IRS Throws FCUs for a Loop with Unexpected Aug. 15 457b Plan Deadline

WASHINGTON – The IRS is not budging on an August 15 deadline it gave to FCUs to have a 457b plan in place. “The notice that was put out by the IRS still stands,” said Bruce Friedland, an IRS spokesman. Seemingly out of the blue, the IRS issued notice 2005-58 on July 21 saying FCUs have until Aug.15 to maintain the deferred compensation plans and add new employees. Both Dave Fowler, assistant vice president, employee benefits compliance, CUNA Mutual Group, and Kathy Thompson, CUNA senior vice president for compliance and associate general counsel sent a letter appealing to the agency to extend the deadline to at least Dec. 31, 2005. Friedland didn’t offer much more including having “no comment” on recent appeals from credit union trade groups to extend the deadline and their disappointment on the short notice given. The unexpected deadline is further complicated by an IRS private letter ruling issued in April 2004 involving 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 FCU 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. “Depending on whether (the IRS) offers guidance between now and Aug. 15, we’ll be pushing for some sort of meeting with them in the near future,” Fowler said. “Maybe since there’s `no comment,’ that could mean they’re trying to sort it all out.” Given the short time frame, both CUNA and CUNA Mutual have recommended that FCUs adopt a board of directors’ resolution establishing the plan by August 15, regardless of how many details have been agreed to concerning the program. FCUs should also consider adopting a “generic” 457 deferred compensation plan under which they can add participants as the need for individual deferred compensation agreements arises. FCUs might also consider a “letter of intent” or certification indicating the adoption of a 457 plan. Both CUNA and CUNA Mutual as well as NAFCU have been in conversations with IRS officials since last summer to offer guidance on what type of plan FCUs could offer. Some industry watchers suggested the IRS might explore the concept of FCUs offering deferred compensation plans under Section 451 of the IRC, which applies to “for-profit” employers and provides greater flexibility than a 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. The IRS told CUNA and CUNA Mutual that all FCUs would not be impacted by the private letter ruling and should go forward with adopting 457 plans. “Until the Notice (2005-58) was issued, there was no indication that federal credit unions would be under a short deadline to adopt a 457 plan in order to be able to take advantage of the grandfathering rules under the Notice,” Fowler and Thompson said. “We were disappointed that the Notice did not give any reason why the IRS believed it was critical that federal credit unions have their 457 plans `in effect on’ August 15.” FCUs are still waiting on guidance here on Code Section 414(d). An IRS spokeswoman recently told Credit Union Times that guidance could come by September. The IRS notice, however, only indicates sometime in the future. “Until that time, grandfathered 457 plans of federal credit unions could continue to operate as is on the condition that the federal credit union has always treated itself as a nongovernmental tax-exempt entity for all employee benefits purposes,” CUNA and CUNA Mutual said. “We are confident that no federal credit union has ever treated itself as a governmental entity for any employee benefit plan purpose.” Realistically, given the IRS’s priorities, guidance on 414(d) may not come for at least a year, Fowler said, causing a “blackout” on what type, if any, deferred compensation plan FCUs can adopt. “What if a federal credit union hires a new CEO in October 2005, and guidance on Section 414(d) has not been issued,” Fowler wondered. “If a federal credit union is left `in limbo’ with respect to a prospective executive’s deferred compensation package, it will be at a distinct disadvantage in being able to attract and hire that individual with the promise of competitive compensation and benefits.” FCUs may have to turn to “less attractive alternatives” in the interim, such as split dollar insurance arrangements, Fowler and Thompson suggested. Meanwhile, credit union boards generally need up to two years to approve an executive’s deferred compensation plan, the groups said. “Many of the federal credit unions currently contemplating a deferred compensation plan were surprised by the short August 15 deadline and are not in a position to `sign on the dotted line’ by that date. It is also possible that many federal credit unions may not become aware of the deadline until it is too late,” Fowler and Thompson appealed. CUNA Mutual asked the IRS for clarity on whether the last paragraph of the Notice should be interpreted as saying that 457(f) plans are not subject to the grandfathering rules, so that they could be adopted by a FCU at any time, including after August 15 prior to the issuance of further guidance. Fowler and Thompson said it was the IRS’ intent that the August 15 “cut off” date would apply to both 457(b) plans and 457(f) plans. “We have talked with several attorneys about the impact of the Notice. They were surprised to learn that both 457(b) plans and 457(f) plans were intended to be subject to the grandfathering rules. To avoid further confusion on this issue and the possibility that some federal credit unions may mistakenly establish a 457(f) plans after August 15, further clarification from the IRS on this detail is needed,” Fowler said. Fowler also said when the private letter ruling came out in April 2004, shortly after, the IRS indicated that guidance on what type of deferred compensation plans FCUs could offer was placed among the agency’s top priorities. “It would be extremely helpful to federal credit unions if the IRS answered the Section 451 question as soon as possible, and then separately dealt with the 414(d) issue as it relates to qualified plans,” Fowler said. “While it is important to provide guidance on Section 414(d), we believe that issue can be handled independently from question of whether Code Section 451 will apply to federal credit union deferred compensation plans.” Fowler and Thompson said they are ready to meet again with IRS officials to offer their assistance to resolve any issues so that guidance can be expedited. [email protected]