457(b) nonelective employer contributions / 404(a)(6)

[Guest Seg]

Can an employer make nonelective contributions to a 457(b) plan for 2006 in early 2007, or must these amounts be credited before the end of 2006?

In other words, is there something similar in the 457(b) world akin to 404(a)(6) (which allows payments to be deemed made for deduction purposes in the prior year if made by the time the prior year's tax return is due)?

Or, because there is no concern about the year of deduction, can a 457(b) plan be credited for 2006 in 2007 so long as the applicable dollar amount for 2006 is not exceeded?

[Randy Watson]

I'm not sure what the rules are for gov't 457(b)s, but if this is a tax exempt 457(b) it is going to be an "unfunded" plan. The contributions will be made to a rabbi trust, if at all. I believe that any "funding" requirements would be imposed by the plan document or trust agreement.

[Guest Seg]

I agree. I guess what I am trying to ask is, can an employer make the bookeeping entry in 2007 for a nonelective employer contribution to be effective for 2006 without having the contribution treated as made in 2007 for purposes of the applicable dollar amount?

It seems that the entry should be able to be made in 2007 effective for the 2006 year as long as the entry is made within a reasonable time period after 12/31/06 (i.e., as part of the closing of the 2006 year), but I can't find any authority.

[Guest mjb]

2006 contributions must be contributed by 12/31/06.

[Randy Watson]

MJB, do you have any authority or commentary on making contributions by 12/31? It would be helpful to me if I could get my hands on that. Thanks.

[Peter Gulia]

According to the Treasury department's interpretation, deferred compensation attributable to a nonelective "contribution" counts against the section 457 deferral limit for a tax year when that deferred compensation "vests". See 26 C.F.R. 1.457-4©(1)(iv), example 3.

[TLGeer]

If the plan is nongovernmental and the plan document doesn't have any rules in it, there are no rules about when the employer has to start investing the deferrals. The employee, as FDG rightly pointed out, has to have enforceable rights not subject to a substantial risk of forfeiture at 12/31, but the calculation of the amount under a formula can be done in the subsequent year and it never has to be invested (although not doing some kind of investment probably makes the plan a defined benefit plan). It does not permit the kind of flexibility employers have with discretionary profit sharing and matching contributions to set the amount or rate in the subsequent year.

If the plan is governmental, the rights have to exist at 12/31 and the deferral has to end up in a trust within a reasonable time (whatever that is) after 12/31.

Take a look at Regs. 1.457-8 and 1.457-2(b) (which has a useless definition based on the undefined term "the amount of compensation deferred").

Tom Geer