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Changing Salary Deferrals to a 457 Plan

Q: I have a school district with a 457(b) plan that changed the salary reduction amount to $0.00 for five employees in the same month the deferral agreements were signed. What happens to them now? How do they make a correction?

A: I asked the IRS about this after checking the wording of the rule that salary reduction agreements have to be in before the first day of the month in which the deferral will take place. The IRS tells me that the “first of the month rule” is clear regarding an agreement to defer. But since the change in question is to cease deferrals, the IRS says it is not a violation.

Keep in mind that we can’t rely on informal opinions of the IRS, but it may make sense!