New guidance for deferred comp. plans
It has been a long time coming, but the U.S. Department of Treasury has issued its first comprehensive set of regulations on 457 deferred compensation plans in 20 years. The regulations fill in the gaps in statutory laws to help administrators operate their retirement plans.
For instance, the Internal Revenue Service (IRS) never has been clear on whether loans are legal for 457 plans, as they have been for years in private sector 401(k) plans. While the 1996 tax law requiring trusts for 457 assets argued for loans, some plan sponsors refrained from offering them. The regulations settle the issue: Loans are OK.
The regulations include guidance on the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, the Economic Growth and Tax Relief Reconciliation Act of 2001, and the Job Creation and Workers Assistance Act of 2002.
The effective date of the final regulations is retroactive to Jan. 1, 2002. The regulations do not provide a deadline by which employers need to update their 457 plan documents for the final regulations, but the IRS may offer guidance in the future.
Below is an examination of some of the key provisions:
Provision: Deferral agreements now must be in place prior to when compensation is paid, not before it is earned.
Significance: That allows the deferral of accumulated sick pay, vacation pay and back pay.
Provision: Deferrals of accumulated sick pay, vacation pay or back pay (i.e., “accumulated pay”) are now specifically permitted as long as the agreement to contribute the pay to the 457 plan is made prior to the date it becomes payable to the participant. The final regulations clarify that a participant must be employed at the time the sick, vacation or back pay is actually paid.
Significance: That allows participants to make sizable contributions in the year that they separate from their employer. Election can be made as late as the month of separation if certain conditions are met.
Provision: The regulations allow for participant loans that follow “section 72(p)” (the rules that govern 401 plan loans).
Significance: That confirms that employers may elect to include a loan feature in their 457 plans.
Many other questions are addressed in the regulations, and plan providers should help their plan sponsors work through the bureaucratic maze. A summary of the regulations, as well as a link to the full text, can be found on the Washington, D.C.-based ICMA Retirement Corp.’s VantageLink at www.icmarc.org.
Kurt Walden is director of legislative affairs for ICMA Retirement Corp.