457(g) Trust Language

[Guest gaham]

I have two questions: (1) Is it appropriate to provide a domestic relations order exception to the exclusive benefit language required in the trust? (2) Can you provide for reasonable Plan/Trust expenses to be paid from trust assets? It would appear to me that the answer to the first is no and that you can pay legitimate expenses from the trust but I would appreciate other comments. Thanks.

[Guest CVCalhoun]

Well, I'm not sure that there are clear answers to either one of these questions. But here's my best stab at them:

1. Even before the qualified domestic relations order provisions were added to the Internal Revenue Code and ERISA, several court cases had held that transfers pursuant to a domestic relations order did not violate the exclusive benefit rules applicable to qualified plans. The theory was that plan assets were supposed to be held in trust for the "exclusive benefit of participants and their beneficiaries." Given some rather broad language as to the intent of ERISA to provide for employees and their families, at least some courts held that providing for family members of a participant should be treated as providing for "beneficiaries."

   Presumably, similar arguments could be made with respect to section 457(g), which imposes the trust rules on governmental section 457 plans. In the past, IRS officials have indicated informally that they are not challenging transfers from 457 plans pursuant to domestic relations orders, so long as the distribution timing restrictions of section 457(d) are not violated. In other words, unlike a qualified plan, a 457 plan could not provide for in-service distributions before the participant's attainment of age 70½ or unforeseeable emergency. However, once the plan was able to distribute, the distribution could be made, in whole or in part, to a spouse or child under a domestic relations order rather than to the participant.

2. It seems to me that there should be no bar to paying reasonable administrative expenses from the trust. After all, the exclusive benefit language mirrors that in the Code and ERISA, which have always been held to permit the payment of reasonable administrative expenses. Of course, you would still have to make sure that the expenses involved were actual administrative expenses rather than settlor expenses. See letter to Kirk F. Maldonado from Elliot I. Daniel (March 2, 1987), which although issued by the Department of Labor under ERISA is likely to be looked to by analogy in the 457(g) context.

[Guest Ralph Amadio]

Just an addendum to other comments: Do not forget to review state laws on trusts, family law, fiduciary responsibility, payment of reasonable trust expenses etc.

[Guest PeterGulia]

State law governs whether a state or local government deferred compensation plan must or may recognize a domestic relations order.

The Internal Revenue Code governs whether a plan administrator's recognition may interfere with the 457(B)-eligible status of the plan.

Under the Internal Revenue Service rulings so far, only an order to a spouse or former spouse for support, alimony, or property division upon divorce or marital separation can be recognized as a 457(B)-plan-approved domestic relations order. [iRS Letter Rulings 97-29-013, 96-19-029, 95-43-010, 92-37-018, 90-49-036, 90-24-075] None of these rulings recognized child support as grounds for a "PADRO".

It is unclear whether such a distinction was requested by the IRS, or simply resulted from the presented facts of each ruling request.