ASG rules apply to non-profits for 457(b) plans?

[Belgarath]

Is there any reason why the ASG rules wouldn't apply? Never happened to see a situation where a non-profit member of an ASG sponsors a 457(b) plan, but I wouldn't think it is unheard of.

[Peter Gulia]

I'm not seeing what question might invoke an affiliated-service-group rule.

At least with healthcare employers, it is not uncommon that an employer group includes not only organizations that are tax-exempt but also some that are not.  A tax-exempt organization might have a 457(b) eligible deferred compensation plan for a select group of executives and physicians.

 

[Belgarath]

Thanks Peter. After taking a little time to peruse the regulations under 1.414(c)-5(f),  and (g) - see Example 2, it does appear that the ASG rules would apply to a 457(b) plan.

Agree/disagree?

[Peter Gulia]

I see subsection (f)'s anti-abuse rule, and I see example 2's illustration that not treating two organizations as one employer could undermine a coverage or non-discrimination provision that otherwise would apply.

But if the worry is that less than all the organizations of an employer maintain a select-group 457(b) eligible deferred compensation plan, which tax-law provision are we imagining the non-combination or asymmetry would avoid?

 

[Belgarath]

Actually, to me it was more a question of whether another member of the ASG COULD sign on as a participating employer if they wished to. And it would appear that they can. I wasn't concerned about discrimination/coverage in a Top Hat plan anyway, but my original post didn't specify why I was asking the question, so I certainly can't expect anyone to read my so-called mind...

Thanks for the response.

[Peter Gulia]

I would not reason that being in an IRC § 414 group with an organization that is an “eligible employer” extends IRC § 457(e)(1)(B) treatment to an organization that is not itself such an eligible employer.

 

IRC § 457(e)(1)(B) states: “For purposes of this section—The term ‘eligible employer’ means—. . . any other organization (other than a governmental unit) exempt from tax under this subtitle.” The reference to “this subtitle” is to subtitle A (income taxes) of the Internal Revenue Code of 1986.

 

The Treasury department’s rule to interpret this subparagraph of IRC § 457 does not extend the concept of an “eligible employer” beyond the tax-exempt organization itself. 26 C.F.R. § 1.457-2(e). See also 26 C.F.R. § 1.457-10(a)(2) (providing tax-treatment rules for situations in which an employer that was an eligible employer becomes no longer such an employer).

 

IRC § 414(b) states: “For purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, all employees of all corporations which are members of a controlled group of corporations . . . shall be treated as employed by a single employer.”

 

IRC § 414(c) states “[F]or purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, under regulations prescribed by the Secretary, all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer. The regulations prescribed under this subsection [414(c)] shall be based on principles similar to the principles which apply in the case of subsection (b).” 
 

IRC § 414(m)(1) states: “For purposes of the employee benefit requirements listed in paragraph (4), . . . employees of the members of an affiliated service group shall be treated as employed by a single employer.” IRC § 414(m)(4) states: “For purposes of this subsection [414(m)], the employee benefit requirements listed in this paragraph [4] are—(A) paragraphs (3), (4), (7), (16), (17), and (26) of section 401(a), and (B) sections 408(k), 408(p), 410, 411, 415, and 416.”

 

IRC § 414(n) states: “For purposes of the requirements listed in paragraph (3), with respect to any person (hereinafter in this subsection referred to as the “recipient”) for whom a leased employee performs services—(A) the leased employee shall be treated as an employee of the recipient, but (B) contributions or benefits provided by the leasing organization which are attributable to services performed for the recipient shall be treated as provided by the recipient.” IRC § 414(n)(3) states: “For purposes of this subsection [414(n)], the requirements listed in this paragraph [414(n)(3)] are—(A) paragraphs (3), (4), (7), (16), (17), and (26) of section 401(a), (B) sections 408(k), 408(p), 410, 411, 415, and 416, and (C) sections 79, 106, 117(d), 125, 127, 129, 132, 137, 274(j), 505, and 4980B.”

