Additional Deferral Elections (moved from old board)

[Guest CVCalhoun]

This message from Dolores Upton was moved from old board, since the discussion was still in progress when the board moved:

Let me start by saying that I am not well versed in IRC section 457 plans so any help you can give me will be appreciated. I am confused as to the change made by the SBJPA to provide for "an additional deferral election" as described in IRS Notice 98-8. In reviewing IRS Notice 98-8 and other materials, I am confused as to the meaning of "additional". Does the word "additional" have plural meaning - (1) an election in addition to an election made prior to the first permissible payout date and (2) the deferral date is beyond (or in addition to) the deferral date originally elected? In other words can I elect to defer to 62 prior to the first permissible payout date and then make a subsequent post-permissible payout date election to instead defer to 60? The model amendment leads me to believe that my second election would need to be an election to defer beyond age 62.

Thanks!

[Guest CVCalhoun]

This one is a bit confusing. However, the basic rule is that an election to defer the receipt of a distribution works to defer taxation of that distribution only if the election is irrevocable. Thus, if someone had previously elected to defer a payout until age 62, s/he could not be permitted to accelerate the distribution until age 60.

Under the pre-SBJPA rules, no more than one deferral election could be made. Thus, if an individual elected to defer a payout until age 62, and then at age 62 elected to defer it again until age 65, s/he would nevertheless be taxable at age 62 on the amount s/he could have received.

What the "additional deferral election" provision of the SBJPA does is to allow the person who has already deferred the distribution until age 62 to defer it again until age 65 if certain conditions are met. However, it does not permit acceleration of a payout to a date before the original election would have provided.

[Guest CVCalhoun]

This message from Dolores Upton was transferred from the old board, because the discussion was still in progress when the board moved:

Help again...please. Amended IRC 457(e)(9) now permits in-service distributions of small amounts and an additional deferral election after the first permissible payout date. However, as amended, the old rule which provided that if the total amount payable to a participant did not exceed $3,500 and if no additional amounts could be deferred under the plan (in other words the person is terminated), the amount payable would not be treated as made available simply because the participant could elect to receive it, is now gone. It is my understanding that the new in-service option is "optional" and is in addition to and not in place of a plan's existing small balance rule after termination. With that said:

If a plan permits lump sum distributions of small amounts after termination (now less than $5,000), a participant terminates employment on August 1, 1998 and has account balance of $4,400 at termination and has deferred amounts up through termination - is the $4,400 treated as "otherwise made available to the participant"? Under Pre-SBJPA IRC 457(e)(9), I would conclude the answer is no. Under Post-SBJPA IRC 457(e)(9), in the absence of anything stated to the contrary, I would conclude the answer is yes - (though it seems like a disconnent).

Any light you can shed on this would be appreciated.

Thank you.

[Note: This message was edited by CVCalhoun]

[Guest CVCalhoun]

It is my reading that the old rule was deleted only because the new one provides similar (though more generous) relief. Under the old rule, the general rule was that if a person was entitled to receive a distribution, s/he would be taxable on the amount received unless s/he irrevocably elected to defer it before it would otherwise become available. The "small distributions" rule was an exception to that general rule.

Under post-SBJPA IRC section 457(e)(9), any participant (not just one whose benefit is less than $5,000) can be given the right to defer the benefit once without causing constructive receipt of the benefit. Thus, there is no longer a need to have a special rule covering small distributions.