At Last! 457 Guidance!

May 8, 2002 ( - The Internal Revenue Service has published some much-anticipated guidance on Section 457 defined contribution plans for state and local governments and tax-exempt organizations.

The proposed regulations are the first comprehensive guidance on the subject in 20 years and incorporate several changes made in the law since then, including provisions of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), as well as plan loans, the deferral of sick and vacation pay and nonqualified stock options, according to a BNA news report.

Deferral Limits

EGTRRA brought 457 plans in line with other qualified plans by allowing an $11,000 yearly maximum elective deferral in 2002 along with $1,000 hikes until the 2006 limit of $15,000.

457 plans also came more into line with the extension of the so-called “catch up” provision to them. Now 50-somethings in state and local government plans can set aside an additional $1,000 beyond those limits in 2002. By 2006, they will be allowed to save $5,000 more than plan limits.

Participants over 50 and within three years of the normal retirement age specified by the plan are entitled to contribute the annual deferral limit plus the greater of the limit provided by the age 50 catch-up contribution or the Section 457 catch-up contribution, the regulations stated.

Loans and Distributions

The proposed regulations allow for participant loans from eligible state and local government plans.

In granting the loan, the regulations require that the loan have a fixed repayment schedule and a reasonable interest rate. Tax-exempt plans can’t extend loans, the regulations said.

Transfers and Terminations

Plans may transfer assets to other like plans such that state and local government plans may transfer assets to other government plans. Assets in tax-exempt employer plans can be moved to other tax-exempt employer plans. However, transfers between the two types of plans are not permitted under the proposed regulations.

The regulations allow eligible plans to be terminated if all amounts deferred under the plan are paid to participants “as soon as administratively practicable.”

Sick/Vacation Pay, Excess Deferrals

The proposed regulations would allow an eligible plan to provide that a participant may elect to defer accumulated sick pay, vacation pay, or back pay for any calendar month only if an agreement providing for the deferral is established prior to the month in which the amounts would be paid.

Eligible plans may self-correct excess deferrals without failing the requirements of the regulations solely for that reason. The IRS is seeking comments on recordkeeping requirements for excess deferrals, as well as the proper income and payroll tax reporting of distributions of excess deferrals.

Most provisions of the regulations would be effective for taxable years beginning after December 31, 2001, the IRS said.

A public hearing is planned for August 28. Written comments must be received by August 6 and requests to speak at the hearing must be received by August 7.

The proposed regulations are in the Federal Register