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457(b) distributions


Belgarath

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I'm looking at a 457(b) document and adoption agreement specifying that payments must commence no later than April 1 following date of termination. Obviously done back when that was the required beginning date.

I just want to confirm - for a 457(b) plan, I assume it is still ok to retain this provision, (if they want to) even if RMD date for active participants is the new 72 or 73, depending upon DOB?

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Meeting § 457(b)-(e)’s application of § 401(a)(9) is not an exclusive explanation of a provision that refers to the April 1 after a severance. For example:

In the 1980s, many § 457(b) plans were designed to allow a period—often, 60 days after the severance (or 60 days after the end of the year in which the severance occurred) for a participant’s election to defer payment to her specified date. Absent an election, a plan provided payment on the first of the month after the end of the election period. Some plans set provisions of this kind in terms of calendar dates.

You’re right that Internal Revenue Code § 457 does not preclude provisions more limiting than those needed to state a § 457(b) eligible deferred compensation plan.

For a governmental plan, church plan, or other plan for which ERISA does not supersede and preempt State law, a plan’s sponsor might consider relevant States’ laws.

For a governmental § 457(b) plan, providing an involuntary distribution sooner than is needed to meet a condition for tax treatment as an eligible plan is unusual.

For a nongovernmental § 457(b) plan, providing a distribution after severance from employment, with little or no choice to defer longer, is somewhat less unusual.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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In my view the RMD rules for these palns are practically moot (not entirely).  A Participant is not subject to RMDs while still employed.  I've seen people defer payments until the year after they retire but no later.  So someone could theoretically retire when they are 75, under your provision they get their first payment on the Required Beginning Date, and then presumably they elect either a lump-sum or perhaps some annual installments - the latter should really never be more than 10 on the high side. 

So it is true that in my example the participant could not defer their distribution until they turned 80 but the reality is people tend to want to get their money (and employers would prefer to part ways).

Your same provision applies to someone who leaves when they are 45 by the way, I presume?

Austin Powers, CPA, QPA, ERPA

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Before 2002, a § 457(b) plan participant’s deferred compensation was income subject to Federal income tax “for the taxable year in which such compensation . . . is paid or otherwise made available to the participant[.]” I.R.C. § 457(a), as in effect for 2001.

Many § 457(b) plans were designed so a participant who had a severance from employment or other distribution-allowing event (for example, age 70½) was not entitled to a payout until after the end of a period in which the participant would elect, irrevocably, when the deferred compensation is to be paid. Absent an election to defer (with all future payments specified or determinable), a plan’s default might provide yearly or monthly installment payments over a few years, or the default might be a single-sum payment. Everything was designed so no compensation would be available sooner than it was scheduled to be paid. (Some plans allowed no choice, and specified a payout schedule.)

Economic Growth and Tax Relief Reconciliation Act of 2001 § 649 removed a governmental § 457(b) plan’s need for those irrevocable-election provisions. Yet, a plan-design need to avoid a made-available trap continues for a plan of a nongovernmental tax-exempt organization. Compare I.R.C. § 457(a)(1)(A) with § 457(a)(1)(B) https://irc.bloombergtax.com/public/uscode/doc/irc/section_457.

If a nongovernmental tax-exempt organization’s plan allows an election to defer, even a participant who severs from employment in her 40s or younger must make her irrevocable election about whether and how long to defer.

That choice might have serious consequences for a payment obligation that is unfunded and unsecured. Not every tax-exempt organization is sure to be creditworthy for decades or even years to come.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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