Forms of Distribution in Tax-Exempt 457(b)

[PensionPro]

Plan allows for lumpsum, instalments and annuities as the allowable forms of benefit. Can the document be amended to remove annuities as a form of distribution for all assets or is there any cutback issues? Thanks!

[Peter Gulia]

If the plan you're thinking of is neither a governmental plan nor a church plan, is unfunded, and is restricted to a select group of top executives, such a plan (if it is not an excess-benefit plan) is governed by Parts 1 and 5 of Subtitle B of Title I of ERISA, but is not governed by Parts 2, 3, and 4.

The non-application of Part 2 means that ERISA's anti-cutback rule does not apply.

A non-governmental employer's 457(b)-eligible plan need not meet Internal Revenue Code section 401(a) conditions, and so need not meet section 411's anti-cutback rule.

Even if you're ready to advise your client that neither ERISA nor the Internal Revenue Code restrains the amendment of payout forms, consider other laws, including the law of contracts. (When I represent an executive, we might seek provisions that disable the employer's power to amend the plan without the executive's assent.)

If the employer holds an annuity contract as a way to help the employer meet its obligation, consider that removing the plan's annuity payout forms might make further annuity purchases unsuitable under insurance and securities regulators' rules, including FINRA rules.

[PensionPro]

Thanks, that is very helpful. Yes it is a top-hat plan sponsored by a tax-exempt entity which is neither governmental nor a church. It is unfunded but the underlying assets are being moved from an insurance company to a mutual fund company. In restating the document the employer is inquiring whether amending the forms of benefit is permissible. Our function is to advise the employer about ERISA and the Code, however the entity's attorney is involved to advise on other legal aspects. Good points about the contractual obligations and possible existing annuities. We will have them review those issues.