Piggybacking years

[Ken Davis]

The University of South Alabama began sponsoring a 457(B) effective 1/1/02. The State of Alabama has sponsored a 457(B) plan since 1986. University employees may contribute to either or both plans, and have been contributing to the State's plan on a voluntary deferral basis since 1986. The University's plan has more investment options, so in the future it is likely that more employees will choose it rather than the State's plan.

The vendor that supplied us with our 457 plan is saying that for purposes of the 457(B)(3) three-year catch-up calculation, the years during which an employee could have contributed to the State's plan (back to 1986) may be counted as years for our plan (even though our plan has only been in existence for one year). Are they correct? The University is considered a "public body corporate" and is able to issue tax-exempt bonds as a political subdivision of the State, if that helps.

If they are correct, must our plan's normal retirement age of 65 be changed to agree with the State plan's NRA of 60?

Thanks,

Ken Davis

Univ. of South Alabama

[Ken Davis]

Okay, I may have found the answer myself. The last sentence of final reg. 1.457-2(f)(2) states "A prior taxable year includes a taxable year in which the participant was eligible to participate in an eligible plan sponsored by a different entity, provided that the entities sponsoring the plans are located within the same State. . . ."

But this sentence was dropped in the prop. regs. published last May. Any idea why? Any idea when the prop. regs. will be adopted as final regs.?

Also, I still have the question about coordinating the normal retirement ages if a university employees is able to piggyback the years during which he/she was eligible to participate in the State's plan onto the university's plan which came into existence on 1/1/02. Any thoughts?

Thanks,

Ken Davis

Univ. of South Alabama

[Guest Harvey Carruth]

This thread isolates 457(B) issues that I have found to be perplexing for some time. The real problem here is proper interpretation of what constitutes the "plan" or "plans" offered by The University of South Florida. Views from attorneys on these matters would be most welcomed.

My personal view is that the University is an "eligible employer" that "established and maintained an eligible deferred compensation plan" when it began allowing University employees to make voluntary deferrals into the State of Alabama "Plan" back in 1986. Presumably the University now has in place a "Plan Trust Declaration" which allows selection of new "eligible plans" [e.g., the University Plan] and/or discontinuation of existing "eligible plans." Hence, it would appear that there are two "plan levels," the primary level being the "Employer Plan," with rules established by the employer's "Plan Trust Declaration," and the secondary level being the "Vendor Plan or Plans."

It seems clear to me that the intent of the 457(B)(3) three-year catch-up provision was to allow participants to make catch-up contributions based on their eligibility to make contributions to the "Employer Plan," not based on their eligibility to make contributions to any particular "Vendor Plan" sponsored by the Employer. After all, some 457(B) vendors have gone out of business and the participants' account balances have been transferred to alternate "Vendor Plans" out of necessity. It would be ludicrous to think that employees affected by such transfers would lose rights to catch-up contributions based on their eligibility to contribute to the discontinued "Vendor Plans."

Historically, and even currently, different vendors have different "Vendor Plan" documents. In fact, the typical situation is that a vendor's "Plan and Agreement" is a comprehensive document that includes all applicable rules along with the salary reduction agreement and definition of "Normal Retirement Age" for the "Vendor Plan." If an "Employer Plan" includes two or more "Vendor Plans," then my view is that the employer's "Plan Trust Declaration" takes precedence over the various vendors' "Plans and Agreements." In particular, the definition of "Normal Retirement Age" in each "Vendor Plan" should agree with the corresponding definition in the "Employer Plan."

The following statement appears in Prop. Reg. 1.457-4©(3)(v)(A):

"For purposes of the special section 457 catch-up in this paragraph ©(3), an entity sponsoring more than one eligible plan may not permit a participant to have more than one normal retirement age under the eligible plans it sponsors."

While a liberal interpretation of this provision might allow different "Vendor Plans" to define "Normal Retirement Age" in different ways, administration of the "Employer Plan" is much easier if all such "Vendor Plans" have definitions consistent with the "Employer Plan" definition.

[Ellie Lowder]

And, in response to "when will the regs. be finalized", the IRS says by mid-2003. And, by year-end, the plan is to issue 457 examination guidelines to facilitate the audits of 457 plans.

The IRS Field people have reported already been trained for those audits.

Harvey, I really concur that the years of eligibility count from the time participants could participate in the state plan through the employer and continue to be counted when the employer installs their own "local" plan. However, the IRS has been known to blind side us in the past.

[mbozek]

Since the employer is the plan sponsor the employer determines what is the eligible plan, not the vendor. Adoption of sucessor vendor plans does not affect the eligible employer plan as defined by the employer. Also Govt employers whose plans do not conform to IRS regs have 6 months after notification by the IRS to correct the defect witout any adverse affect to the plan. See IRC 457(B). Given IRS funding constraints and lack of personnel I doubt whether there will be any implementation of an audit program for 457 plans because their is no revenue collection to be gained, e.g., no loss of tax deduction and the ability of the er to correct the program within 6mos. The IRS recently closed an audit of the NYC pension system after the city admitted removing millions in plan assets to pay its general expenses without any penalities other than a promise by the city not to do it again. I dont think that the IRS will take any adverse action against the retirement plan of the state in which the Governor is the president's brother.

[Guest dhannah]

Since you aren't prohibiting employees who use the state's 457 plan from using the new 457 plan, it seems pretty clear that you need to change the definition of NRA in your new plan to age 60, assuming that would match the existing (state) plan's definition. Proposed Reg. 1.457-4©(3)(v)(A) says, "an entity sponsoring more than one eligible plan may not permit a participant to have more than one normal retirement age under the eligible plans it sponsors." Only an "eligible employer" may sponsor an "eligible plan", so the vendor isn't relevant.

Although entities that only offer one eligible plan can give their employees flexibility by defining the normal retirement age as a range of ages (e.g. any age selected by the participant between 60 and 70 1/2), it would be much more difficult for an entity that offers more than one plan to offer a range of ages because it would mean that someone would have to monitor the NRA selected by employees in both plans in order to ensure that you did not permit an employee to select a different age in each plan.

You seem to be linking the question of whether you need to coordinate the NRAs in your two plans to whether or not you count years of eligibility for the state's 457 plan in calculating the employee's underutilized limit for your new plan. Since you didn't close down the state's plan when you opened your new one, I don't see that there is any connection. The University is now sponsoring two 457 plans, regardless of whether or not you "piggyback" prior years of eligibility. There was some related language added in 1.457-3(B): " Treatment as single plan. In any case in which multiple plans are used to avoid or evade the requirements . . . the Commissioner may apply the rules . . . as if the plans were a single plan."

Assuming you do go back to 1986 in calculating the employee's underutilized limitation for purposes of the special 457 catch-up in your new plan, keep in mind that any deferrals the employee made to the state's 457 and/or to a 403(B) must be counted against the employee's permissible annual deferrals through 2001.

It is my understanding that employees of the State of Alabama have had access to two "competing" 457 plans for years: one through Dr. Bronner's office and one through the Alabama State Employee's Association. Did the University of South Alabama add a third 457 plan or simply start offering the ASEA's plan?