Multiple 457 Documents for One Employer?

[Christine Roberts]

California governmental entity sponsors a Section 457 plan and offers investments through one large insurer.

Govt. entity wants to offer CalPERS' 457 plan to employees.

Per CalPERS reps, gov't. entities commonly do this (maintain "private" 457 plan alongside CalPERS), with each provider's plan document governing only those monies invested with the provider. No "global" plan document is prepared.

Participants are notified about keeping deferrals within one single 402(g) annual limit and about making sure beneficiary designations are current under each plan. Also about withdrawal charges if they intend to move money from the insurer to CalPERS.

Questions: have any of you seen arrangements like this? Any thoughts or comments as to such an arrangement?

[Peter Gulia]

A local-government employer maintaining two or more plans that the employer intends as 457(b) plans is common; whether it's sound is a different question.

The regulations state: "In any case in which multiple plans are used to avoid or evade the requirements of [sections] 1.457-4 through 1.457-10, the [iRS] may apply the rules under [sections] 1.457-4 through 1.457-10 as if the plans were a single plan." 26 C.F.R. 1.457-3(b).

As one part of this, the employer remains responsible for applying deferral limits based on all deferrals under all plans regarding the participant's relationship with the employer. 26 C.F.R. 1.457-4(e)(2). And for the "last-three-years" catch-up, the regulation states that an employer "sponsoring more than one eligible plan may not permit a participant to have more than one normal retirement age under the eligible plans it sponsors." 26 C.F.R. 1.457-4©(3)(v).

An employer that permits more than one service arrangement (whether under separate plans, or even under one plan) should be alert to how this can increase fraud risks.

For example, imagine that separate accounting reports from providers A and B for the quarter ended September 28, 2007 show that Bill Sharp received on August 8 an emergency distribution of $2,352.87 paid by A, and Bill Sharp received on August 20 an emergency distribution of $2,352.87 paid by B. Although it's possible that Mr. Sharp in fact had two different emergency situations, the IRS might assert that the low likelihood that different situations would happen to result in identical need amounts puts the employer on inquiry notice such that it should look into whether this participant submitted a false claim.

Two suggestions about potential advice that you might choose to present to your client:

Consider integrating all documents into one that is accepted by CalPERS and all other providers. (In this, the insurance company might not care much about which plan provisions the employer selects.)

If there is more than one service arrangement (whether under two plans or one plan), the employer might instruct a plan auditor to test for the points mentioned above and other kinds of mistakes and frauds that could become more likely because of the use of more than one service arrangement.