental employer and does not terminate their plan how does that affect the taxation on amounts previously deferred by plan participants.

[mbozek]

Deferral under IRC 457 is dependent upon the employer being an eligible employer, i.e., either a TXO or govt entity. When an eligible employer become ineligible, its corporate status changes and the successer entity is not eligilbe for deferrals. Usually the 457 deferrals will remain with the 457 employer but if this not possible because the entity is being convered to a for profit er then the 457 deferrals can be distributed to the participants and taxed as ordinary income. If a txo becomes a govt entity then future deferrals will be subject to the rules for govt entities under 457. See prop. reg 1.457-10(a)(2) for change to ineligible employer.

[Guest Frankie]

Thanks for your reply. Do you feel then if a tax-exempt employer changes to a for-profit or governmental employer status and does not terminate their plan all amounts previously deferred would become taxable to plan participants ?