457 to 401(k)

[Guest Tom Fridrich]

Can a 457 Plan of a municipality, be converted to a 401(k) plan-can the assets be transferred into the investment options of the 401(k) plan, or must they remain segregated?

[MGB]

A municipality is ineligible for a 401(k) plan unless they had one in the 1980s and were grandfathered.

[mbozek]

I think under the new tax law there can be a rollover of assets from a municipal 457 plan to another qual plan or IRA as of 1/1/02.

[MGB]

The new rollover rules have nothing to do with the conversion of a 457 and establishment of a new 401(k) plan.

[Guest Monster]

I too am confused by the original question.

However, know that portability under EGTRRA allows rollovers of eligible governmental 457 plan distributions to another 457 governemntal plan (was always allowed) as well as between qualififed plans (403(B)/401(k)/IRA). However, the new plan must agree to accept rollovers and to account for such amounts (rolled into the plan from an un-like plan) separately.

I believe a receiving plan can opt to not allow rollovers of these assets by choosing not to accept/account for them separately. I am not aware of any requirement that they accept rollover distributions from eligible Governmental 457 plans, only that it is now an allowable transaction.

[mbozek]

MGB: Under prop reg. 1.457-10(a)(2) a municipality that terminates a 457 plan may permit a rollover to any other qualified plan or a trustee to trustee transfer to another 457 plan of a public employer in the same state. The 457 plan assets can be rolled over to grandfathered 401(K) plan as a separate account. Otherwise the municipality could establish a qualified plan to accept rollovers from the 457 plan and transfers of excess vacation/ sick pay of employees.