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DURHAM, N.C. – One pressing compensation issue discussed at the recent Mid-Sized FCU CEOs Roundtable involved the latest updates on the IRS’ treatment of 457(f) plans. In an April 2004 private letter ruling, the IRS said FCUs do not qualify for 457 plans. Federal credit unions may qualify for 451 plans, which mean contribution maximums could be lifted and much larger deferrals would be allowed, clarified Tim O’Rourke, president/CEO, Matthews, Young Management Consulting. The CEO could take distributions over a number of years and pay taxes only as the money is received. At the time the Roundtable took place, the deadline extension for any changes to 457(f) plans was not known. According to Dave Fowler, assistant vice president, employee benefits compliance, CUNA Mutual Group, the deadline is Dec. 31, 2006. Fowler emphasized that changes only apply to 457(f) plans and not 457(b) plans. “If the ultimate direction from the IRS is for FCUs to be subject to Code Section 451 for existing 457(b) plans, contract modification would mean the contribution maximums (which were $13,000 in 2004) could be lifted and much larger deferrals would be allowed,” O’Rourke said. Since the rule of forfeiture rule would no longer apply under Section 451, the executive could take distributions over a number of years and pay taxes only as the money is received, according to O’Rourke, emphasizing “these are very significant changes.” Many credit unions currently fund SERPs through 457(f) plans, O’Rourke said. The recently-signed American Jobs Creation Act could ultimately affect 457(f) deferred compensation plans because the law added Section 409A to the Internal Revenue Code establishing specific requirements that the plans must meet to receive tax-deferral treatment. O’Rourke said 457(b) plans aren’t subject to Section 409A requirements. According to Fowler, proposed 409A regulations were issued on Sept. 29. “If a 457(f) plan involves employee deferrals of compensation, the employee must elect to defer before the beginning of the year in which the services are performed, giving rise to the compensation,” O’Rourke said. Elections to defer “performance pay” such as bonuses, must be made at lease six months before the end of the performance period, he added. Distributions under a plan are limited to a specific time or date stated in the plan; separations from service; death; disability; change of control; and any unforeseen financial emergency. O’Rourke pointed out that benefits may not be accelerated except under certain circumstances. “Generally, a plan sponsor may terminate a 457(f) plan and make distributions from a pre-Oct. 4, 2004 arrangement on or before Dec. 31, 2005,” he said. Credit unions should also keep in mind that elections to change the time and/or form of payment must be made at least 12 months before the initial payment date, O’Rourke said. If an employee wants to delay taking a distribution, the payment won’t be able to be made earlier than five years after the initial payment date. Other important reminders are knowing that failure to comply with any of these provisions will cause the executive to be taxed immediately on the total vested value of the deferred compensation plus interest and an additional 20% penalty, according to O’Rourke. Finally, employer-financed 457(f) plans “that promise to pay a benefit at a future date and that pay all benefits immediately after the lapse of the risk of forfeiture would be outside the scope of 409A.” Meanwhile, Fowler said there’s still uncertainty on when the IRS will issue any further guidance beyond the April 2004 private letter ruling. “Every year, the IRS publishes a list of priorities and this issue was not included on this list,” Fowler said. “We probably won’t see anything for at least a year.” -

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