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John Feldt

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Everything posted by John Feldt

  1. 1. How long can the withdrawal be spread over? Is it 2 or 3 years? Can withdrawals be made monthly or only annually? It depends on the terms of your plan's written document. Its provisions will dictate the options you have available. 2. Are funds remaining in the 457 account tax free until they are withdrawn? Tax-deferred, yes. Tax-deferred means the earnings are not taxed as long as the funds stay in a tax-favored plan, like a 457(b) plan, or as long as they are rolled to an IRA (the payment of taxes is thus "deferred" to a later date). Once distributed, taxes apply. "Tax-free" only applies to withdrawals from designated Roth accounts that meet certain criteria to be considered as a tax-free withdrawal. Tax-free means no taxes apply to the earnings while the funds are in the plan and no taxes apply even when paid out! That's quite a difference between tax-free and tax-deferred! Of course with Roth, your Roth deferrals and/or your Roth conversions are taxed at the time, so you've paid taxes on these contributions. If you have Roth in the 457(b) plan and you are going to reach age 70.5 next year and if you are eligible to withdraw your Roth account from the plan, you may want to consider rolling your Roth account to an IRA in order to avoid RMDs from the 457(b) plan (required minimum distributions). Under current rules, there is no RMD for a Roth IRA until after the death of the IRA owner. State rules can differ on how deferrals are treated, so all of the above is really just covering the Federal rules. You may want to speak with a tax advisor to help you with your specific situation.
  2. According to Federal law, a 457(b) plan sponsored by a government must meet the requirement that the funds be held in a trust. At the time of the Orange County, CA problem many years ago, 457(b) plans sponsored by governments were not held in a trust and the funds were considered assets of that government. Since that time governmental 457(b) plans have been required to be protected by being held in a trust, and the funds are protected from creditors and under the care of its trustees to be invested and distributed properly. You are correct that the employee can only withdraw under specific circumstances that your plan's document will outline. Simply reaching age 59.5 won't be one of those circumstances. It may be possible that if you owe the plan sponsor money, they might be able to "garnish" your 457(b) withdrawal when the funds are paid, or perhaps even submit a claim against your existing account prior to your withdrawal. However, I have not researched this at this time, so this answer should not be relied upon. I do know that the rules here differ from the usual protections that apply to a qualified plan, such as a 401(k) or profit sharing plan, since a 457(b) is not technically considered a "qualified plan". State law might apply instead. In my view it's not really your money until you have it in your hands - you can't use it as collateral. But the terms of the written plan should be followed and the trustees are subject to the terms of trust, and to abide by it they should only process payment claims that meet the requirements under the legal plan's document.
  3. Shirley (Bob?) is correct. There is no in-service withdrawal option under Code Section 457 or under the 457(b) regulations that list the attainment of age 59.5 as an in-service withdrawal option. Some 457(b) plans are written to allow for small balances to be distributed (one time only) if certain conditions are met - but that's probably not what the OP is looking for here. Under a 403(b) plan, profit sharing plan, 401(k) plan, yes, you could have a withdrawal at age 59.5 if the written plan document allows, regardless of the amount. Also note the difference between a 457(b) plan maintained by a government vs. a not-for-profit corporation: The govermental plan can allow rollovers to an IRA when a withdrawal event is reached and the participant will receive a Form 1099-R for the rollover. But a distribution from not-for-profit's plan cannot be rolled - the participant will actually receive a W-2 - you can't rollover W-2 income!
  4. Are you saying that you have a Roth IRA account? The IRS allows you roll your designated Roth 457(b) account into your Roth IRA. To have Roth in your 457(b) account, you must have worked for a governmental employer, a not-for-profit employer's 457(b) cannot roll over any amounts and cannot have Roth. When you roll the amount to an IRA, it takes on the nature and rules a Roth IRA. That includes the rule about the 10% pre-age 59.5 excise tax (or age 55/termination, or age 50 public safety employee separation). So be careful about that. 457(b) distributions (not rolled over) after termination are exempt from that 10% excise tax, regardless of age. If you established a Roth IRA before the rollover, the 5-year clock for the Roth IRA account now applies to the Roth rolled into that account. If you do not have a Roth IRA already and you just now open one to roll over your Roth 457(b), the Roth IRA clock begins with the year you first put that Roth into it. That's right, the year that the 5-year clock started inside the 457(b) plan is not retained with your rolled over Roth account, that year is lost and is replaced with whatever "Roth start year" that the Roth IRA already has in place. If the age 59.5 and the 5 year clock is not an issue, be sure to consider Joel's comments as well to avoid RMD by moving to an IRA (Roth IRA). Hope this helps!
