Government Employers Lobby For Options, Clarification

August 30, 2002 ( - Proposed regulations for 457 DC plans could strip out tax benefits from stock options or mutual fund shares from a tax-exempt group's workers.

Representatives of tax-exempt organizations told members of a government advisory committee hearing feedback on the proposed rules that the provision taking away the tax benefits of the options and shares needs to come out of the regulations’ final version.

If not, the government committee was told, officials would be treating workers at taxable organizations differently than those at tax-exempt groups, the story by Washington-based legal publisher BNA said.

The Internal Revenue Service/US Treasury Department panel is hearing public comment on (REG-105885-99) covering Section 457 plans.

The BNA article said nonqualified stock options have traditionally been tax-deferred until exercise because of the lack of a readily ascertainable fair market value, then taxed on the difference between the price paid for the option and the exercise price.

Nonprofit employers commonly issue discounted stock options and mutual fund shares to executives and mandate that the options cannot be exercised until a certain date in order to retain the executive until that time, allowing executives to foresee the exact point in time at which they will take a tax hit on the option, the BNA article said.

State, Local Government Reps ‘Pleased’

Another witness, Mary Willett, told the government panel that her group, the National Association of Government Defined Contribution Plans, was generally pleased with the regulations on Section 457(b) state and local government plans, and requested only minor adjustments and clarifications.
For example, the proposed rules 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 if an agreement providing for the deferral is established prior to the month in which the amounts would be paid or made available.

Willett said the “prior to the month” clause in the regulations might add an additional layer of complexity to the administration of these plans that may not be necessary. She requested that it be modified to allow deferral agreements to be permitted before the date compensation is otherwise paid or made available.

The proposed regulations also allowed for requests for withdrawal in the event of unforeseeable emergencies, including funeral expenses for a family member. Willett asked for clarification of what relationship to the participant constitutes a family member.