SunGard Relius

On July 10, the IRS released the long-awaited final 457 regulations. The final regulations make important changes and clarifications to the 2001 proposed regulations.

Excess Deferrals to Tax-Exempt Sponsored Plans. The final regulations permit a tax-exempt sponsored 457 plan to correct excess deferrals, avoiding ineligible plan treatment. Under the proposed regulations, a tax-exempt sponsored 457 plan with excess deferrals became an ineligible plan.

Deferral of Accumulated Vacation, Sick and Back Pay. The regulations permit a terminating employee to defer accumulated vacation pay, sick pay and back pay under more liberal terms than under the proposed regulations.

Unforeseeable Emergency Distributions. The regulations add a definition of "family member."

Transfers. The IRS has clarified and liberalized several aspects of the rules permitting an asset transfer from one 457 plan to another 457 plan.

457 Plan In-Service Distribution of Non-457 Rollover Amounts. The regulations contain provisions regarding the ability of a 457 plan to distribute in-service, non-457 amounts that an employee rolls over to the 457 plan. The IRS will be issuing more guidance in the near future on this subject.

Accounting for Rollovers into 457 Plans/Distribution Ordering Rules. A 457 plan that accepts a rollover from a non-457 plan must account separately for the rollover for purposes of applying the 10% premature distribution penalty on a subsequent distribution. The regulations specify permissible separate accounting and provide for the ability of the 457 plan to "order" the subsequent distributions as being from 457 or non-457 rollover accounts, affecting application of the penalty.

Effective Date. The final 457 regulations generally are effective for taxable years commencing after December 31, 2001. However, taxpayers are entitled to good faith EGTRRA operational compliance until the end of the 2003 taxable year.

457 Plan Document Updating. The final regulations do not address the deadline for an employer to update its 457 plan for the final regulations. However, we have addressed this question to the IRS and will advise clients of the IRS response. In addition, we are now revising the Sungard Corbel 457 prototype plan to comply with the final regulations and will have the document available for subscriber use well in advance of any IRS imposed deadline to update 457 plans.

Plan to attend an upcoming SunGard Corbel 457 Plan Specialty Workshop for the latest important information regarding 457 plans, including an analysis of the just-released final 457 regulations.