deposit rules

[Guest Rosemary Raymer]

What are the timing rules for depositing contributions to a 457 plan? Are employee contributions under the 15 day/as soon as can be segregated rules like a 401(k)? What about employer contributions?

[mbozek]

457 plans are non qualified plans exempt from the DOL rules which require remittence by the employer within 15 days after the end of the month. Contributions could be remitted as infrequently as once a year.

[Guest Rosemary Raymer]

I want to make sure I understand this. The answer is for a broker that sends me alot of qualified plan business.

Even employee deferrals can be withheld from paychecks and only deposited once a year? By any date - for example 2.5 months after the end of the plan year? I know you can't base it on a tax return since there are none.

Thanks for your help!

[mbozek]

The proper question is what does the plan or salary reduction agreement provide- Why would an employee agree to make salary reduction if contributions are remitted only once a year? The terms of most salary reduction agreements require the remittance of the employee's contributions within a short period of time after being withheld from the employee's compensation.

[Guest Rosemary Raymer]

I've never seen "terms of a salary reduction agreement" on any enrollment form, SPD or in a plan document that specifies a time limit for deposits to be made. This is making no sense.

[Everett Moreland]

Is this a govermental plan? The IRS position is that a delay in adding contributions to the trust violates the trust requirement for governmental 457 plans. The IRS has stated that complying with the DOL rule satisfies the trust requirement.

[Guest Rosemary Raymer]

Yes, it is a governmental plan. Can you please tell me where I can find where the IRS issued that advice? I'd like to forward the cite to the broker. Thank you so much! This was helpful.

[mbozek]

I think you need to step back and think about the type of plan you are discussing. In a 457 plan there is no separate fund (unless there is a govt entity). Compensation withheld from the employee's pay is retained in a general account of the employer. Whether or not you have seen provisions specifying when the deferrals will be credited to an employee's account is not important-- a well drafted plan will provide that the deferred comp will be credited to the participant's account when the deferrals are deducted from from the particpant's compensation to avoid the questions you raised. Once the amount is in the account it is entitiled to the earnings. In some dc plans the Def comp begins accruing interest as of the date of deferral without regard to when it is placed in a notional account.

[Guest Rosemary Raymer]

As stated above, this is a governmental plan. The issue is not the document here. This well-drafted document does not mention timing of deposits. Mr. Moreland appears to have IRS guidance on this issue that should be of benefit to all of us.

[Everett Moreland]

IRS Notice 98-8, sec. VI.,

[Guest Rosemary Raymer]

Thank you so much! For those of you researching this in the future, the text of this is:

In order to satisfy the requirement that all plan assets and income be held in trust, amounts deferred under a governmental section 457(B) plan after a trust has been established must be transferred to the trust within a period that is not longer than is reasonable for the proper administration of the accounts of participants. For purposes of this requirement, a governmental section 457(B) plan may provide for amounts deferred for a participant under the plan to be transferred to the trust within a specified period after the date the amounts would otherwise have been paid to the participant. For example, a governmental section 457(B) plan could provide for amounts deferred under the plan to be contributed to the trust within 15 business days following the month in which these amounts would otherwise have been paid to the participant.

[mbozek]

This provision is now in prop. reg 1.457-8(a)(2)(ii). What is a resaonable period? Is it determined under state or fed law? Also there is no downside to not complying with the reg since all govt 457 plans have at least 6 months to correct provisions which are not in compliance with the IRS requirements. Reg. 1.457-9