More to Come on 457 Guidance

Cheryl Press, IRS senior counsel, told a gathering of more than 700 at the National Association of Government Defined Contribution Administrators (NAGDCA) that they can expect a significant amount of additional guidance before the end of 2002.

Fresh from public comment sessions on the recently issued 457plan regulations, Press told the NAGDCA attendees that the IRS had been asked to come up with a “top 10” list of areas in which guidance was needed.  “We expected two or three”, Press told the conference, “…but it looks like we got all ten.”

On that top ten list were:

• final regulations for 457 plans, following the publication of proposed rules and subsequent industry comments, Press said that might include model amendment language
• updated participant withholding notices for 457 plans.  The Economic Growth and Tax Relief and Recovery Act (EGTRRA) did many things to bring 457 benefits up to the level of their 401(k) bretheren.  However, distributions from 457 plans are now subject to the 20% withholding requirements that have been the norm for 401(k) programs for nearly a decade.

In addition to 457-specific guidance, Press also noted the following that apply to ERISA-covered programs generally:

• final regulations on plan loans under Section 72(p)
• final guidance on minimum distributions under 401(a)9
• guidance on rollovers, particularly now that EGTRRA has liberalized the ability to roll distributions between 401(k), 403(b), 457 and IRAs
• final regulations on the so-called deemed IRAs under Section 408(g), an EGTRRA-based change that is due to go into effect in January
• guidance on nondiscrimination tests under sections 401(m) and 401(k)
• updated regulations on 403(b) programs – those regulations haven’t been revisited in 30 years, according to Press, and with so many EGTRRA-based changes, they are due for a fresh look

Regarding the proposed 457 regulations, Press told the audience that plan sponsors should rely on the regulations, despite the fact that they are not final, and that the IRS is still reviewing and considering changes.  “We’re not mean people”, she offered, noting that to the extent the final regulations are different, they will likely be less restrictive than the current proposals.

Acknowledging that we were at that “awkward” period between proposed regulations and a public hearing that only concluded last week, Press was unable to offer much in the way of specifc outcomes from those discussions.  However, based on some of those comments, she did offer some insights on the questions.

Sick/Vacation Pay Deferrals

On the issue of treatment of deferral of sick and vacation pay, she noted that the proposed regulations offered two scenarios of how that could be accomplished. 

However, she went on to say that if the question is, does the worker have to be an employee in the same year when they receive the deferral credit, she stressed that they did under the current regulations.

She noted that lots of government workers retire in December, but then income from the leave deferrals isn’t received until the following year. 

Acknowledging that plan sponsors were pushing for a grace period in such matters, she said the IRS was looking at it.  For now, she suggested letting the workers retire in November so that the administrative process can credit the deferral in the same year. 

Alternatively, she said that pushing retirements until January to allow the credit to occur in the same year would work as well.

Another issue relates to a limitation on allowing deferrals only in those months in which a worker is paid.  Press said that plan sponsors want to know why they have to wait in order to allow deferrals. 

She said that while the IRS has carved out an exception for new employees, officials are unable to overcome the plain language of the statute in 457)(b)4.

On the issue of unforeseen emergency distributions, Press said that some administrators were apparently very cautious in how they applied the term “unforeseen”, and that the examples included in the proposed regulations were designed to help offer clarification.

In the case of a home eviction, for example, she said that it was enough to have a notice of eviction in hand, that the “furniture doesn’t have to be in the street.” 

However, she said the comments reflected most confusion around the definition of “family member” for purposes of paying funeral expenses – and that the final regulations should offer additional clarity on that point.

On the purchase of permissive service credits, Press was adamant in stating that this was only allowed within plans of the same state at present.  However, she acknowledged that there was some legislative “history” with a more liberal interpretation – and said that the IRS was “looking at it.”

Finally, Press noted that, although the public comment session had ended, plan sponsors can still send in comments on the 457 regulations.  She also noted that the IRS was considering issuing 457 audit guidelines and a 457 publication like the one that currently exists for 403(b)s.