Eligible Internal Revenue Code Section 457 Plans for Governmental Employers
By Joe Rankin & Bruce Delbecq
Employee Benefits Alert, November 2005
Requirement
Recent legislation and Internal Revenue Service guidance have made changes to governmental eligible Section 457 Plans. These changes will require amendments to plan documents and, in some cases, administrative procedures.
Description
Mandatory cash-out rules. Because maintaining small account balances for former employees can result in administrative burden, Section 457 plans may automatically cash out accounts valued at $5,000 or less — unless the departing employee elects a rollover to another plan or an IRA.
Under new rules, plans must transfer automatic cash-outs of more that $1,000 directly to an IRA set up for the former employee — unless they elect to receive the distribution or have it paid directly to an eligible retirement plan or another IRA. Accounts of $1,000 or less may continue to be cashed out for administrative convenience.
Plan sponsors can avoid the mandatory rollover rules by amending plans to eliminate the automatic cash-out requirement altogether or to lower the plan’s automatic cash-out limit to $1,000 or less. Alternatively, sponsors can elect to follow the new rules and cash out those balances of $1,000 or less and automatically rollover balances exceeding $1,000 but not in excess of $5,000.
In addition, December 31, 2005 is the extended deadline to amend plan documents for EGTRRA law changes and for the final 457 regulations.
Action
Generally, documents must be updated by December 31, 2005.
