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[joel]

How many days are allowed to pass, after the payroll deduction is made, before the contribution must be credited to the investment account? Please give citation.

[J Simmons]

Treas Reg §1.457-8(a)(2)(ii): "Amounts deferred under an eligible governmental plan must be transferred to a trust within a period that is not longer than is reasonable for the proper administration of the participant accounts (if any). For purposes of this requirement, the plan may provide for amounts deferred for a participant under the plan to be transferred to the trust within a specified period after the date the amounts would otherwise have been paid to the participant. For example, the plan could provide for amounts deferred under the plan at the election of the participant to be contributed to the trust within 15 business days following the month in which these amounts would otherwise have been paid to the participant."

[joel]

Does this rule also apply to 457(b) plans of non-profits?

[J Simmons]

Treas Reg §1.457-8(b) addresses funding of non-profit's 457b plans. The employee contributions must remain part of the employer's general assets until the employee is to be taxed on them, not go into a trust separate and apart from those general assets and that would remove any assets from the reach of the employer's general creditors. So the regulations do not address a timeframe for segregating employee contributions to a non-profit's 457b from the employer's general assets--as the regulations (Treas Reg §1.457-8(a)) do as to governmental's 457b plans where a separate trust is required.

[Peter Gulia]

The regulations that J Simmons helpfully describes govern whether a plan is or isn't an eligible plan (within the meaning of IRC 457(b)) for Federal income tax purposes. While helpful in understanding the distinction between funded and unfunded plans, those regulations don't interpret (at least not directly) non-tax law, including an employer's obligation or a participant's right.

For a deferred compensation plan under which a participant's rights are contract rights, a participant's rights (or an employer's obligations) are stated by the written plan and, if not precluded, other relevant documents. For example, a plan could specify when a payroll deferral is credited to a participant's bookkeeping plan account. If no relevant document specifies the time, it's less clear what (if anything) the employer and the participant agreed on. If an absence of terms doesn't make a plan void or voidable, some courts might find that the parties impliedly agreed on a "reasonable" time, and then use fact-finding procedures to evaluate what "reasonable" means. If a court finds that some law interpretation beyond the documents is needed, the court would look to ERISA (sometimes including the Federal common law of ERISA) or, if the plan is a church plan, State law.

Knowing that the protections of ERISA's Part 4 might not apply - because the plan is a church plan or is maintained for a select group of highly compensated or management employees, a participant should read the plan carefully (and evaluate other risks) before he or she decides whether the plan rights and other compensation are satisfactory to make him or her willing to accept or continue an employment or engagement. In providing an exception (for a plan other than a governmental plan or a church plan that had not elected to be governed by ERISA), Congress assumed that a select-group employee would be capable of evaluating or negotiating the risks of unfunded deferred compensation.

Some of the risks to evaluate include considering the possibility that the employer's management (or its ownership, and then its management) could change, that a change in the employer's financial circumstances could make it unable or unwilling to pay the deferred compensation, that other creditors might be quicker or more skillful than the participant in pursuing their rights, and that the expense of pursuing the participant's rights could be out of proportion with the value likely to be realized by pursuing the rights. This evaluation matters even more if the organization's exposure to other potential creditors involves signficant uninsured risks. Likewise, a participant would want to be alert to an organization's potential for an operating loss or lack of a meaningful surplus.

If your inquiry isn't entirely hypothetical, how to handle it depends on whether your client is dealing with something that already happened or is planning ahead. If it's planning, there are opportunities in drafting documents to say what your client wants or is willing to do. (Concerning churches and charities, I've advised both sides about unfunded compensation, and you might be surprised by how much is negotiable.) If the less-than-prompt credit is an open problem, there are often non-dispute reasons to get the parties to "do the right thing".