Linda Segal Blinn
While we may be in the dog days of summer, the IRS has been doing some belated spring cleaning. On June 22, 2016, the IRS issued proposed 457 regulations in part to reflect federal legislation that was issued after the 457 regulations were last finalized in 2003.
Generally, the proposed regulations apply to compensation deferred under a 457(b) plan for calendar years beginning after the date that the final regulations are published. However, taxpayers may rely on the proposed regulations before that date.
What does that mean for sponsors of a 457(b) plan? Most of the changes focus upon 457(b) plans sponsored by governmental employers. The proposed guidance now incorporates the rules for such plans to:
- Enable a nonspousal beneficiary to roll over eligible amounts from a 457(b) plan sponsored by a governmental employer into an inherited IRA, a feature that was added by the Pension Protection Act of 2006 (PPA).
- Enable eligible retired qualified public safety officers to make a tax-free transfer of up to $3,000/year from a 457(b) plan sponsored by a governmental employer to pay for qualified accident and health premiums (initially part of the PPA, but later modified to include self-insured plans, following a technical correction under the Pension Protection Technical Corrections Act of 2007). To be eligible for the transfer, the public safety officer must have separated from service due to either disability or attainment of normal retirement age under the plan.
As a reminder, the PPA incorporates the definition of “public safety officer” from the Omnibus Crime Control and Safe Streets Act of 1968. So, for purposes of this tax-free transfer, a public safety officer would be “an individual serving a public agency in an official capacity, with or without compensation, as a law enforcement officer, as a firefighter, as a chaplain, or as a member of a rescue squad or ambulance crew.”
- Enable a beneficiary to receive benefits under a 457(b) plan sponsored by a governmental employer if a participant were to die while on qualified active military service equivalent to the benefits that would have been provided had the participant returned to service with the employer and then terminated employment. This feature was added by the Heroes Earning Assistance and Relief Tax Act of 2008.
- Address Roth-specific rules under a 457(b) plan sponsored by a governmental employer, including:
o Separate accounting for Roth 457 contributions (added by the Small Business Jobs Act of 2010 (SBJA)), in-plan Roth rollovers (also authorized under the SBJA), and in-plan Roth conversions (permitted by the American Taxpayer Relief Act of 2012), to the extent that the governmental employer decides to offer such feature(s) in the 457(b) plan. Note that a 457(b) plan sponsored by a governmental employer must permit Roth 457 contributions in order to offer in-plan Roth rollovers and/or in-plan Roth conversions.
o Tax treatment of Roth contributions as an irrevocable designation by the participant as after-tax contributions and exclusion of qualified Roth distributions from gross income, in accordance with the SBJA.
In addition, the proposed regulations clarify changes to a participation agreement to contribute to a 457(b) plan of either a governmental employer or a nonprofit organization. Under the proposed guidance, if a participant wishes to either revoke or modify an existing participation agreement, that change becomes effective not earlier than the first day of the month after the revoked or modified participation agreement was entered into.
Under the 2003 final regulations, when a revocation or modification of an existing participation agreement became effective apparently was determined by the plan document. According to the final 457 regulations issued in 2003, “An eligible plan may provide that if a participant enters into an agreement providing for deferral by salary reduction under the plan, the agreement will remain in effect until the participant revokes or alters the terms of the agreement.”
Since these regulations are in proposed form, public comments may be submitted to the IRS no later than Sept. 20, 2016. The IRS also has scheduled a public hearing date for Oct. 18, 2016.
Linda Segal Blinn, J.D.*, is vice president of Technical Services for Tax-Exempt Markets at Voya Financial. In this capacity, Blinn leverages over 25 years of experience administering and designing defined contribution plans to provide general legislative and regulatory information to assist public and non-profit employers in operating their retirement plans.
This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.
* Linda is not a practicing attorney for Voya Financial.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.