457(b) Plan

[52626]

501© adopts a 457(b) Plan - employee contribution only. We know discover the doctors who are deferring are not employed by the Plan Sponsor, but a wholly owned subsidiary. Problem is the wholly owned subsidiary is a for profit organization.

Does the plan return the deferrals and income to the doctors ( taxable for 2015) since they were never eligible to begin with.

Suggestions on how to correct this matter would be greatly appreciated.

Thanks

[jpod]

Any chance that the governing plan document, and elections made thereunder, are 409A-compliant just by coincidence? Or, if not compliant can be fixed to be 409A-compliant under the IRS' guidance?

[QDROphile]

A nonprofit organization cannot have deferred compensation based on compliance with section 409A alone. It has to fit 401(a), 403(b), 415(m)(if governmental), 457(b) or 457(f), or so thinks the IRS.

[jpod]

but the employer/plan sponsor was discovered to be a for-profit

[52626]

the current 457(b) plan is compliant with 409A. Since the participants were not allowed to defer into the plan ( the entity that empolys them is a for profit organization), can it be as simple as returning the funds and income and having the participant claim the payment as income in 2015?? To me 409A does not apply to these employees since they were never eliigible to participant in the plan.....

[QDROphile]

jpod:

Your idea is that the for-profit adopted its own deferred compensation plan that has the same terms and the same document as the nonprofit's 457(b) plan and the nonprofit's 457(b) plan did not cover the for-profit's employees. That is conceptually possible if supported by the documentation. I doubt that the 457(b) plan has distribution provisions that are 409A compliant, but it might. I think it would have to be abundantly clear in the documentation the two employers were overlapping on the same plan document, which is almost certainly not so. But I like the idea.

[Josh62]

My assumption is that the documentation shows they were participants in the 457(b).

Since this is a Tax-Exempt employer rather than a governmental entity, the impact of a failure is that the plan becomes a 457(f). Since the organization is an eligible employer as defined in 1.457-2(e) of the regulations they could allow independent contractors that perform services for the eligible employer to participate. Under both 1.457-2(e) & (j). "Only individuals who perform services for the eligible employer, either as an employee or as an independent contractor, may defer compensation under the eligible plan"

Section 1.457-3(a) requires compliance in form an operation. Section 1.457-9(b) provides that if the plan fails to satisfy the requirements it is treated as an ineligible plan. I am not sure there is enough information here to draw the conclusion.

SO if the plan does not satisfy the requirements in operation, then there is no correction under EPCRS because EPCRS does not generally apply to 457. If there is any correction it would be under the Employee Plans Voluntary Closing Agreement-

http://www.irs.gov/Retirement-Plans/Employee-Plans-Voluntary-Closing-Agreements

If the employer determines that there is a failure under 1.457(b)-9(b) then it is either take your chances and make a correction and hope you are not audited or try obtaining the Employee Plans Voluntary Closing Agreemen.

[jpod]

QDRO: I am just throwing it out there, but if it coincidentally happens to be 409A-client, or can be fixed per the IRS Rev. Proc. without any penalties, the fact is that the employees who contributed are employees of a for profit so I think that the document purports to be "sponsored" by the tax-exempt entity is not fatal even if a little weird.