457(b) Distribution - Procedurally speaking

[Buffalo TPA]

We only administer a couple of non-governmental 457(b) Plans so i am far from an expert.

in one of them a participant will be terminating soon and will be taking a lump sum withdrawal.

Since the distribution is reflected on the company W2 should the funds be transferred to the company checking account and then run through payroll

OR

is it ok that the funds go directly to the participant and then the company just adjusts that person's W2  at the end of the year

thanks

 

[Carol V. Calhoun]

Absolutely!  The money in a 457(b) plan is technically part of a "rabbi trust," which is treated for tax purposes as if it was owned by the employer.  So if the money gets paid out of that trust, it's still the employer's obligation to report it on the W-2 at the end of the year.  No need to have it make a pit stop in an account of the employer on the way out of the rabbi trust before going to the participant.

[John Feldt ERPA CPC QPA]

Technically the funds are company assets anyway, so either way should be okay. 

[Bill Presson]

I don’t work in this area but doesn’t the rabbi trust protect the assets from use by the employer for any purpose other than paying benefits? If so, wouldn’t transferring the assets to an employer account risk diversion?

If I’m accurate on that, I would definitely recommend avoiding moving the money to an employer account. 

[Peter Gulia]

Consider also whether the employer prefers that a recordkeeper, third-party administrator, rabbi trustee, or another service provider tax-report the deferred wages.

[EPCRSGuru]

I am not terribly familiar with this topic but I know that we have a signed agreement agreement with our 457(b) service provider authorizing them to report the distributions on a W-2.  The funds are paid from the 457(b) account directly and do not pass through the employer's accounts.