• No results found

Affecting Deferred Compensation Programs

Prior to 1979 when Section 457 was added to the Internal Revenue Code with the passage of the Revenue Act of 1978, deferred compensation arrangements ex- isted in local governments solely under private letter rulings issued by the IRS to adopting employers. One of the earliest deferred compensation arrangements to be issued a private letter ruling was established by a school district in Utah. This local plan and others that followed were typically funded with investments in annuity contracts issued by insurance companies. Since that time, a number of legislative and regulatory changes have altered 457 plans and enabled them to expand to more employees.

The following provides a chronology of legislative and regulatory changes to 457 plans.

Nationally Available Plan Document.The first plan designed for national availability and adoption without the need for an employer to seek a separate private letter ruling was developed in 1972 through the efforts of the Interna- tional City Management Association to meet the needs of its membership, which was among the most mobile groups of public sector employees.

No Contribution Maximum - IRS Threat to End Deferrals.Prior to the adop- tion of Section 457 in 1978, as long as compensation was not “constructively re- ceived” by the participant in accordance with an agreement between the local government employer and employee, the deferrals were excluded from current federal income tax without an annual dollar limit. In fact, some individuals de- ferred virtually 100 percent of their compensation at a time when individual marginal tax rates were significantly higher than they are currently. The Internal Revenue Service generally advocated elimination of the availability of deferred compensation arrangements to public sector employees for this reason. In 1977, the IRS suspended the issuance of private letter rulings and announced that it was reviewing deferred compensation plans in the public sector. The result was Proposed Regulation 1.61-16, issued in 1978, which provided that if receipt of compensation was electively deferred by an employee to a later year, the de- ferred amount would be treated as taxable in the year in which the deferral was made.

Section 457 Adopted by Congress – Revenue Act of 1978. Legislation to coun- ter the IRS proposals and include deferred compensation in the Code was intro- duced in 1978 and supported by a coalition of organizations, including the Gov- ernment Finance Officers Association, International City Managers Association, National League of Cities, U.S. Conference of Mayors, National Conference of State Legislators, National Association of Counties, and others. With the Reve- nue Act of 1978, Congress added Section 457 to the Code (effective January 1, 1979) in order to provide the benefit on a statutory basis and to set limits on the amount of tax deferral. Regulations elaborating the IRS position on Code Section 457 were proposed in 1980 and adopted on September 23, 1982.

Tax Reform Act (TRA), 1986, and Technical and Miscellaneous Revenue Act (TAMRA), 1988.TRA and TAMRA represented the most fundamental revision to the Code in decades, as evidenced by the change in citation of the Code from the Internal Revenue Code of 1954, as amended, to the Internal Revenue Code of 1986, as amended. Although there were changes made to Section 457, their rela- tively minor nature indicated that state and local government deferred compen- sation arrangements were on solid ground with Congress. This was not the case for 401(k) Cash or Deferred Arrangements that can no longer be adopted by gov- ernmental entities.

Small Business Job Protection Act (SBJPA).In 1996, a fundamental and wel- come change was made to Section 457 plans. Prior to this legislation, assets of deferred compensation plans were considered assets of the employer and sub- ject to its general creditors. In the aftermath of the highly publicized investment difficulties encountered by the deferred compensation plan for the employees of Orange County, California, the SBJPA required that all assets be held in a trust, custodial account, or annuity contract for the exclusive benefit of participants and their beneficiaries. This statutory change removed what had been at least a deterrent for many public employees. The act also provided that the maximum contribution amount was indexed for increases in the cost-of-living for tax years beginning after December 31, 1996. Other changes made to Section 457, in the area of distribution commencement date and small account balance payouts, have been superseded by later legislation. An official Congressional “Confer- ence Report” released with the Act stated that employers have the option of al- lowing participant loans under their 457 plans.

Taxpayer Relief Act of 1997 (TRA ‘97).TRA amended the small account bal- ance payout provisions of SBJPA.

Economic Growth and Tax Relief Reconciliation Act (EGTRRA ‘01).Signifi- cant changes to Section 457 plans were made in 2001 (largely effective January 1, 2002) with the enactment of EGTRRA; the changes included a substantial in- crease of maximum contribution limits (and linked 457 plans to the contribution limits for 401[k] and 403[b] salary deferrals); addition of an age-50 catch-up pro- vision; change in the normal catch-up provision to allow double the current an- nual limitation as maximum contribution; portability to and from other retire- ment plans and IRAs; repeal of coordination of contributions with 403(b) and 401(k) plans; assets taxed when actually paid, not “when made available,” re- sulting in the ability of participants to change distribution schedules; availability of a tax saver credit for low income tax filers; and assets permitted to purchase service credits in defined benefit plans. Unless Congress extends or makes per- manent some or all of its provisions, EGTRRA will expire on December 31, 2010. The expiration of EGTRRA would return maximum contributions to the level specified in the original legislation of the Revenue Act of 1978, as amended by the SMJPA of 1996, as well as reinstate the constructive receipt rule.

IRS Final Regulations for Required Minimum Distributions (2002). These regulations simplified and generally decreased the minimum distributions re- quired annually from all retirement plans and IRAs.

IRS Final Regulations for 457 Plans (2003, effective January 1, 2002).Among a number of issues dealt with, the final regulations specified provisions for treat- ment of sick and vacation accrual contributions at termination of employment; catch-up contributions, including treatment for multiple employers; loans from 457 plans; additional situations qualifying for emergency withdrawals; and treatment of assets distributed by qualified domestic relations orders.

IRS Final Regulations for Deemed or “Sidecar” IRAs (2004).Under EGTRRA (2001), plan sponsors of 401, 403(a) and (b), and governmental 457 plans may permit IRA accounts within the employer’s retirement plan, effective January 1, 2003. The most important provision of the regulations for plan sponsors is that the failure of the Sidecar IRA to meet all requirements of the statute and regula- tions will not result in disqualification of the underlying retirement plan.

59

E

Guide to Using the Vendor

Related documents