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WASHINGTON – Several developments in the ongoing guidance phase from the IRS on the treatment of 457(f) deferred compensation plans occurred this year. It’s been more than a year and a half since an IRS private letter ruling which told a federal credit union that, as a federal instrumentality, it was not eligible to establish a 457(b) plan. The problem was the IRS did not indicate in the ruling what kind of deferred compensation plan the credit union could offer. Jumping forward, CUNA, CUNA Mutual and NAFCU continued to work closely with the IRS on guidance in 2005. In August, IRS enacted an unexpected deadline for credit union to establish a 457(b) deferred compensation program but there still was no indication of whether the plans could remain intact for the long term while the agency continued its research on the issue surrounding the private letter ruling. Federal credit unions have been offering 457(b) plans since the tax law was changed in 1986 to cover tax-exempt organizations, according to CUNA. The IRS issued regulations in 2003 that interpreted the words in the statute that excludes a “governmental unit” from offering 457 plans to exclude a “federal instrumentality” from doing so. Meanwhile, in response to the August deadline, CUNA Mutual saw a great deal of activity with credit unions adopting resolutions to ensure their future ability to implement 457 plans. The latest development came through the addition of Section 409A to the Internal Revenue Code under the American Jobs Creation Act of 2004. Under those rules, credit unions that maintain 457 (f) plans will be subject to 409A rules, although 457 (b) programs are specifically exempt. Plans will not have to be amended until December 31, 2006. Dave Fowler, assistant vice president, employee benefits compliance, for CUNA Mutual, said there are some important reminders. Participant deferral elections with respect to compensation for services performed in 2006 generally must be made on or before December 31, 2005; a requirement not likely to affect many credit unions because most 457 (f) plans generally involve only employer dollars and do not have employee deferrals, he said. To terminate participation in a deferred compensation plan or cancel outstanding deferral elections with regard to amounts subject to Section 409A, a participant must act by December 31, 2005. As for when the IRS plans to issue specific guidance stemming for the private letter ruling, Fowler said the matter was not on the IRS’ list of priorities and further details probably won’t come for at least a year. -

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