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greatred

Are Nongov-457b Safe From Your Employers Creditors?

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I have been maximally contributing to my 403b and non-governmental 457b for 6 years. I am blessed with a generous income and both of these plans provide huge returns up front in marginal taxes not paid and tax free growth. All was well until I heard of some employees at a catholic hospital losing some of their 457b deferred comp when the creditors to the hospital demanded cash.

 

I know that real money is in an account with Wells Fargo and I am able to direct its allocation but the idea that my hospital’s creditors have first dibs on this money concerned me. I confirmed with our HR that there is no trust or insurance purchased to cover the money in the 457b as in governmental plans.

 

I would appreciate if anyone might know more about non-governmental 457b’s as to whether my understanding of no protection of the deferred comp is correct. Also, if so, are there ways I can personally mitigate this risk of loss personally, (my own insurance plan, etc.)? If there is no way to mitigate the risk of loss of 457 monies, are there any other options for investment that approach the attractiveness of the 457b. (IRAs are already maxed.) Who might I employ to help me with this issue (tax accountant, lawyer?)

 

Thanks,

 

Greatred

 

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It's my understanding that after Orange County in Southern California declared bankruptcy in the 1990s, the government added the following provision:

 

A 457(b) plan must be held in a trust for the exclusive benefit of the plan's participants and beneficiaries. Section 457(g)(3) of the IRC allows public (governmental) plans to use qualifying annuity contracts and/or custodial accounts in lieu of, or in addition to, a trust to satisfy this requirement.

 

Dan Otter

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The Trust requirement only applies to government 457(b) plans.

 

You are correct that a nonprofit company 457(b) plan is not allowed to use a trust or insurance to cover the money in the 457(b).

 

A nonprofit corporation 457(b) plan can only cover "primarily" upper management and highly compensated employees, thus the lawmakers have not offered any trust protective provisions for those 457(b) plans. Since these folks should be the same folks who have the most control over the company overall, protecting their own 457(b) funds perhaps provides an additional incentive to keep the company out of bankruptcy.

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I have been maximally contributing to my 403b and non-governmental 457b for 6 years. I am blessed with a generous income and both of these plans provide huge returns up front in marginal taxes not paid and tax free growth. All was well until I heard of some employees at a catholic hospital losing some of their 457b deferred comp when the creditors to the hospital demanded cash.

 

I know that real money is in an account with Wells Fargo and I am able to direct its allocation but the idea that my hospital’s creditors have first dibs on this money concerned me. I confirmed with our HR that there is no trust or insurance purchased to cover the money in the 457b as in governmental plans.

 

I would appreciate if anyone might know more about non-governmental 457b’s as to whether my understanding of no protection of the deferred comp is correct. Also, if so, are there ways I can personally mitigate this risk of loss personally, (my own insurance plan, etc.)? If there is no way to mitigate the risk of loss of 457 monies, are there any other options for investment that approach the attractiveness of the 457b. (IRAs are already maxed.) Who might I employ to help me with this issue (tax accountant, lawyer?)

 

Thanks,

 

Greatred

 

 

While 457 plans of non profits must be subject to the claims of creditors under the tax law there are two issues that need to be reviewed:

 

1. State labor laws may protect part or all of you benefits that are attributable to your contributions.

 

2. investments in life insurance and annuities are usually protected from creditors claims. I dont know if if this extends to an employer who owns policies which hold contributions made by an employee but you should check with counsel. If there is protection see if you could purchase an annuity policy under your 457 plan.

 

As far as purchasing your own insurance to protect you in the event of such default, there is nothing available. Years ago some insurance companies did sell such insurance but only to employees who worked for AA or AAA rated corporations because there was little risk of loss. Those polices are not available any longer in the post Enron financial environment.

 

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Hey, Intruder,

 

I was wondering if you think that the non-govt'al 457b would qualify for favorable tax treatment if it is in a state that gives employees a preference over other creditors as to any 457b benefits, from EE or ER contributions?

 

Would the annuity have to be an asset of the ER? If it could be cashed out, could the ER's creditors force such in bankruptcy proceedings? If it couldn't be cashed out, would it be a preference over other general creditors that would disqualify it from the favorable tax treatment of 457b?

 

 

All are good Q. You need to check bkcy law to see if there are answers. I recall there is a NY bankruptcy case where a Bkcy ct said that it would be futile to require a debtor who owned a LI policy to surrender the policy since NY law protected LI policies from creditors claims (NY is an opt out state). The ct denied the creditor's request to force a surrender.

 

As far as tax law, I dont know of any IRS ruling that has taxed NQDC because of a state law that could potentially protect the benefits from creditors. Creditor's claims are decided in Bkcy ct based on equity not on tax law principles.

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Thank you all for the information. You seemed to have verified my concerns. I will look into you suggestions regarding annuities although none are currently offered and I am not a fan of them in general. I am also pursuing whether a rabbi trust could truely cover my investment without violating the need for the risk of forfeiture of funds to take advantage of the tax break.

 

Greatred

 

P.S. As a doctor working for a health system, I earn enough to be considered a top hat but I am far from having enough power to make decisions to keep our system out of bankruptcy.

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