Distribution from Qualified Plans and IRAs

1
Lesson 4

• Distribution from Qualified Plans and IRAs
• Choosing a Retirement Plan
• Section 457 Plans

2
Distributions from Qualified Plans

• All qualified plans must provide two forms of
  survivorship benefits for spouses (except certain
  profit-sharing plans)
• Qualified pre-retirement survivor annuity
• Qualified joint and survivor annuity

3
Pre-retirement Survivor Annuity

• Once a participant is vested, the non-participant
  spouse acquires the right to a pre-retirement
  survivor annuity payable to the spouse in the
  event of the participants death before
  retirement.
• This is an actual property right created by
  federal law that can be transferred at death.
• This is equivalent to a term life insurance
  policy with an annuity as the pre-selected
  settlement death.

4
Qualified Joint and Survivor Annuity

• This is a post-retirement death benefit for the
  plan participants spouse.

5
Distributions from Qualified Plans (cont)

• Waiver of either the joint and survivor annuity
  (before or at retirement) requires the consent in
  writing, by the spouse witnessed by a notary or
  plan official and is irrevocable.

6
Distributions from Qualified Plans (cont)

• Most of the plans not subject to minimum funding
  requirements are not required to provide a
  qualified pre-retirement survivor annuity or
  qualified joint and survivor annuity if certain
  requirements are met.
• Here are the plans
• Profit-sharing plans
• Stock-bonus plans
• ESOPs
• 401(k)
• Requirements include
• Plan does not pay the participant a life annuity
  benefit and
• The participants non-forfeitable accrued benefit
  is payable to the surviving spouse upon the
  participants death.

7
Distributions from Qualified Plans (cont)

• Plan provisionsOther benefit options
• A qualified plan can offer a wide range of
  distribution options.
• A qualified plan must provide for direct
  rollovers of certain distributions.
• Failure to elect a direct rollover (trustee to
  trustee) will subject the distribution to a
  mandatory 20 withholding for federal income tax
  (includes lump-sum distributions).
• This rule does not relate to distributions from
  IRA accounts.

8
Defined-Benefit Plan Distribution Provisions

• DB plans must provide a married participant with
  a joint and survivorship annuity as an automatic
  form of benefit.
• For an unmarried participant, the plans
  automatic form of benefit is usually a
  single-life annuity.
• To elect any option that eliminates the automatic
  benefit, the spouse must give consent on a
  notarized written form to waive the spousal right
  to the joint and survivor annuity.

9
Defined-Contribution Plan Distribution Provisions

• DC plans include such plans as profit-sharing,
  401(k), and money-purchase. Section 403(b) TDAs
  also have similar distribution provisions.
• Most DC plans provide annuity benefits like those
  of DB plans.
• Money-purchase, target-benefit, and 403(b) plans
  subject to ERISA must meet the pre-retirement and
  joint-and-survivorship annuity rules.
• For these purposes, these plans are pension plans
  as opposed to profit-sharing plans.

10
Nontaxable and taxable amountsCost Basis

• Qualified plans may contain after-tax employee
  contributions (thrift plans, for example).
• The first step in determining the amount subject
  to income tax for any plan distribution is to
  determine the participants cost basis in the
  plan benefits.
• The participants cost basis includes
• Total after-tax contributions made by the
  employee to a contributory plan.
• Total cost of life insurance actually reported as
  taxable income on federal income tax returns by
  the participant if the plan distributions are
  received under the same contract that provides
  the life insurance protection.

11
Taxation of Annuity Payments

• Amounts distributed as or from an annuity, are
  taxable in the year received except for a
  proportionate recovery of the adjusted taxable
  cost basis.
• The cost basis is recovered as a part of each
  benefit payment through the calculation of an
  exclusion ratio and an inclusion ratio applied to
  each payment to determine the nontaxable and
  taxable amount.

12
Lump-Sum Distributions

• Lump-sum distributions from a qualified plan may
  receive special tax treatment.
• Generally, any distribution from a qualified plan
  will be taxed as ordinary income (with the
  exception of basis within the plan) and subject
  to ordinary income tax rates.
• There are several important exceptions to the
  standard ordinary income treatment for lump-sum
  distributions, including
• Ten-year forward averaging.
• Pre-1974 capital gain treatment.
• Treatment of distributions of employer securities
  (net unrealized appreciation treatment).

