Summary plan description for 457 plan

[Moe Howard]

Are 457 plans required to issue a summary plan description to its participants ?

I would think not, because a 457 is not an ERISA plan.

However, how is the plan supposed to educate a participant as to what a 457 is, how a 457 works, and the participant's rights in a 457 ?

[mbozek]

Although subject to ERISA, a 457(b) plan is exempt from all reporting and disclosure requirements including filing an SPD if it files a notice with the DOL within 120 days after the plan is adopted. See Reg 2520.104-23. There is no requirement to educate participants about investments because an unfunded 457 plan is exempt from the fiduciary requirements of ERISA.

[Kirk Maldonado]

I don't think that 457 plans maintained by governmental entities are subject to (any aspect of) ERISA.

[Guest jdharbert]

I agree an SPD for a 457 plan is not required by ERISA. However, I believe a salary reduction 457 plan for a private sector tax-exempt employer is likely to be considered a "security" under many state securities laws because it is an investment of money in an activity over which the participant may not have enough management control in the activity to make it not a security. While there will likely be no need for registration of the security due to various exemptions, a 457 plan would likely be subject to the antifraud provisions of state securities laws. As a consequence, some sort of written disclosure of risks would be a very good idea. A "summary plan description" is a good place to put a description of those risks and also to explain the income tax consequences. The most significant risk to be made prominently known to participants is the risk that if the employer becomes insolvent or bankrupt , the 457 plan participant may lose all of his or her account.

[mbozek]

Why doesn't ERISA 514(b)(2)(B) preempt the application of state securities laws to 457 plans of non profit employers? State govt employers may be subject to only state laws relating to retirement plans .

[Kirk Maldonado]

ERISA Section 514 expressly doesn't preempt state securities laws.

[GBurns]

The reporting and disclosure requirements (or exemption) that most of you seem to be concerned with are those that are required by ERISA for reporting and disclosure to the DOL. However, regardless or reporting disclosing anf filing antwhere, you seem to have overlooked state labor laws and most of all the participating employee.

How do you propose that an employer get employees to participate in the plan if the employees are not given explanations and disclosures? How would the plan operate without written guidelines? How would the employer explain the use of employee pay without complying with state law which in most states requires employee consent ?

If there are written guidelines (a de facto Plan document) and employee consent (which would need an explanation and written agreement) there would be the pragmatic need to put together a description of what is being proposed and what will be done and how it will be done. Presto, a Summary Plan Description.

Is there something wrong in my thought that the "need" for an SPD exists regardless of ERISA?

[mbozek]

True but isnt unfunded deferred comp regarded as a debt, an IOU, to the employee, not a security interest because it is an unfunded promise to pay money in the future. When does an interest in a nonqualfied deferred comp plan become an interest in a security instead of a debt? Does an employer's promise to pay an employee the value of the funds invested in his account under the plan pursuant to his direction make the plan an investment company? ( An ERISA plan cannot be an investment company under state laws). If state securities laws are not preempted then arent both qualfied and non qualified subject to registration/anti fraud regulation under state securities laws? (Qualifed plans are expressly exempt from regulation under federal securites laws.) I would be interested in any case that has been brought against an employee benefit plan or employer sponsoring a plan under state securities laws.

State labor laws are preempted by ERISA from applying to ERISA plans or salary reduction agreements ( e.g., NY state labor law requirement of employee's consent). I understand there is some question about the preemption of the Cal labor law that is under review by the Dol.

[GBurns]

Why do you think that ERISA preempts salary reduction agreements in any state?

[Guest DMK]

mbozel -- There has been a lot of controversy over the last several years regarding the securities issue. The SEC stopped issuing no-action letters on this issue and now seems to have taken the position that many nonqualified deferred compensation plans do consitute security interests and must either be registered or qualify for an exemption, particularly plans in which participants are investing their own money and are credited with earnings. The theory is that participation in such a plan constitutes an investment contract, and the nature of the security is the obligation of the employer since the source of payment is the employer's assets (similar to a bond or debenture). If you look at SEC filings, you will see that a number of publicly traded companies now register their nonqualified deferred compensation plans (although I suspect that there are many companies out there that still take the contrary position). Presumably, federal registration and exemption issues aren't a significant problem in the 457/governmental/tax-exempt arena, but I just wanted to explain why some think that nonqualified deferred compensation plans can be security interests.

[mbozek]

There is case law holding that an employee's interest in a voluntary, contributory plan is not a security, e.g., Cunha v. Ward foods, Inc. 545 F Sup 94 (DB plan) and O'Neill v Marriott Corp, 538 F Supp 1026 DC plan) but I have not read the cases. Kirk should be able to tell us more but I thought that a few years ago the SEC had rejected a Staff proposal to regulate certain interests in nonqualfied plans as securities and decided to allow the corporations on the advice of counsel to determine whether an interest in a nonqualified plan constitutes a security.

[Kirk Maldonado]

For a number of reasons, the SEC has decided not to take an official position on whether the interests in a nonqualified deferred compensation plan must be registered; leaving that determination as to the legal counsel for the corporation.

Publicly traded corporations often use the Form S-8 to register deferred compensation plans because it is a quick and cheap way of avoiding this entire problem.

Although Rule 701 provides some relief, the issue is somewhat more problematical with private employers.

[GBurns]

Does anyone know what the state securities laws say?