Taxation of 457(b) Nongovernmental Plan

[Rob P]

A tax-exempt entity sponsors a non-governmental 457(b) plan. We are getting conflicting information from several attorneys regarding the taxation of distributions.

Is there any circumstances that would allow a participant to defer taxation of their account balance to a date later than their termination (but in no event later than attainment of age 70.5)? In this case, the participant is not interested in taking installment payments and wants to defer to a single lump sum distribution several years down the road.

It was my understanding that a participant could elect to defer their payment to a later time providing that the election was in place prior to their termination. Thus, deferring taxation to a later time as well. A prominent attorney is telling us otherwise. According to him, taxation takes place upon termination unless installment payments are elected.

Any input would be appreciated.

[John Feldt ERPA CPC QPA]

Yes. The plan document should spell out what is required in order to defer the date under which constructive receipt occurs.

You may want to look at Treasury Regulation 1.457-7©.