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Is your city's deferred comp plan in compliance?

In 1996, Congress passed legislation that requires state and local government nonqualified deferred compensation plans (Section 457 plans) to hold all assets and income in a trust or other arrangement that is for the exclusive benefit of employees. This new requirement applied immediately to any new plans established after August 20, 1996. For already existing plans, however, the trust could be established at any time up to and including January 1, 1999.

January 1, 1999 is approaching rapidly. If the necessary changes are not made by that date, the law passed by Congress will make the state or local government nonqualified deferred compensation plan an "ineligible" plan.

Most state and local government nonqualified deferred compensation plans already hold plan assets and income in a separate account or an annuity contract. However, these accounts or annuity contract are designed so that they are held for the benefit of the state or local government, not the plan participants. This means that if the state or local government were to become insolvent, its creditors could be entitled to these funds. Congress established the new trust requirement in order to prevent this and to make sure that participants would receive their share of plan assets.

State and local governments that currently use trusts, annuity contracts, or custodial accounts to hold participant contributions will need to make sure that the annuity contract or custodial account is properly amended to include language stating that the assets are for the exclusive benefit of plan participants.

The Internal Revenue Service has provided model language that can be used for this purpose in Revenue Procedure 98-41. A copy of Revenue Procedure 98-41 (Internal Revenue Bulletin 1998-32, 7) is available on the IRS web site: www.irs.ustreas.gov/prod/bus_inf o/bullet.html. State and local governments that do not currently use trust, annuity contracts, or custodial accounts will need to establish one or more of these investment vehicles.

Further information about recent changes in the law that apply to section 457 plans can be found in the IRS documents below.

* Notice 98-8 (Internal Revenue Bulletin 1998-4, 6)--explains recent changes to section 457 of the Internal Revenue Code.

* Revenue Procedure 98-40 (Internal Revenue Bulletin 199832, 6--describes special procedures for obtaining a ruling from the IRS about a section 457 plan.

* Revenue Procedure 98-41 (Internal Revenue Bulletin 1998-32, 7), referenced above--provides model language for making changes to reflect new legislation affecting section 457 plans.

Mary Oppenheimer is Assistant Chief Counsel (Employee Benefits and Exempt Organizations) at the Internal Revenue Service.
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Title Annotation:nonqualified deferred compensation plans
Author:Oppenheimer, Mary
Publication:Nation's Cities Weekly
Date:Sep 7, 1998
Words:422
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