457(b) of Tax-exempt sponsor

[John Feldt ERPA CPC QPA]

A tax-exempt entity sponsors a 457(b). The plan allows the participant to make an election regarding the form of payment. The participant elects 4 annual installments. The participant left employment in December 2002, but before that, in July 2002, an election was made to delay the distribution until March 1, 2007. The employee is now at another tax-exempt and they are discussing doing a direct 457(b) transfer.

Since March 1, 2007 has already gone by, the first installment (of the 4) is "considered to be made available" and is thus taxable in 2007. However, the participant has never utilized their additional election option to further delay distribution. With regard to their remaining 3 installment payments that are due, could the participant make such an election now to delay those distributions?

I looked under 1.457-10(b)(6)(ii), "in the case of a transfer between eligible plans of tax-exempt entities ... the transferred amount is subject to §1.457-7©(2) (relating to when amounts are considered to be made available under an eligible plan of a tax-exempt entity) in the same manner as if the elections made by the participant ... under the transferor plan had been made under the receiving plan."

Does this section of the regulation lock the 4 installment option into place in such a way that the next 3 installments cannot be delayed?

Also, was it ok that the participant made the election to delay payments even before they left their old employer?

[John Feldt ERPA CPC QPA]

Well, no takers yet.

I think the answer is no, no and probably.

The March 1, 2007 date has gone by, so no further delay can be elected.

Also, the "distribution" has "commenced" even if not actually paid yet, because in a 457(b) sponsored by a tax exempt organization, commencement of the distribution means the date "made available" (constructive receipt).

The initial election to delay the distribution seems to be valid, even though it was made while still employed, I see nothing in the 457 regs to indicate otherwise on this last point.

[davef]

I'll take a stab at this. I would view the four installment election as one payment election, such that once the date of the first payment has come and gone, the ability to make a subsequent election has been lost. The regs relating to the additional election to defer state that the additional deferral election must be made "before distributions have commenced in accordance with the initial election." If you treated the distribution as not having commenced, then the person could theoretically delay the second election indefinitely (or at least until 70-1/2), which clearly is not the intent of the rules.

I agree that the first deferral election was done properly.