Section 457 Plans May Include Auto-Enrollment, IRS Says
The IRS in a private letter ruling (PLR) has said that a Section 457(b) plan may include an auto-enrollment feature. PLR 201743002
, which the IRS issued on July 19, 2017, was only recently released.
The PLR pertains to a county’s deferred compensation plan that provides for an eligible automatic contribution arrangement (EACA). Under this provision, an employee is treated as having entered into a participation agreement to defer compensation, at an amount equal to the percentage of compensation specified by the county, unless the employee affirmatively elects a different amount or opts out during the initial opt-out period specified by the county. Employees have between 30 and 90 days to opt out.
An employee may also become a participant by executing a participation agreement to defer compensation into the plan after having initially opted out or after ceasing participation. This election must be made before the beginning of the month in which the employee’s compensation would be paid or made available.
The plan provides for a maximum amount that may be deferred by a participant in any taxable year. It also provides for a catch-up contribution for amounts deferred for one or more of the participant’s last three taxable years ending before he or she attains normal retirement age under the plan. The plan also provides for age 50+ catch-up contributions, subject to the Section 457(c) annual maximum limitation and the catch-up provisions.
With certain limitations, a participant or beneficiary may elect the manner in which his or her deferred amounts will be distributed. The plan provides that the manner and time of benefit payout must meet the Internal Revenue Code’s distribution requirements.
Upon separation from service, a participant’s account will be paid in accordance with the payment option he or she elected. Benefits under the plan will commence no later than the later of either April 1 of the year following the calendar year in which the participant attains age 70½, or April 1 of the year following the calendar year in which the participant has a separation from service. The plan provides that the manner and time of benefit payout must meet the distribution requirements.
Under the plan, a participant (upon severance from employment) or beneficiary may elect to have any portion of benefits deferred under the plan directly to another eligible retirement plan such as an IRA in a direct rollover, with nonspouse beneficiaries subject to certain limitations.
The plan allows distributions due to an unforeseeable emergency that is a severe financial hardship resulting from extraordinary and unforeseeable circumstances beyond the control of the participant.
The plan provides for acceptance of transfers of a participant’s account balance from another Code Section 457(b) eligible deferred compensation plan. The plan provides for permissive plan-to-plan transfers or rollovers of all or a portion of a participant’s account to another Section 457(b) eligible deferred compensation plan if the participant has terminated service and is a participant under the other eligible plan. The plan provides that amounts of deferred compensation are to be promptly remitted to, and invested in, a trust as described in Internal Revenue Code Section 457(g) for the exclusive benefit of the participants and their beneficiaries.
The plan provides that a participant may elect to defer accumulated sick pay, accumulated vacation pay, and back pay as described in Treas. Reg. §1.457-4(d).
The IRS says in the PLR that maintaining an EACA through the plan, under which the participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation provided under the plan until the participant specifically elects not to have contributions made (or specifically elects to have contributions made at a different percentage), does not cause the plan to fail to satisfy Code Section 457(b)(4) and Treas. Reg. §1.457-4(b).
The IRS also says that permissible withdrawals made from the plan are includible in the employee’s gross income for the taxable year of the employee in which the distribution is made. Permissible withdrawals do not violate the distribution restrictions of Code Sections 457(b)(5) and 457(d)(1)(A).
It is important to note that IRS PLRs do not have the force of law, nor is compliance required as with a regulation. The IRS sends a PLR in response to a specific situation. However, a PLR does give an indication regarding what the IRS is thinking regarding a particular matter.