  5. The 180 days is something that the written plan document has in place, and it is probably there in order to allow a terminated participant enough time to make a written election to delay the taxation of amount to a future date. The employer is required to follow the terms of the written plan document. The installment option is also something that the written plan document has in place, although that language might have some wiggle room for interpretation.
  6. I could be wrong, but I think this site is geared more toward 457(b) plans. If you don't get a response here, you may want to post this question in the 457 forum at Benefitslink.com.
  7. The advice seems sound to me. It sounds like you want to do a lot of trades, or very frequent trading? The firm I work with also provides service for employers that have defined benefit plans. As an internal joke, if a doctor's or lawyer's or dentist's defined benefit plan becomes overfunded (beyond the maximum that can be paid out), we jokingly suggest that the investment advisor should allow the doctor/lawyer/dentist to start doing their own day-trading with the plan assets, and that should fix the plan's overfunding problem in about a week. After they stop laughing, we suggest a real solution of course. Thought you might enjoy that! - Have a great Thanksgiving. -John
  8. Also, let me clarify, the "15 day" quote is not a rule, it's an example. 1.457(b)-8(a)(2)(ii): Amounts deferred under an eligible governmental plan must be transferred to a trust within a period that is not longer than is reasonable for the proper administration of the participant accounts (if any). For purposes of this requirement, the plan may provide for amounts deferred for a participant under the plan to be transferred to the trust within a specified period after the date the amounts would otherwise have been paid to the participant. For example, the plan could provide for amounts deferred under the plan at the election of the participant to be contributed to the trust within 15 business days following the month in which these amounts would otherwise have been paid to the participant.
  9. Is the hospital a government employer, or a non-profit corporation? The answer makes a big difference. Of course, the plan's document might have a more strict requirement than the law and regulations require, but the rules say: For a governmental 457(b) plan, deposits of employee elected salary deferrals must be occur in a reasonable time for proper administration of plan, not later than 15th business day of next month. The funds must be in a trust. But for a tax-exempt 457(b) plan (the plan is sponsored by a non-profit non-government entity), there is no deadline because the assets are employer assets. The funds must NOT be in a trust - must remain an employer asset (no protection from creditors like you get in a trust).
  10. Okay, the point I am struggling to make here is perhaps just one of perception or of semantics. When I read "just leave the funds with the employer", I think of a participant doing nothing at all, and thus the funds stay with the employer. Well, that is how it can work in a 401(k) plan, a 403(b) plan, a profit sharing plan, a governemnt 457(b), etc. but it does not quite work that way with a non-profit corporation 457(b) plan, they way I see it. I am concerned over the taxable event. The non-profit company 457(b) documents (those I've seen) require a written election by the participant to spell out a later date (to delay the benefit until then), in order to avoid current taxation of the benefit. Thus, if the former employee does not make a written election to delay the taxation to a later date by the deadline listed in the plan, then they get a W-2 with a 457(b) amount as taxable. Are you suggesting that the participant make no written election, somehow pay the taxes on the benefit now, but still leave the funds in the plan? If so, I had not considered that, but I don't know what a "deminimis cost investment option" is. edited to add an important "not" in the second paragraph, 2nd sentence
  11. No, I don't think so. The plan allows an employee to sign up for a salary deferral. Once the employee provides the instructions (a written deferral election) to the employer, the employer must follow the terms of the plan and withhold such deferrals exactly as the employee elected (subject to any plan limits or restrictions). If the instructions indicate that these were pre-tax deferrals, then the employer followed the instructions and did not violate the terms of the plan. Federal and State income tax withholding were also calculated for those paychecks based on pre-tax deferrals. Retroactive deferral changes are simply not allowed under the regulations (for many reasons). Another note, however. If the employer knew it would be amending the plan sometime in 2011 to add Roth, and if they wanted Roth deferrals to be available for the whole year, they could have provided some type of new deferral form with Roth right away before the first January payroll, along with some written explanation to describe how Roth deferrals work. Then, as long as the amendment is adopted before the last day of the plan year, such amendment can retroactively add Roth to the plan. Of course, payroll and accounting would need to be ready to handle it as well. The plan would have a problem if the Roth amendment does not get done by the end of the year. I think most practitioners would recommend allowing Roth deferrals only after the amendment has been adopted.
