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Nongovernmental 457(b) plans and rollovers … the two don’t mix

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My client works for a nonprofit hospital that has a 457(b) plan. Another advisor told him he could take a distribution from the plan and roll it over to an IRA within 60 days. Is that correct—I’m suspicious?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from New York is representative of a common inquiry related to 457 plans and rollovers.

Highlights of the Discussion

No—that is not correct; a nongovernmental 457(b) plan (e.g., a plan maintained by a nonprofit hospital) is not an eligible plan for rollover purposes, only eligible plans of governmental entities are eligible plans for rollover purposes [IRC Sec. 457(e)(1)(A) and not subsection (B), which refers to tax-exempt entities]. Therefore, nongovernmental 457(b) plan distributions are not eligible for rollover. For a handy rollover guide, see the IRS’s Rollover Chart.

For nongovernmental 457(b) plans, the only way to defer taxes would be through a direct transfer to another 457(b) plan of a tax-exempt entity [Treas. Reg. 1.457-10(b)]. A 457(b) plan of a tax-exempt entity may provide for transfers of amounts deferred by a participant to another eligible plan of a tax-exempt entity if

  • The transferor plan provides for transfers;
  • The receiving plan provides for the receipt of transfers;
  • The participant or beneficiary whose amounts deferred are being transferred will have an amount deferred immediately after the transfer at least equal to the amount deferred with respect to that participant or beneficiary immediately before the transfer; and
  • In the case of a transfer for a participant, the participant has had a severance from employment with the transferring employer and is performing services for the entity maintaining the receiving plan.

Aside from the ability to rollover distributed assets, there are many other differences between 457(b) plans maintained by governmental entities versus those maintained by tax-exempt entities. The IRS has a helpful online chart that highlights the key differences.

Conclusion

Nongovernmental 457(b) plan distributions are not eligible for rollover. In some cases, amounts could be transferred to another tax-exempt 457(b) plan if certain conditions

© Copyright 2024 Retirement Learning Center, all rights reserved
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State and Local Plans for Public Employees—Are They Protected?

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An advisor asked: I know private-sector qualified plans are protected under federal law (ERISA) but state and local plans for public employees are not. Are there any protections for state plans?

Highlights of the Discussion
There is no comprehensive federal law that protects state and local governmental plans for public employees, and the Pension Benefit Guaranty Corporation (PBGC) does not insure such plans. That said, all 50 states have some form of protection for public pensions. The National Conference on Public Employee Retirement Systems (NCPERS) has a state-by state rundown of coverage. According to the U.S. Census Bureau, over 5,000 public sector retirement systems exist in the U.S.

The creation of public plans and the rules that govern them emanate from the entity that has “authority” over the pension, which could be the state constitution, the legislature, case law or a combination thereof. These rules vary significantly by state not only with respect to the source of protection, but who is entitled to protection and the plan features that are protected.

Public plans also are subject to state laws governing open meetings and open records rules, anti-conflict of interest rules, codes of ethics, the investment of trust assets, and common-law trust provisions. Further, the Governmental Accounting Standards Board (GASB) has some say in the operation of public pensions. GASB is an independent, nonprofit organization that sets financial accounting and reporting standards for state and local governments. GASB is the source of generally accepted accounting principles (GAAP) used by state and local governments in the United States. While GASB has no enforcement authority, public employee pension plans typically follow GASB rules in order to obtain unmodified opinions from their auditors (e.g., Statements 67, 68 and 75). Adhering to GASB standards is also an important consideration for the bond rating agencies.

There are also nonprofit organizations that work for the protection of public pensions, such as NCPERS, The National Public Pension Coalition, the National Association of State Retirement Administrators, as well as others.

Conclusion
While federal involvement is limited, all 50 states have some form of protection for their public pensions. Significant differences exist among the plans. Working with these plans requires expertise in both pension law and investment theories.

© Copyright 2024 Retirement Learning Center, all rights reserved
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Long-Term Part-Time Employees and Liberal Plan Entry

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My client is concerned about the Long-Term Part-Time Employee (LTPTE) rules. His plan allows employees to enter the plan as of the first of the month following their date of hire, without an hour of service requirement. How do the LTPTE rules apply in his case?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Indiana is representative of a common inquiry related to long-term part-time employees.

Highlights of the Discussion
The short answer is—they do not apply. Here’s why. Under the LTPTE rules for 2024, employees who had at 500-999 hours of service in 2021, 2022 and 2023 (i.e., three consecutive years) and reached age 21, would have become eligible to defer into the company’s 401(k) plan in 2024. Pre-2021 service is ignored in this case. For 2025, the years of service requirement is reduced to two years. Therefore, an employee with at least 500-999 hours of service in 2023 and 2024, and who is age 21 would become eligible for deferrals in 2025. Pre-2023 service is ignored for this purpose.

If a plan has immediate eligibility (no hour of service requirement) or the eligibility requirements are more liberal than the LTPTE eligibility requirements, then the LTPTE rules are not applicable (REG–104194–23). Since the plan’s eligibility provisions, in this case, allow employees to enter the plan as of the first of the month following their date of hire without any hour of service requirement, the LTPTE rules do not apply as the eligibility rules are more liberal than the LTPTE requirements.

Conclusion
In 2024, we saw the first LTPTEs become eligible to participate in 401(k) plans. Plans that have more liberal eligibility requirements than those outlined under the LTPTE rules are not subject to the LTPTE rules.

© Copyright 2024 Retirement Learning Center, all rights reserved
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Suspending Social Security retirement benefits

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My client who is 68 heard that he could suspend his Social Security retirement benefit and earn delayed retirement credits. Is that true and, if so, what are the details?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Oklahoma is representative of a common inquiry related to Social Security benefits.

Highlights of the Discussion
Suspending Social Security benefits is an important tax question for which your client should seek professional tax advice based on his personal situation. Based on guidance available on the Social Security’s website (www.ssa.gov), since your client has reached full retirement age, but is not yet age 70, it appears he can ask the Social Security Administration (SSA) to suspend his retirement benefit payments. By doing this, he will earn delayed retirement credits for each month his benefits are suspended, which will result in a higher benefit payment when he resumes them.

If your client makes the decision to suspend benefit payments after consulting with a financial advisor, he can make a request to suspend payments by calling the SSA or sending a written request. The SSA will suspend benefit payments beginning the month after an individual makes the request. If your client suspends benefit payments, they will automatically start again the month he reaches age 70—or sooner if he requests they restart prior to age 70.

There are several factors to consider when contemplating a suspension of retiree benefits, including, but not limited to, the following.

  1. If a retiree voluntarily suspends his/her retirement benefit and he/she has others who receive benefits on their record, the others will not be able to receive benefits for the same period that the retiree’s benefits are suspended. An exception applies for divorced spouses.
  2. If a retiree voluntarily suspends his/her retirement benefit, any benefits he/she receives on someone else’s record will also be suspended.
  3. Medicare Part B premiums cannot be deducted from suspended benefits. Therefore, a person who suspends his/her retirement benefit will be billed for such premiums.

Conclusion
The rules related to suspending Social Security retiree benefits are complex. It is possible to earn delayed retirement credits by suspending benefits, but other issues such as the availability of family benefits and Medicare considerations may come into play when making the decision. Anyone contemplating a suspension of retiree benefits should seek expert advice from a tax and/or legal advisor.

© Copyright 2024 Retirement Learning Center, all rights reserved