An issue has existed concerning the ability of a federal credit union to establish and maintain a deferred compensation plan under Section 457(b) of the Internal Revenue Code, and therefore not subject to Section 409A.
The issue arose after a private letter ruling issued last year in which the IRS said that a credit union did not qualify as an employer that could sponsor such an arrangement. Although the private letter ruling was only directed to the credit union that requested it, this ruling caused a great concern among other federal credit unions that believed they had the authority to establish a deferred compensation plan under this provision of Section 457.
However, the IRS recently released Notice 2005-58 that gives some guidance to credit unions. The Notice recognizes that the IRS is currently working on providing guidance concerning what is a “governmental plan.” Until that guidance is released, the Notice provides certain conditions that are necessary for the federal credit union’s deferred compensation plan to avoid being subject to Section 409A.
First, the federal credit union must have maintained the plan and intended for the plan to qualify as a 457(b) plan as of
August 15, 2005, the date the Notice is scheduled to be published in the Internal Revnue Bulletin. Additionally, the credit union must have consistently claimed the status of a non-governmental tax organization for purposes of all of its benefit plans.
The Notice further provides that if future guidance were to be issued that would prohibit federal credit unions from maintaining the plan as being subject to Section 457(b), they would be permitted a reasonable transition period to amend their plans to prevent adverse tax consequences to the participants. The Notice goes on to state again that Section 409A does apply to a Section 457(f) plan.
– John N. Smith III