  12. First, for the old plan to be distributing a rollover and for the current plan to be accepting a rollover, these plans must both be government sponsored 457(b) plans. If that's not the case, please let me know - and ignore the rest of the comments in this reply. The plan document for the current 457(b) plan may have language that permits the distribution of rollover contributions. Check the rollover contribution section and check the distribution section. If the document allows for this, then you should be able to make a request to have your rollover funds distributed, or preferrably directly rolled into a Roth IRA. This distribution option does not apply to "transfers", since they are not rollovers (a transfer is basically where one employer enters into an agreement with another employer to transfer 457(b) accounts). Otherwise, if the plan document does not allow early distributions for rollover accounts, then your funds cannot be withdrawn from the plan unless you A) end your employment, B) die, or C) reach age 70.5. - The code and regs do not allow for the types of in-service distributions commonly seen in 401(k), 403(b), profit sharing plans, etc. Earlier payments can occur from a 457(b) plan but only for certain exceptions, in general: a de minimis option exists for a small account, unforeeable emergency withdrawals can be allowed, a QDRO (if the plan allows), and if the plan itself terminates. If the new "in-plan Roth rollover" rules are considered, you really get no additional help there either. First, the plan would have to have adopted this option, but the provisions are only available if you are eligible for a distribution anyway (death, age 70.5 or terminated). Lastly, I have never heard of an IRA being "within" a 457(b) plan, so I don't know what the advisor was indicating there. If your current plan allows Roth, you can defer the rest of year as Roth. Just make sure your Roth and non-Roth deferral contributions when combined from both employers for the year plus any employer 457(b) contributions to your account (from both employers) are not over the annual 457(b) limit. Yes, it's an individual limit, so both plans' contributions to your account must be added together and tested against the annual 457(b) limit.
  13. Sorry, in advance. The deadline to return any excess annual deferrals for a 457(b) plan for a non-profit entity is April 15 following the end of the calendar year in which the excess contribution occurred. If the excess is for contributions made in the current year (2011), I would guess that the amounts could be transferred now from the plan's vendor to the employer's general asset account (including earnings on the excess) by the end of the year - it is all employer money anyway since it is a non-profit 457(b) plan. Any portion of that amount which is employee deferral should then be paid as normal taxable wages to the employee in 2011 and adjustments may need to be made with the Form 941's for any FICA tax issues. If the refund to the employee occurs after 12/31/2011, I think the IRS is right to indicate that a Form 1099-R is needed with a code for excess deferrals - I have not researched that, but I do know that refund has to be done by April 15, 2012. The consequence for failing to meet this deadline is that the entire plan falls out of 457(b) and lands under the 457(f) plan requirements (really, really bad news: the participants' accoounts become taxable immediately and worse). If this is for contributions made before 2011, then the plan has an operational error (see the really, really bad news comment above). Although EPCRS (Revenue Procedure 2008-50) has a correction option available for government sponsored 457(b) plans, I don't see a correction option for a non-profit's 457(b) plan. Strategies should be discussed with ERISA counsel for fixing this issue somehow so that the IRS will not ruin the tax-deferred nature of the whole plan for all participants. Maybe recommend stopping all future contributions to that 457(b) plan and adopting a brand new 457(b) plan, FWIW. All responsibilities for the plan rest with the plan sponsor, the employer. If the vendor has an engagement agreement that states the vendor handles any tax reporting for refunds, then the employer should expect that the vendor will report this refund properly, but the employer must take steps to make sure it truly does get done properly and that it gets done on time. Also, the employer should change their procedures such that this excess annual deferral issue will not happen again.
  14. Assuming this is a government sponsored 457(b) plan and the amounts are over the annual deferral limit under 457(e)(15), I believe the refund is reported on a Form 1099-R. A Form W-2c would only be necessary if an incorrect amount was actually reported on the Form W-2.
