Retroactive amendment of 457(b) plan?

[Guest Teresa O'Toole]

A small local government with a 457(B) plan missed the deadline for amendment to comply with the SBJPA trust requirement. Is this plan irretrievably disqualified, or is there some way to fix it now?

[Carol V. Calhoun]

This is an interesting question. The requirements of section 457(g) came into effect on January 1, 1999. However, section 457(g) merely says that assets of the plan must be held in trust. It does not say how long the employer has to put the assets into the trust. While there is guidance on this issue in the case of plans subject to Department of Labor rules, obviously a governmental plan is not subject to those rules. Thus, at least an argument could be made that if all 1999 deferrals are put into a trust by the end of 1999, the plan would still be an eligible plan under section 457(B).

Even if the plan became ineligible for several months, the consequences may not be all that severe. Any vested account balances as of December 31, 1998 would not be taxable to participants, because they were deferred while the plan was still an eligible 457(B) plan. Thus, the only amount subject to tax would be amounts which became vested between January 1, 1999 and the date on which the problem was fixed.

Moreover, in an amazing feat of logic, the IRS has held in TAM 199903032 (October 2, 1998) that even if amounts are includible in an employee's income for tax purposes due to having vested under a nonqualifying section 457(B) plan, the employer is not required to withhold income taxes on such amounts or include them in the amount shown as subject to income tax on the employee's Form W-2. (The TAM requires the free Adobe Acrobat Reader to read or print.) Apparently, employees are supposed to guess at what amount to include in their tax returns, with no guidance from the employer.

Good luck!

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Employee benefits legal resource site

[Guest PeterGulia]

In addition to Carol's ever-helpful suggestions, here's an earlier avenue you might try.

Sometimes the 457(g) exclusive benefit requirement has been met for at least some assets without the plan sponsor being entirely aware of how the requirement was met. Many municipal deferred compensation plans include annuity contracts as plan investments. The IRC 457(g) exclusive benefit requirement can be satisfied by an annuity contract if that contract states appropriate provisions. IRC 457(g)(3); IRS Notice 98-8, 4 IRB 6 (Jan 1998).

During late 1998, many insurance companies mailed contract amendments that added IRC 457(g) exclusive benefit language as a contract provision. Some of these contract amendments provided that the amendment was deemed accepted by the absence of the contractholder's objection.

So to the extent that your client's plan held annuity contracts with these provisions, the plan may have met the exclusive benefit requirement without the plan sponsor quite remembering that it had done so.

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[Guest Ralph Amadio]

As a small local government, be careful of the trap many have discovered too late, that of accepting certain investment providers word on who accepts the fiduciary responsibility of any past bad investments. The "canned" trust agreements they have provided have enough escape clauses for the investment provider to nearly make the agreement declared unilateral, and square move the responsibility (and any liability) right over to your appointed and elected officials. Check your documents carefully or you may have the unpleasant job of giving your bosses some very bad news, depending on your local and state laws.