 

IRC § 414(o) directs the Secretary of the Treasury to “prescribe such regulations (which may provide rules in addition to the rules contained in subsections (m) and (n)) as may be necessary to prevent the avoidance of any employee benefit requirement listed in subsection (m)(4) or (n)(3) or any requirement under section 457 through the use of—(1) separate organizations, (2) employee leasing, or (3) other arrangements.”

 

Except for § 414(o), none of the quoted § 414 enumerations refers to IRC § 457.

 

And the focus of all five provisions is on “requirements” and not allowing a distinctness of organizations to defeat a restraint that would apply if the organizations linked by the specified commonality are treated as one employer. Subsection 414(o) states the regulations would be “to prevent the avoidance of” specified sets of tax-treatment conditions.

[Belgarath]

Hi Peter - point well taken. I had considered this, but in this case they are both eligible employers. Two 501(c)(3) non-governmental employers, who do, under 1.414(c)-5(b), constitute an ASG.

Granted that the documents we are using are not "pre-approved" by the IRS, they do contain language for "participating employers."

Do you think it is being too aggressive to have such an employer sign on as a "participating employer?"

[loserson]

20 minutes ago, Belgarath said:

Two 501(c)(3) non-governmental employers, who do, under 1.414(c)-5(b), constitute an ASG.

I believe that reg is referring to controlled groups, not to affiliated service groups, isn't it?  I might be misunderstanding.

[Belgarath]

Yup, I've been saying ASG all along when I should have been saying CG. Sorry about that. But I don't think it alters the question, or the results. Perhaps, as Peter notes, I just can't make the leap to use this in a 457 context. Seems crazy to have to set up two plans, but maybe that's where it ends up.

[loserson]

So is your goal to get two tax-exempt entities into a non-governmental 457(b) plan, meaning an unfunded top hat plan?  If there is no trustee and this is just NQDC held separately by each employer, couldn't you just design two plans to use identical documents, but then modify the employer name?

You could use the same name for each, like "Entity A 457(b) Deferred Compensation Plan" and "Entity B 457(b) Deferred Compensation Plan."  You could probably even send the same SPD/booklet to every covered executive and just say it applies to both plans and both employers.

Maybe I am missing some administrative issues and that's why you are asking.

[Belgarath]

As to your first question, yes, absolutely. As to the second, I'm asking because sometimes the funding companies charge a separate fee "per plan" - just looking, at this point, to minimize fees at the request of the broker. We're just at the initial "feasibility" investigation, and I want to get my ducks in a row. Thanks.

[loserson]

Ah!  Got it.  Sorry, I am used to the outside lawyer perspective and I do not always think about admin details with regard to cost containment and vendors.  I am used to focusing on the actual comp, which is only part of the picture.  The exception for me is DBs, where I have trouble not thinking about all the time and money "wasted" on actuaries and PBGC premiums

The DOL will sometimes let you get away with filing a single top hat registration statement, which is plausible to argue with the broker that this is "one plan."  You might use some creative drafting to make a "single" plan document and get a one-plan fee, maybe?

For your convenience:

DOL Advisory Opinion 2008-08A

Melbinger on group top hats and 2008-08A

 

[Belgarath]

Thanks!

[Peter Gulia]

The construct of inviting participating employers to sign onto a common document has been a service feature regarding unfunded deferred compensation plans at least since the 1970s.

 

I obtained IRS letter rulings on 457(b) documents with participating-employer provisions.  The IRS was content so long as the construct is limited to eligible employers within the IRC § 457(e)(1) definitions and nothing funds a deferred-compensation promise or removes an eligible employer’s assets from that organization’s creditors.

 

With appropriate provisions, I think it’s sensible to allow as adopters of one written plan all non-governmental tax-exempt organizations in an IRC § 414 group.

