MADISON, Wis. – It has been two weeks since the IRS' deadline to set up a 457 plan has passed and some credit unions have done what they could to beat the cutoff date. On July 21, the IRS issued notice 2005-58 saying FCUs had until Aug. 15 to set up the plans. The IRS notice did not answer the question that first came to light in an April 2004 private letter ruling which told a FCU that, as a federal instrumentality, it was not eligible to establish a 457(b) plan. The letter was silent on what kind of deferred compensation plan the FCU could offer. The IRS has said that it could be quite some time before guidance on nonqualified deferred compensation plans or Section 414(d) of the Internal Revenue Code is issued. CUNA Mutual Group reports that there was "a great deal of activity with credit unions moving ahead and adopting board resolutions to ensure their future ability to implement 457 plans," according to Joe Tripalin, vice president of executive benefits. Many credit unions that were "on the fence" were prompted to move forward and get it done, CUNA Mutual said. Tripalin estimated that Employee Solutions staff spoke to more than 70 credit unions, and he was pretty confident that 30 to 40 of those completed board resolutions. Although FCUs have been offering 457(b) plans since the tax law was changed in 1986 to cover tax-exempt organizations, the IRS issued regulations in 2003 that interpreted the words in the statute that excludes a "governmental unit" from offering 457 plans to exclude a "federal instrumentality" from doing so. CUNA and CUNA Mutual had been working since last summer to resolve this problem either by retaining the 457 coverage or by permitting eligible plans under Section 451, which were the deferred compensation programs credit unions offered before 1986. The IRS is currently reviewing the definition of "governmental plan" under Section 414(d) of the code, and plans to evaluate how federal credit unions may, or may not, fit within those rules. Since several agencies have to work through the rules under Section 414, this process would unfortunately take a year or more to complete, CUNA has said. Meanwhile, the IRS notice allowed any FCU with a 457(b) plan already in place by mid-August to maintain its plan and add new employees. The IRS notice made clear that if it eventually decides that FCUs cannot offer 457(b) plans, there will be appropriate transition rules to avoid adverse tax consequences for participants. -

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