What to do about tribal 457(b)

[Guest Penelope]

A Native American tribe established a 457(b) plan years ago to permit employees to make pre-tax deferral contributions. Their consultant advised them that they were eligible to do so as a state or local government employer. After the law changed to permit tribes to establish 401(k) plans, the 457(b) plan was frozen, but accounts remained in the plan and some of them are now quite large.

In fact, the tribe is not a state or local government and therefore was not eligible to establish this plan. The tribe would like to terminate it, but of course is concerned about minimizing the tax impact. I believe that there was a similar problem years ago with tribes that had established 403(b) plans. When the problem came to the IRS's attention, the tribes were permitted to "correct" the problem under EPCRS by terminating the plans. Participants were allowed to roll over their distributions. (I believe this arrangement was also enacted into law as part of PPA.)

I'm sure this tribe is not the only one with a problem 457(b) plan. Has anyone else encountered this issue and/or does anyone know of any IRS initiatives to fix the problem?