13
Lump-Sum Distributions Defined

• A lump-sum distribution is a payment or
  distribution that occurs within one taxable year
  of the entire balance of the account or benefit
  of a participant from a qualified plan.

14
Requirements of A Lump-Sum Distribution

• First, the entire amount of the employees
  benefits in the plan must be distributed.
• Second, an election must be made by the
  participant or in the case of the participants
  death, by his or her estate within one year of
  receipt of the distribution.
• The election is made by attaching Form 4972 to
  the taxpayers federal income tax return for the
  year in which the distribution occurred.
• Third, the distribution must be due to one of the
  following
• Employee death
• Attainment of age 59 ½
• Separates from service (not applicable to
  self-employed) or
• Becomes disabled
• Fourth, the employee participated in the plan for
  at least five taxable years prior to the tax year
  of distribution (a death benefit is exempted from
  this requirement).

15
Aggregation of Plans

• In determining the total distribution, all
  pension plans maintained by the same employer are
  treated as a single plan.
• A profit-sharing plan maintained by the same
  employer as the pension plan would NOT be counted
  as part of the pension plan.
• All profit-sharing plans maintained by the
  employer shall be treated as a single plan.
• All stock bonus plans maintained by the employer
  shall be treated as a single plan.

16
Ten-Year Forward Averaging

• A plan participant is eligible to elect ten-year
  forward averaging if he or she attains age 50
  before January 1, 1986 (born before January 1,
  1936).
• Using the ten-year forward averaging method, the
  tax on the lump-sum distribution may be lower
  than the tax would be if the distribution were
  included in current taxable income and taxed at
  ordinary income tax rates.

17
Ten-Year Forward Averaging (cont)

• Under ten-year forward averaging, the income tax
  for the qualified plan distribution is calculated
  by determining the tax attributable to an amount
  equal to one tenth of the total distribution.
• The tax on the 1/10th is then multiplied by 10 to
  determine the total tax due on the distribution.
• The entire amount of tax on the lump-sum
  distribution must be paid in the year of the
  distribution.
• Ten-year averaging does NOT allow the taxpayer to
  spread the tax payments over a ten-year period.

18
Ten-Year Forward Averaging (cont)

• The benefit of ten-year forward averaging is that
  the taxpayer will avoid the distribution being
  taxed at higher income tax brackets.
• Ten-year forward averaging is based on 1986 tax
  rates, NOT current tax rates.
• The tax on the lump-sum distribution may NOT be
  lower under the 1986 rates.
• Consideration must be given to current rates, and
  the method creating the lowest total tax should
  be utilized.
• Exhibit (AZ) summarizes the steps used in
  Calculating ten-year forward averaging.
• Example (BA) shows an example of 10-year forward
  averaging.

19
Pre-1974 Capital Gain Treatment

• Participants born prior to January 1, 1936 are
  also eligible to treat the portion of a lump-sum
  distribution attributable to pre-1974
  participation in a qualified plan as a capital
  gain, subject to a tax at a 20 capital gain
  rate.
• If the lump-sum distribution is received by a
  taxpayer who ceased participating in a qualified
  plan before 1974, then the entire distribution
  will be eligible for capital gain treatment.
• However, if participation continued beyond 1973,
  there will be an ordinary income portion AND a
  capital gains portion.

20
Pre-1974 Capital Gain Treatment (cont)

• The capital gains portion is determined as
  follows
• The portion remaining is eligible for ten-year
  forward averaging.

21
Net Unrealized Appreciation (NUA)

• Lump-sum distributions that consist entirely, or
  in part, as employer securities receive special
  tax treatment.
• The portion of the distribution that is
  considered NUA is NOT taxed upon distribution of
  the securities.
• The disposition of the securities will result in
  capital gains as opposed to ordinary income.

22
Net Unrealized Appreciation (NUA) (cont)

• NUA is defined as the excess of the market value
  of the employer securities distributed over the
  cost or basis of the securities to the trust.
• The cost or basis of the securities to the trust
  is generally the total value of the securities at
  the time of the contribution.
• The cost or basis of the securities is taxed as
  ordinary income in the year of distribution.
• However, this amount is eligible for ten-year
  forward averaging if the participant was born
  prior to January 1, 1936.
• The NUA will be treated as long-term capital
  gain.
• Any subsequent appreciation after the
  distribution of employer securities will be
  treated as long-term or short-term capital gain,
  depending on holding period since distribution.
• See (BB) for an example.

