Deck 10: Section 457 Plans

Question 1

Describe the different funding requirements of eligible 457(b) plans depending on whether the sponsor is a tax-exempt organization or a governmental organization.

Answer 1

Section 457 of Internal Revenue Code (IRC) consists of deferred compensation plan available to state and local government employer and other tax exempt organisation that are non-governmental as per section 501 of IRC.
In case of government organisations, the contributed amount is to be held by the trust or annuity account to make the benefit of plan exclusively available to the participant or their beneficiary where such trust helps in proper management of funds without possibility of any fraud.
In case of tax-exempt organisation, deferred amount remains property of employer until distributed to the participants.
Thus the funding requirement under section 457(b) plans differ from government and non-government tax exempt companies

Question 2

Can all eligible 457(b) plans offer loans to their participants?

Answer 2

Section 457 of IRC provides a deferred compensation plan to state and local governmental employer. This plan is also available to non-governmental tax exempt organisations stated under section 501 of IRC.
Section 457 plan provides with Investment options made available to the participants. One such option is loan availability against plan money. 
However, such options are available only to participants under governmental organisation. These loans are given in general terms like in case of 401(k) plans. The format of loan, time period, interest etc. determines the loan to be included as distribution or not.
For tax exempt non-governmental participants, this loan provision is not available as because the fund solely belongs to the employer and without any security or non forfeitable benefit loan cannot be provided to the participants.
Thus, provision of loan as an investment option against section 457 plans is available to some participants and not available to other on the basis of organisation employed in.

Question 3

Describe the characteristics of ineligible 457(f) plans.

Answer 3

Section 457 of IRC consists of deferred compensation plan for state and local government employees. This plan is also made available to tax exempt non-governmental organisation.
Ineligible 457 plans are governed by rules that are separately described in section 457(f). Various characteristics of this plan are as follows-
1. This plan does not hold any limit for deferrals like an eligible section 457 plan holds.
2. It constantly holds risk of forfeiture.
3. This amount is included the gross income of participant in the first taxable year when there prevails no risk of forfeiture.
4. It is useful for employers in case of providing supplementary benefit or employees deferring above the eligible limit.
5. The distribution of such amount is based upon certain criteria or service fulfilment on which forfeiture depends.
6. Termination of service also results in plan forfeiture.
7. The deferrals made under this plan rules is required to fulfil the requirements as per section 409A of IRC stated by American Jobs Creation Act, 2004.
8. In case of not meeting the requirements additional 20% tax on deferred amount would be charged in the first taxable year.
9. Distribution of amount is subject to taxation regulated and determined under Section 72 of IRC.
These are the basic characteristics of ineligible plan covered under section 457(f) of IRC

Question 4

What types of benefits generally are excluded from Section 457 restrictions and are not viewed as providing compensation deferral?

Question 5

Compare and contrast governmental Section 457 plans to similar types of plans utilized by for-profit corporate employers in the private sector.

Question 6

What is the purpose of a deferred compensation plan?

Question 7

How might tax-exempt employers utilize Section 457 plans as part of their executive compensation total rewards to compete for executive talent in the private sector?

Question 8

Distinguish between deferred compensation plans structured as pure deferred compensation plans and those structured as supplemental benefit arrangements.

Question 9

Explain the tax "doctrines" of economic benefit and constructive receipt.

Question 10

Which types of organizations may utilize Section 457 plans?

Question 11

How do eligible employers generally use Section 457 plans?

Question 12

Can independent contractors participate in eligible Section 457 plans?

Question 13

Explain how coordination between maximum deferrals in eligible 457(b) plans and amounts excluded from income under other types of deferral arrangements has changed over time.