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457(b) And Discrimination

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If a non-profit municipality, like a public school system, adopts a 457(b) deferred compensation plan, can the school system discriminate and select who it will allow to participate? I am in this situation. The only employee of the Board of Education that is allowed to participate is the Superintendent of Schools. If anyone can help me with this please respond.

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Hi Rich,

 

Unfortunately they can. The following is taken from the FAQ section on 457(b)wise (http://www.457bwise.com/faqs/index.html).

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Are all employees eligible to contribute to a governmental 457(b) plan?

Unlike the 403(b) plan, there is no universal accessibility under the 457(b). This means that employers are not required to make the plan available to all employees. However, any individual who performs service for the employer, including independent contractors, are eligible to participate in the plan. Your employer's plan document should spell out the specific rules for contribution.

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Furthermore, an employer can choose to offer a "top hat" plan solely to highly compensated employees. These "top hat" plans are more popular in 457(b) plans for tax-exempt organizations that are non-governmental (hospitals, charitable organizations, unions, among others). It's my understanding that these "top hat" plans can also be offered in 457(b) governmental plans popular in schools. Below is some more information from the 457(b) FAQ section:

 

Private plans — Non-governmental tax-exempt entity plans.

Tax-exempt organizations that are non-governmental (hospitals, charitable organizations, unions, among others) must generally limit participation to a select group of management or highly compensated (also known as "top hat") employees. This is due to the rules under Title I of the Employee Retirement Income Security Act of 1974 (ERISA). ERISA generally requires that a private retirement plan providing benefits to employees be funded by a trust or annuity contract. The rules, however, require that private 457(b) plans be unfunded in order to obtain tax benefits. Therefore, a plan will violate ERISA unless an exception applies. If a tax-exempt employer limits participation to a a select group of management or highly compensated employees (or "top hat" group) then it is exempt from most ERISA requirements.

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Note: Public governmental 457 plans, on the other hand, are required to be funded. As required by IRC section 457(g), those funds must be held in trust for the exclusive benefit of plan participants and their beneficiaries.

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I would be curious to hear what others say about this and what others experience with this situation has been.

 

Dan Otter

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Guest rollover

Rich,

 

You may also want to get an opinion from the pros at www.benefitslink.com.

 

Peace,

Joel

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Guest Chuck Yanikoski

I agree with Dan. There is absolutely no federal law or regulation that prevents government sector (including public school) 457 plans from discriminating in any way they wish.

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