Terminating a Non Profit 457(b)

[Lori H]

a non profit is going out of business and they maintain a 457(b) for one of their key employees. What hoops do they need to jump through to distribute the funds? If I am not mistaken, the participant could only rollover the 457(b) to another 457(b) plan. Are there forms that need to be distributed to the participant? A resolution to terminate the plan? The original plan was effective July 2003 and the plan was restated in 2005 to incorporate regs Rev. Proc. 2004-56 amendments to the SBJPA and Automatic Rollover Amendment.

Should a benefit payment election form and notice of tax treatments be provided to the sole participant?

thanks

[Peter Gulia]

If the employer is a non-governmental tax-exempt organization, consider at least the following steps:

1) Check whether the employer informed the Labor department of the plan’s existence. 29 C.F.R. § 2520.104-23. (If not, file a Form 5500 for each plan year not so protected.)

2) Look up (i) the relevant State’s law of not-for-profit corporations (or of the other kind of organization), (ii) the employer organization’s formation (for example, articles of incorporation) and operations (for example, bylaws) documents, and (iii) agreements and other documents concerning the executive/participant to discern what acts are sufficient to commit the organization to the plan’s discontinuance and termination.

3) Amend and restate the plan for the discontinuance and termination:

a) Your description of a 2005 restatement suggests that some provisions might be incorrect. For example, there is no rollover from a non-governmental § 457(b) plan.

b) Amend the plan to reflect ERISA and the Internal Revenue Code as of the time of the discontinuance and termination.

c) If not precluded by an earlier agreement with the executive/participant, consider whether the employer prefers to get rid of payout options other than a single-sum final distribution. (It’s not easy for an out-of-business organization to make continuing payments over years. Further, it’s unclear whether continuing payments would meet the condition of 26 C.F.R. § 1.457-10(a)(1) and -10(a)(2)(ii) that the employer distribute all amounts deferred “as soon as administratively practicable[.]”)

4) Deliver to the participant a claim form that reflects the plan as in effect for the termination. (Or if the plan has been amended to remove every participant choice, a form might be unnecessary.)

5) A § 402(f) explanation isn’t required (and isn’t appropriate); a distribution from a non-governmental § 457(b) plan isn’t an eligible rollover distribution.

6) Withhold Federal, State, and local income taxes from the distribution.

7) Pay the distribution.

8) Tax-report [W-2] the distribution.

Throughout, be mindful that another creditor might challenge the deferred compensation plan’s payment to the executive/participant. If there is a risk that not all creditors of the organization will be paid in full, consider recusing and removing the executive/participant from all of the employer’s decisions that relate to the plan. If the organization needs or wants advice about the correct order in which to pay its creditors (including the executive/participant), consult a lawyer who’s knowledgeable on bankruptcy and other insolvency law.

If the organization was the plan’s administrator and the organization has a bankruptcy trustee, that trustee “continue to perform the obligations required of the administrator[.]” 11 U.S.C. §§ 704(a)(11); 1106(a)(1).

[Lori H]

If the plan is considered unfunded, then a 5500 would not be required, correct?

[Peter Gulia]

Not quite correct; it's the unfunded and select-group conditions plus the filing under 29 C.F.R. § 2520.104-23 that excuses ERISA's annual-report requirement.

[Guest Pension Girl]

Hi Peter,

What do you mean amend the plan for ERISA? Not sure what ERISA provisions would apply to a top hat plan.

[Peter Gulia]

If the right exceptions are met, ERISA Parts 2, 3, and 4 don't apply, but ERISA Parts 1 and 5 do apply.

A practitioner should be guided by his or her client's direction on how much time and money to spend. But because so many charitable organizations' deferred compensation plans have significant defects, I'd be inclined to suggest a glance at the administrative provisions to consider whether there are some that are easy and worthwhile to improve while one is otherwise touching the documents. And if a client instructed me not to pursue this ("why spend effort on a terminating plan?"), I'd preserve a writing that those were my client's instructions.

[Lori H]

a non profit is going out of business and they maintain a 457(b) for one of their key employees. What hoops do they need to jump through to distribute the funds? If I am not mistaken, the participant could only rollover the 457(b) to another 457(b) plan. Are there forms that need to be distributed to the participant? A resolution to terminate the plan? The original plan was effective July 2003 and the plan was restated in 2005 to incorporate regs Rev. Proc. 2004-56 amendments to the SBJPA and Automatic Rollover Amendment.

Should a benefit payment election form and notice of tax treatments be provided to the sole participant?

thanks

a) Your description of a 2005 restatement suggests that some provisions might be incorrect. For example, there is no rollover from a non-governmental § 457(b) plan.

it could be rolled over to another company's 457(b) assuming their plan had that provision.

[Peter Gulia]

I misunderstood the originating post, and I'm sorry if I confused anyone. A rule recognizes a post-severance plan-to-plan transfer of assets and obligations from a non-governmental 457(b) plan to another. 26 C.F.R. 1.457-10(b). Some of this transfer's practical consequences are similar to a rollover.

[Lori H]

What would the penalties or procedure be if the plan never filed with the DOL? Would the 5500 just be an info only return?

the plan was effective 7/1/03 using a 2002 Corbel Proto then restated in 2005 with a 2005 corbel for EGTRRA using the same effective date(7/1/03). Should they have restated again since EGTRRA? I SHOULD be done with my questions now.

[Peter Gulia]

Using the Delinquent Filer Voluntary Compliance Program, a small non-governmental tax-exempt organization may file the 104-23 statement (rather than Form 5500 reports) and pay a penalty of only $750.

http://www.dol.gov/ebsa/regs/fedreg/final/2002007514.pdf

I don't use Corbel/Relius/Sungard documents (or those of any document packager); so I don't know enough about such a document to guess whether it might be sufficient.

If the employer and the executive are ending the plan, they might decide that the risks of an error are smaller than the expense of finding out whether there is an error. But I'd preserve a writing that those were my client's instructions.

[30Rock]

Does anyone know how to terminate a top hat plan if the plan is funded with individual contracts and the participant cannot be forced out?

[Peter Gulia]

30Rock, if the employer and the executive meant the plan to be unfunded, the employer alone should have all of the rights under the annuity contract. If the participant has a right that could restrain the employer's use of an annuity contract that was meant to be the employer's sole property, your client might need advice about different issues.