 

Beyond perhaps a document efficiency, there is a further practical advantage.  A rule to interpret IRC § 457(b) includes this:

 

Treatment as single plan.  In any case in which multiple plans are used to avoid or evade the requirements of §§ 1.457-4 through 1.457-10, the Commissioner may apply the rules under §§ 1.457-4 through 1.457-10 as if the plans were a single plan.  See also § 1.457-4(c)(3)(v) (requiring an eligible employer to have no more than one normal retirement age for each participant under all of the eligible plans it sponsors), the second sentence of § 1.457-4(e)(2) (treating deferrals under all eligible plans under which an individual participates by virtue of his or her relationship with a single employer as a single plan for purposes of determining excess deferrals), and § 1.457-5 (combining annual deferrals under all eligible plans).

 

26 C.F.R. § 1.457-3(b).  While I read this rule to apply to plans of an eligible employer, it can’t hurt to have provisions that also are logically consistent across an IRC § 414 group.  It’s easier to read and manage the provisions if they’re stated in one document.

 

One point to be careful about with non-governmental tax-exempt organizations.  A participant’s right to her deferred compensation must be the unfunded obligation of her eligible employer.  If a document allows more than one eligible employer, the document should provide each participant’s deferred compensation as the obligation of the particular organization for which the participant performed the service that earned the compensation.  And if a participant performs service for more than one organization, the document should specify each organization’s obligation to such a participant.

 

Beyond other consequences, not being clear about each organization’s exact obligations can affect the analysis about whether a deferred compensation promise is an exempt-from-registration security under Federal or State securities laws.

 

If there are practical preferences about using fewer investment arrangements or fewer service agreements (or both), these often can be met if the employers deal with providers that understand the points described above and provide separate accounting.  It’s easier if there is a rabbi trustee or custodian between the employer and its investments.

[Belgarath]

Thanks all. I appreciate your time and expertise.

[C. B. Zeller]

2 hours ago, loserson said:

thinking about all the time and money "wasted" on actuaries

Ouch

[BTG]

On 8/14/2019 at 12:54 PM, Peter Gulia said:

One point to be careful about with non-governmental tax-exempt organizations.  A participant’s right to her deferred compensation must be the unfunded obligation of her eligible employer.  If a document allows more than one eligible employer, the document should provide each participant’s deferred compensation as the obligation of the particular organization for which the participant performed the service that earned the compensation.  And if a participant performs service for more than one organization, the document should specify each organization’s obligation to such a participant.

My apologies for reviving an old thread.  

Peter, I have often seen separate 457(b) plans set up for each common law employer within a group of related employers.  My understanding has always been that this was primarily done for creditor protection purposes, so that if one employer went belly up, its creditors could not reach assets attributable to the plans of the other related employers.  In the excerpt above it sounds like you're suggesting that this is not necessary, as long as the document carefully defines which benefits are the obligation of each employer.  Is that correct?  Any chance you could provide some authority for that position?  It seems like a reasonable interpretation of 1.457-8(b), but it would be nice to have something definitive.

[Peter Gulia]

As I mentioned, using fewer plans, investment arrangements, or service agreements depends on working with service providers that know enough and have legal and practical capabilities to make distinct each organization’s obligations and each organization’s assets.

The arrangements I alluded to not only involve separate accounting but also legal and contractual segregation of each organization’s property rights.  Whether it’s effective and enforceable goes beyond the work of tax lawyers and involves the work of banking, securities, debtor-creditor, and bankruptcy lawyers.

I’m unaware of any court (or bankruptcy court) decision that tests whether contractual segregations were enough that creditors of one organization could not reach another organization’s assets.  (If any BenefitsLink reader knows of such a decision, whether recognizing or ignoring an attempted segregation, please let me know; I’d suggest my 457 Answer Book coauthors explain it in our next update.)

If it’s impractical to use enough legal and operational efforts to be confident in the segregations, a participant might prefer that her employing tax-exempt organization’s assets are separated by the several-plans approach BTG describes.

Different clients see the tradeoffs differently.

[BTG]

Thanks Peter.  That makes sense.

As an aside, I am expecting the latest edition of your 457 Answer Book to arrive tomorrow.  It's a great resource.

[Peter Gulia]

Thank you for the kind words.

And know that some of the authors take questions from subscribers.  If I can do so without stepping on a client conflict, I help an inquirer meet her immediate client-facing need.  Later, Gary Lesser and I sort out what ought to make its way into the book.