10 - Section 457 Plans: Public and Private Sector Use

Question 1

To receive tax-preferred treatment in an ineligible plan, amounts deferred must be subject to a ___________. For a this to exist, a person’s right to receive deferred amounts must be conditioned on future performance of substantial services.

Answer 1

“substantial risk of forfeiture.”

Question 2

Eligible employers generally use Section 457 plans in two ways:

Answer 2

• (1) As pure deferred compensation plans that allow participants to reduce their taxable salary in a manner similar to that of private sector 401(k) plans
• (2) As supplemental benefit plans that provide executives with supplemental retirement income.

Question 3

During any or all of the three taxable years ending before the year the participant reaches normal retirement age, the “catch-up” provision is superseded by an amount equal to _____ the otherwise applicable limit, or, if less, the participant’s normal ceiling plus aggregate unused annual ceiling amounts for deferrals in prior years.

Answer 3

twice

Question 4

For a 457 plan, must normal retirement age be specified in the plan to utilize the catch-up provision?

Answer 4

Yes (between 65 and 70 1/2)

Question 5

must eligible section 457(b) plans receive internal revenue service approval in order to allow participants to defer income?

Answer 5

No. Unlike qualified plans, eligible Section 457(b) plans are not required to apply to the Internal Revenue Service for approval to operate.

Question 6

ineligible plans place no limits on the amount of ______ made.

Answer 6

deferrals

Question 7

Section 457 plans are ____________ plans available only to state and local governmental employers and nongovernmental organizations exempt from tax under Internal Revenue Code Section ____.

Answer 7

• nonqualified deferred compensation
• 501

Question 8

generally states that an economic benefit results when an economic or financial benefit, even though not in cash form, is provided to an employee as compensation, such as when an employee receives beneficial ownership of amounts placed with a third party, or when assets are unconditionally and irrevocably paid into a fund to be used for the employee’s sole benefit.

Answer 8

doctrine of economic benefit

Question 9

The following deferred compensation plans of state and local government and tax-exempt employers generally are not subject to Section 457 restrictions if certain conditions are met: (5)

Answer 9

1. Nonelective deferred compensation of nonemployees
2. Church and judicial deferred compensation plans
3. Nongovernmental tax-exempt employer deferred compensation plans
4. Nonelective governmental employer deferred compensation plans that met certain conditions
5. Collectively bargained deferred compensation plans.

Question 10

Section 457 plans are available only to (2)

Answer 10

• state and local government employers
• nongovernmental organizations exempt from tax under Internal Revenue Code (IRC) Section 501.

Question 11

Eligible Section 457 plans are utilized by state and local governmental employers to provide _____ opportunities to their employees. Without these plans, state and local governmental employees would not have the same opportunities as those provided by Section 401(k) plans and Section 403(b) plans

Answer 11

salary deferral

Question 12

In , _______ the employer pays an additional benenfit (sometimes based on a qualified retirement plan benefit formula), without reducing the employee’s present compensation, raise or bonus.

Answer 12

supplemental benenfit plans

Question 13

generally states that income, although not necessarily received in hand by an individual, is considered received and, therefore, currently taxable when it is credited to an account or set aside so it may be drawn upon at any time and amounts receivable are not subject to substantial limitations or restrictions

Answer 13

the doctrine of constructive receipt

Question 14

Unlike most types of retirement plans, a Section 457 plan can be offered on a _______ basis with participation limited to only a few employees or even to a single employee.

Answer 14

discriminatory

Question 15

In _________, employees enter into an agreement with their employer to reduce present compensation or to forgo a raise or bonus in return for the employer’s promise to pay bene ts at a future date.

Answer 15

pure deferred compensation plans

Question 16

Section 457 Deferred amounts exceeding limit generally are treated as made available and subject to ____ in the taxable year deferred.

Answer 16

normal taxation

Question 17

457 Plan benefits generally cannot be made available until the participant has a ______ from employment or is faced with an ________ or until the calendar year when the participant attains the age of ___, if later.

Answer 17

severance

“unforeseeable emergency,”

701⁄2

Question 18

Under the ____________, deferred compensation plans of state and local governments are required to place plan assets in a trust, custodial account or annuity contract. The law repealed the provision that formerly required amounts under deferred compensation plans of state and local governments to remain the property of the employer and be subject to employer creditor claims until the assets were made available to plan participants.

Answer 18

Small Business Job Protection Act

Question 19

_______ employer Section 457 plans are exempt from ERISA’s reporting and disclosure requirements. __________ must meet these requirements, though.

Answer 19

State and local government

Nongovernmental tax-exempt employer plans

Question 20

distributions from section 457 plans are exempt from the ____ penalty tax on withdrawals made before the age of ___ except for portions attributable to _____ from another type of plan

Answer 20

• 10%
• 591⁄2
• rollovers

Question 21

Maximum deferrals in eligible Section 457 plans previously needed to be coordinated with amounts excluded from income under other types of ________, such as 401(k) plans, simplified employee pensions, SIMPLE plans and 403(b) plans. However, tax law provisions enacted under the _________ removed this requirement in 2002 and later years. The Pension Protection Act of 2006 made this provision of EGTRRA permanent.

(important)

Answer 21

• deferral arrangements
• Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

Question 22

Are loans permitted in eligible section 457 plans?

Answer 22

• NO
• (unless 457 plans maintained by state and local govts where plans have been funded)

Question 23

allows for non-governmental, non-profit organizations to set up a plan that can be tax deferred and exceed the normal defined contribution employee deferral limit. These plans are made available because non-profit organizations are not allowed to have another kind of non-qualified deferred compensation plan.

Answer 23

inelgible 457(f)

Question 24

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increased the plan ceiling, or maximum annual deferral of 457 plans to $11,000 for 2002 or 100% of includable compensation, whichever is less for eligible Section 457 plans. The $11,000 limit increases each year by _____ to $15,000 in 2006 and is subsequently adjusted annually in amounts rounded down to the nearest $500 (based on general cost-of-living increases). As of 2013, the limit was _____.

Answer 24

$1,000

$17,500

Question 25

Prior to the passage of the Small Business Job Protection Act of 1996, deferred amounts and earnings in an eligible Section 457 plan had to remain the sole property of the ______ until made available to participants, subject only to the claims of the employer’s general creditors. This meant that eligible Section 457 plans had to be ______ and employers could not irrevocably set aside assets to make future benefit payments giving participants and beneficiaries a secured interest.

(Important)

Answer 25

employer

unfunded

Question 26

May ineligible Section 457 plans receive tax-preferred treatment?

Answer 26

Yes BUT, amounts deferred must be subject to a “substantial risk of forfeiture.”

Question 27

State and local government employer Section 457 plans are exempt from _______ reporting and disclosure requirements. ___________ employer plans must meet these requirements, though. However, tax-exempt employer plans maintained for a “select group of _______________ employees” have reduced reporting and disclosure requirements through an alternative compliance method

Answer 27

• ERISA’s
• Nongovernmental tax-exempt
• management or highly compensated