IRS Says 457 Plan Guidance Expected by September, Not June

WASHINGTON – Clearer guidance on 457 plans was expected to come from the IRS by the end of June, but an agency spokeswoman is now saying credit unions can expect something by September. The IRS has sought feedback from CUNA, CUNA Mutual and NAFCU over the past year to put in place guidance that stems from an April 9, 2004 private letter ruling. The IRS responded to a FCU’s inquiry about establishing a non-qualified deferred compensation plan and whether Section 457 of the Internal Revenue Code (IRC) applied to such a plan. In its response, the IRS determined that the federal credit union was a “federal governmental instrumentality” and, therefore, is not an eligible employer. As a result, the IRS concluded that the credit union could not offer a Section 457 plan. If FCUs cannot offer deferred compensation plans under Section 457, industry experts contend that a logical alternative would be to let them offer deferred compensation plans under Section 451 of the Internal Revenue Code. Section 451 is the IRC provision applicable to the deferred compensation plans offered by “for-profit” employers and provides greater flexibility than an 457 plan in that there is no annual dollar contribution limit, and participants have more flexibility in taking distributions which affects when taxes must be paid. Regarding when broader guidance would be issued including whether CUs would be able to offer more “tax-friendly” deferred compensation plans under Section 451 of the Internal Revenue Code, “it will probably be within the next couple of months,” the IRS spokeswoman told Credit Union Times.