WASHINGTON - The IRS is not budging on an August 15 deadline itgave to FCUs to have a 457b plan in place. "The notice that was putout by the IRS still stands," said Bruce Friedland, an IRSspokesman. Seemingly out of the blue, the IRS issued notice 2005-58on July 21 saying FCUs have until Aug.15 to maintain the deferredcompensation plans and add new employees. Both Dave Fowler,assistant vice president, employee benefits compliance, CUNA MutualGroup, and Kathy Thompson, CUNA senior vice president forcompliance and associate general counsel sent a letter appealing tothe agency to extend the deadline to at least Dec. 31, 2005.Friedland didn't offer much more including having "no comment" onrecent appeals from credit union trade groups to extend thedeadline and their disappointment on the short notice given. Theunexpected deadline is further complicated by an IRS private letterruling issued in April 2004 involving a FCU's inquiry aboutestablishing a non-qualified deferred compensation plan and whetherSection 457 of the Internal Revenue Code (IRC) applied to such aplan. In its response, the IRS determined that the FCU was a"federal governmental instrumentality" and, therefore, is not aneligible employer. As a result, the IRS concluded that the creditunion could not offer a Section 457 plan. "Depending on whether(the IRS) offers guidance between now and Aug. 15, we'll be pushingfor some sort of meeting with them in the near future," Fowlersaid. "Maybe since there's `no comment,' that could mean they'retrying to sort it all out." Given the short time frame, both CUNAand CUNA Mutual have recommended that FCUs adopt a board ofdirectors' resolution establishing the plan by August 15,regardless of how many details have been agreed to concerning theprogram. FCUs should also consider adopting a "generic" 457deferred compensation plan under which they can add participants asthe need for individual deferred compensation agreements arises.FCUs might also consider a "letter of intent" or certificationindicating the adoption of a 457 plan. Both CUNA and CUNA Mutual aswell as NAFCU have been in conversations with IRS officials sincelast summer to offer guidance on what type of plan FCUs couldoffer. Some industry watchers suggested the IRS might explore theconcept of FCUs offering deferred compensation plans under Section451 of the IRC, which applies to "for-profit" employers andprovides greater flexibility than a 457 plan in that there is noannual dollar contribution limit, and participants have moreflexibility in taking distributions which affects when taxes mustbe paid. The IRS told CUNA and CUNA Mutual that all FCUs would notbe impacted by the private letter ruling and should go forward withadopting 457 plans. "Until the Notice (2005-58) was issued, therewas no indication that federal credit unions would be under a shortdeadline to adopt a 457 plan in order to be able to take advantageof the grandfathering rules under the Notice," Fowler and Thompsonsaid. "We were disappointed that the Notice did not give any reasonwhy the IRS believed it was critical that federal credit unionshave their 457 plans `in effect on' August 15." FCUs are stillwaiting on guidance here on Code Section 414(d). An IRS spokeswomanrecently told Credit Union Times that guidance could come bySeptember. The IRS notice, however, only indicates sometime in thefuture. "Until that time, grandfathered 457 plans of federal creditunions could continue to operate as is on the condition that thefederal credit union has always treated itself as a nongovernmentaltax-exempt entity for all employee benefits purposes," CUNA andCUNA Mutual said. "We are confident that no federal credit unionhas ever treated itself as a governmental entity for any employeebenefit 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 compensationplan FCUs can adopt. "What if a federal credit union hires a newCEO in October 2005, and guidance on Section 414(d) has not beenissued," Fowler wondered. "If a federal credit union is left `inlimbo' with respect to a prospective executive's deferredcompensation package, it will be at a distinct disadvantage inbeing able to attract and hire that individual with the promise ofcompetitive compensation and benefits." FCUs may have to turn to"less attractive alternatives" in the interim, such as split dollarinsurance arrangements, Fowler and Thompson suggested. Meanwhile,credit union boards generally need up to two years to approve anexecutive's deferred compensation plan, the groups said. "Many ofthe federal credit unions currently contemplating a deferredcompensation plan were surprised by the short August 15 deadlineand are not in a position to `sign on the dotted line' by thatdate. It is also possible that many federal credit unions may notbecome aware of the deadline until it is too late," Fowler andThompson appealed. CUNA Mutual asked the IRS for clarity on whetherthe last paragraph of the Notice should be interpreted as sayingthat 457(f) plans are not subject to the grandfathering rules, sothat they could be adopted by a FCU at any time, including afterAugust 15 prior to the issuance of further guidance. Fowler andThompson 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 havetalked with several attorneys about the impact of the Notice. Theywere surprised to learn that both 457(b) plans and 457(f) planswere intended to be subject to the grandfathering rules. To avoidfurther confusion on this issue and the possibility that somefederal credit unions may mistakenly establish a 457(f) plans afterAugust 15, further clarification from the IRS on this detail isneeded," Fowler said. Fowler also said when the private letterruling came out in April 2004, shortly after, the IRS indicatedthat guidance on what type of deferred compensation plans FCUscould offer was placed among the agency's top priorities. "It wouldbe extremely helpful to federal credit unions if the IRS answeredthe Section 451 question as soon as possible, and then separatelydealt with the 414(d) issue as it relates to qualified plans,"Fowler said. "While it is important to provide guidance on Section414(d), we believe that issue can be handled independently fromquestion of whether Code Section 451 will apply to federal creditunion deferred compensation plans." Fowler and Thompson said theyare ready to meet again with IRS officials to offer theirassistance to resolve any issues so that guidance can be [email protected]