  15. Whew! Aren't we all glad that our leaders in Washington are about to delay having to make any difficult decisions for 4 months? By Grabthar's hammer, what a surprise. (Probably only Alan Rickman could deliver that last sentence with the appropriate gravity of sarcsam).
  16. John Feldt

    Tax Question

    Funds withdrawn from a government 457(b) plan are currently not subject to a 10% early withdrawal tax, a federal excise tax. Of course, the tax rules may change, so be watchful of this. However, you are correct that if you roll over your 457(b) funds into a 401(k) plan, the 10% early withdrawal tax rules that apply to 401(k) plans will now apply to the 457(b) rollover funds coming in. But, you can still avoid the 10% early withdrawal tax if you become disabled, or if you sever from employment on/after age 55 (age 50 for public safety employees) and take a lump sum payment, if you spread the payments evenly over a long enough period of years, or upon death, or one of the rules that apply for avoiding the excise tax (see instructiond for line 2 of Form 5329 and IRS publication 575). The same thing would happen if you roll the funds into an IRA, but the IRA rules do not have an age 55/50 severance exception for lump sums. I am not sure what you are asking with regards to not touching the principal. Bascially, anything not rolled over when withdrawn from the 457(b) plan is taxable income on the date withdrawn (other than any Roth deferral contributions made and their earnings but Roth is a separate discussion altogether), but the 10% federal excise tax for early withdrawals does not apply because 457(b) plans are exempt from that rule. Government 457(b) plan accounts can be rolled over to IRAs or other qualified plans (to avoid the current taxation on the withdrawal, but to be taxed someday in the future). When such a rollover occurs, the 457(b) funds leave behind their 457(b) rules and exceptions and instead they take on the rules that apply to whatever type of arrangement they are rolled into. So if they roll into an IRA, the IRA rules now apply. If they roll to a 401(k), the 401(k) rules apply. If they roll to a 403(b), etc. I hope this helps!
  17. It may be important to note that one cannot (usually) just "leave the funds with the employer" without making a written election to actually do so. The exception would be a 457(b) plan that is specifically written to not allow any payments until a later age (such as age 65), allowing no options to be paid early (very rare to see this). So, you need to be careful to follow the procedure for delaying the receipt of the funds if you want to avoid immediate taxation. The plan will spell out how long you have to make a written election to delay the taxation of your benefits. If you do nothing by the time that deadline, then it is too late to delay and the amount is taxable and payable in whatever default form of payment that the plan requires. To delay, you need to spell out the later date by which you really do want the payment to be made. You will not be able to accelerate that date.
  18. The reasoning behind this is that the assets in a non-government 457(b) plan are still the employer's assets, not yours, even if you elected the "deferral" from your wages. Thus, these assets are subject to the potential claims of any creditors that knock on your employer's door.
  19. "If you have reached the age of 59.5, you can roll your 403b money to a 457 plan under the same employer." That assumes the 403(b) plan allows for an "in-service" distribution - many do, but some do not. Check your SPD or the plan document.
  20. You are correct. Hopefully this was fully explained to the participant. The regulation does not allow acceleration once a written election has been made to delay the distribution to a specific date. On the other hand, the 457(b) plan itself could be terminated, and perhaps that could precipitate an acceleration, but I suggest you seek legal counsel to verify that - check with those who drafted your 457(b) document.
  21. 457(b) plans are required to have a written plan document, at least according to Treasury Regulation 1.457-3(a), it must be a written plan estabished and maintained by an eligible employer. A full SPD (summary plan description) is not required. See prior thread. http://bwise.ibforums.com/index.php?showtopic=4087&view=findpost&p=25200
  22. If the employer was a government organization, then a rollover option exists. If the employer was a non-profit company, then you cannot rollover, but depending on the terms of the plan, you could make a written election to delay the taxation of the benefits in the plan.
  23. Since you received a Form W-2, I will assume that the 457(b) plan is sponsored by a non-profit company, not a government organization. Technically, the assets of a 457(b) plan sponsored by a non-profit company are still company assets (as required by law), so the payment is from the Employer. The EIN on the Form W-2 should be the Employer's EIN. Thus, the Employer is the payor name that should also be on the W-2.
  24. Sorry, I couldn't resist. The tax rates that expire in 2010 will automatically become higher in 2011. I think that's a tax increase. Thus, if no action is taken by Congress, that actually produces a tax rate increase.
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