Tax-Exempt 457(b) Plan - Distribution

[401(k)athryn]

Hello!  I am new to working with 457(b) Plans.   Per the plan document, a terminated participant needs to make a distribution election within 60 days following termination of employment and distributions can commence on or after the 61st day.  The participant can choose lump sum or installments (annual, up to 3 years).  Separately, they can choose to take the distribution as soon as administratively feasible or can delay payment until a specific date.  I understand that they can change this election ONE time prior to the distribution commencement date.

 

My questions are: 

1) Can they choose any prospective date for the commencement of the distribution, i.e. Can it be 10 years from now?

2) If the participant terminates today (12/4/19), then the distribution is not available until 61 days later, so the distribution amount would be reported on a 2020 W-2, since it is reported when first made available.  If the participant delays the commencement date until 2021, does the distribution get reported on the W-2 in 2020 or 2021?  Likewise, if they opt for installments, does each distribution amount get reported for the year in which it is paid?

Thanks!

[Luke Bailey]

401(k)athryn, I assume this is for a 501(c)(3), and not a government.

If you meet the election timing rules of 1.457-7(c)(2)(ii) (which it sounds like you are assuming), then you are essentially on the cash basis. somewhat like a qualified plan, except reported on W-2, as you note, not 1099-R. The reg expresses this by saying that if you meet the rules, then the amount(s) are not considered "available" until the elected payment date(s). So bottom line, (a) yes, it could be 10 years, subject to 401(a)(9) RMD rules, and (b) if installments are appropriately elected, the income occurs when the installments are paid, limited to the amount of the installment. See 1.457-7(c)(3), Example 2.

[Patricia Neal Jensen]

With respect for Luke (as he is undoubtedly more experienced with this than I am), I am worried by the "delay payment to any specific date" language.  I would have to see the language in the document to be more certain that the document permits this.  Also, many of my clients do not want to leave 457(b) money in the "custody" of a plan sponsor they no longer work for or in fact have any legal connection to.

PNJ

[401(k)athryn]

Thank you both for these responses.  I do actually see in the document that they cannot delay beyond Normal Retirement Age!