Generally, for years beginning after 12/31/2001, an eligible deferred compensation plan under IRC Section 457(b) (or “section 457 plan”) must meet the written plan document requirements. The plan must comply in form and operation with the requirements of the Code and regulation. Under IRC Section 457(b) certain provisions are required, and if any optional provisions are intended, they must be stated in the plan document.
IRC Section and Treas. Regulation
- IRC Section 457
Deferred compensation plans of State and local governments and tax-exempt organizations
- Treas. Reg. Sections 1.457-1 through 1.457-11
Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)
- Revenue Procedure 2004-56, Model amendments that may be used by a State or local government eligible employer.
- Revenue Procedure 2016-51, Employee Plans Compliance Resolution System
A “section 457 plan” is a deferred compensation plan that is maintained by an eligible employer and that complies with the specific requirements set out in IRC Section 457(b).
- An eligible deferred compensation plan under IRC Section 457(b) is an agreement or arrangement (which may be an individual employment agreement) under which the payment of compensation is deferred (whether by salary reduction or by nonelective employer contribution). See Treas. Reg. Section1.457-2(k).
- An eligible employer may be a State, a political subdivision of a State, an agency or instrumentality of a State or political subdivision of a State, or any other organization that is otherwise tax-exempt under the Code - except that churches or church-controlled organizations, as defined in IRC Section 457(e)(13), are not allowed to sponsor eligible deferred compensation plans.
- An eligible IRC Section 457(b) plan must be a written plan that is maintained, in form and in operation, in accordance with requirements of IRC Section457 and Treasury Reg. SectionSection1.457-4 through 1.457-10 [Treas. Reg. Section1.457-3(a)].
(Note: Taxable entities, who may not sponsor a 457(b) plan, have other rules for non-qualified deferred compensation arrangements. See, IRC Section409A)
Written Document Required
- The written plan document must contain all the applicable provisions of Treas. Regs. Sections 1.457-4 through 1.457-10.
- The plan must be adopted and the plan document exist before the first day of the month in which the compensation is paid or made available in order to provide that compensation has been properly deferred by salary reduction, and an agreement providing for the deferral must have been entered into prior to the deferral.
- Certain provisions are optional, such as the age 50 catch-up limit, the special 457 catch-up limit, distributions for unforeseeable emergences, loans, plan-to-plan transfers, additional deferral elections, acceptance of rollovers, and involuntary distributions of smaller accounts. However, the plan document must contain provisions for any of the options that the employer wishes to include in the plan.
The final regulations, issued July 11, 2003, apply to taxable years beginning after December 31, 2001. These regulations include changes made to section 457 by the Tax Reform Act of 1986, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, the Economic Growth and Tax Relief Reconciliation Act of 2001, the Job Creation and Worker Assistance Act of 2002 and other legislation making various technical changes and clarifications to the existing regulations.
Revenue Procedure 2004-56 was issued to provide model amendments that may be used by a State or local government eligible employer.
Issue Indicators or Audit Tips
The Examination Agent is required to review plan documents to insure it was adopted timely and is in compliance with the regulations. The regulations are generally effective for plan years beginning after December 31, 2001, which includes changes made by EGTRRA to IRC Section 457.
The plan document should be reviewed for subsequent law changes such as Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) effective for years beginning after December 31, 2007; which applies only to plans of State and local governments.
A plan document failure may cause an operational failure.
Section 4.09 of Rev. Proc. 2015-28, 2015-16 IRB 920, provides that submissions relating to IRC 457(b) Eligible Governmental Plans will be accepted by the Service on a provisional basis outside of the Employee Plans Compliance Resolution System (EPCRS) through standards that are similar to EPCRS, However, a governmental 457(b) may be able to self-correct failures under Treas. Reg. Section 1.457-9.