457(b) plans

[Guest BruceC]

For eligible 457(b) plans for 501© non-profit organizations (not Governments), assuming no ER contributions.....

1. Are these plans exempt from Sec.409(A)?

2. Must the plan document specify what constitutes 'Substantial Risk of Forfeiture' once the EE separates from service, or do the assets simply sit in the account awaiting a request for distribution from the former EE?

3. Are account balances subject to Minimum Required Distributions at 70.5?

4. If so, can these MRD's be delayed while the EE or contractor continues to work for the ER?

5. May the plan allow for 'unforeseen' hardship in-service withdrawals?

6. If so, would there be a 10% premature withdrawal penalty if the EE is <59.5?

7. May the plan allow for loans?

Thanks

BruceM

[John Feldt ERPA CPC QPA]

1. Are these plans exempt from Sec.409(A)?

Yes.

2. Must the plan document specify what constitutes 'Substantial Risk of Forfeiture' once the EE separates from service, or do the assets simply sit in the account awaiting a request for distribution from the former EE?

Mostly no, I think, if I understand the question. After the employee terminates, in a governmental 457(b) plan, the assets sit in a trust waiting for a distribution event (like age 70.5) or for a signed set of distribution forms. A 457(b) sponsored by a tax-exempt entity is much different - the assets are employer assets, not in a trust, and the plan defines when "constructive receipt" occurs and what the employee must do, and when, in order to delay that constructive receipt.

3. Are account balances subject to Minimum Required Distributions at 70.5?

Yes.

4. If so, can these MRD's be delayed while the EE or contractor continues to work for the ER?

Yes.

5. May the plan allow for 'unforeseen' hardship in-service withdrawals?

Yes, sort of. It's referred to as "unforeseeable emergency", so the reasons are not the same as hardship. It includes sudden and unexpected illness of participant, spouse, or dependent, & now under PPA: beneficiary; loss of property due to casualty; other similar extraordinary / unforeseeable emergency outside participant’s control - that might include eviction / foreclosure, likely includes funeral expenses, but I think it would not include home purchase or tuition.

6. If so, would there be a 10% premature withdrawal penalty if the EE is <59.5?

No. 457(b) distributions are not subject to the 10% penalty. If a non-457(b) amount was rolled into a gov 457(b), and that amount was from a plan where the 10% penalty would normally apply, then when that rollover later gets paid out of the 457(b), then it will still be subject to the 10% penalty rules (a rollover into the 457(b) cannot get you out of the 10% penalty rule).

7. May the plan allow for loans?

Yes and No. A govermental 457(b) plan may, but a tax-exempt sponsored 457(b) plan cannot.

[QDROphile]

2. "Substantial risk of forfeiture" is not a necessry element of a 457(b) plan, and in fact can seriously compromise the plan because of when amounts are counted against the annual limit.

[Guest BruceC]

2. "Substantial risk of forfeiture" is not a necessry element of a 457(b) plan, and in fact can seriously compromise the plan because of when amounts are counted against the annual limit.

Yes, 'substantial risk' is probably not the correct term to use with a non-profit 457(b), as the plan is not 'funded'. So I would assume that the plan simply defines when the former EE is in 'constructive receipt'. Might you know...is this annual amount typically determined as a % of the plan's assets or is it somehow based on life expectancy? (I have no experience with NP 457(b) plans)

One other question: like QRP's, are annual contributions to a NP 457(b) subject to employment tax (FICA)?

Thanks

BruceM

[John Feldt ERPA CPC QPA]

Is the annual amount typically determined as a % of the plan's assets or is it somehow based on life expectancy?

The amount that is considered under constructive receipt will be determined under the terms of the 457(b) plan language. For example, suppose the document states something like "unless the participant makes an irrevocable written election to delay their distribution within 6 months following the date they separate from service with the Employer, the benefit is fully payable as a lump sum amount upon expiration of such 6-month period" - this example would have the entire amount taxable after six months following separation (unless the participant otherwise elects to delay).

One other question: like QRP's, are annual contributions to a NP 457(b) subject to employment tax (FICA)?

If the employer is subject to FICA on the wages paid to employees, then yes, any amount contributed/paid into the 457(b) plan is also subject to FICA at the time 'contributed' to the plan (regardless of whether it was an employee salary deferral election or a straight employer contribution).

[Lori Friedman]

2. Since about 1978, Sec. 457(f) arrangements ("ineligible" plans) have been subject to substantial risk of forfeiture (SROF) requirements. The Sec. 457(f) version of SROF is very easy to satisfy. Sec. 457(f) plans are very much subject to the provisions of Sec. I.R.C. Sec. 409A, however, which impose significantly stricter SROF rules.

As for Sec. 457(b) plans ("eligible" plans), SROF isn't an issue.