23
Net Unrealized Appreciation (NUA) (cont)

• Employer securities generally include stock of
  the corporation but may also include bonds or
  debentures of the employer.
• Securities of the parent or subsidiary may also
  qualify as employer securities for NUA treatment.
• If stock attributable to a distribution from a
  qualified plan is inherited, the portion that is
  treated as NUA will be treated as income in
  respect of a decedent.
• Income in respect of a decedent means that the
  beneficiary will NOT receive a step-up in basis
  wit respect to the NUA.
• As a result, the basis of the stock to the
  beneficiary will be equal to the value at the
  date of death less the amount that is treated as
  NUA.
• See Example (BC).

24
Qualified Domestic Relations Order (QDRO)

• In general, a qualified plan benefit CANNOT BE
  ASSIGNED OR ALIENATED by a participant,
  voluntarily or involuntarily.
• This rule protects the participants retirement
  fund from attachment by creditors.
• An exception to this rule applies to claims of
  spouses and dependents in domestic relations
  situations.
• The exception permits an assignment of a
  qualified plan benefit under a Qualified Domestic
  Relations Order (QDRO).
• A QDRO is a decree, order, or property settlement
  under state law relating to
• Child support
• Alimony
• Marital property rights that assign part or all
  of a participants plan benefits to a spouse,
  former spouse, child, or dependent of the
  participant.
• Distributions made to an alternate payee pursuant
  to a QDRO will NOT be subject to the 10 early
  withdrawal penalty.

25
Qualified Domestic Relations Order (QDRO)

• IRAs, SEPs, and 403(b) plans are NOT qualified
  plans and therefore do not have the same
  protection from creditors.
• Only qualified plan assets are protected from
  creditors because they are protected under ERISA.
• However, some states now protect IRAs and SEPs
  from creditor alienation.

26
Retirement Plan Rollovers

• Tax-free rollovers of distributions from
  qualified plans, IRAs, and SEPs, and Section
  403(b) tax-deferred annuity plans are
  specifically allowed by the IRS.
• If the rollover is made within 60 days of receipt
  of the distribution and follows IRS rules, the
  tax on the distribution is deferred.
• However, eligible rollover distributions from
  qualified plans and 403(b) TDAs are subject to
  mandatory withholding at 20, unless the rollover
  is effected by means of a direct
  (trustee-to-trustee) rollover.
• The 20 mandatory withholding is NOT applicable
  to IRAs or SEPs.

27
IRA Rollovers

• As an alternative to paying tax on a qualified
  plan distribution, individuals are able to defer
  taxation by rolling all or a portion of the
  distribution into an IRA or another qualified
  plan within 60 days of receipt of the
  distribution.
• Once in the IRA, the benefits are NOT subject to
  income tax until they are withdrawn from the
  account.
• They do, however, lose ERISA alienation
  protection and the ability to elect ten-year
  forward averaging, pre-1974 capital gain
  treatment, and net unrealized appreciation
  treatment.

28
IRA Rollovers (cont)

• The following are not available for distributions
  from an IRA
• Ten-year forward averaging.
• Pre-1974 capital gains treatment.
• Net unrealized appreciation treatment.
• Recipients of a qualifying distribution can
  generally roll the benefit into another qualified
  plan.
• Distributions rolled into an IRA Rollover Account
  can subsequently be rolled into another qualified
  plan.
• An IRA Rollover Account maintains the integrity
  or character of the qualified plan distribution.
• If qualified funds and nonqualified funds are
  commingled, a rollover into another qualified
  plan is generally NOT permitted

29
IRA Rollovers (cont)

• Eligible rollover distributions FROM qualified
  retirement plans, section 403(b) plans, and
  governmental Section 457 plans generally can be
  rolled over TO any of such plans or arrangements.
• Similarly, distributions from an IRA are
  generally permitted to be rolled over into a
  qualified plan, Section 403(b) plan, or
  governmental Section 457 plan.

30
Eligible Rollover Distributions

• All distributions from qualified plans or
  tax-sheltered annuities are eligible rollover
  distributions except
• Any distributiion that is one of a series of
  substantially equal periodic payments (not less
  frequently than annually) made for the life of
  the employee, or the joint lives of the employee
  and the employees designated beneficiary for a
  period of 10 years or more AND
• Required distributions at age 70 ½.

31
Eligible Rollover Distributions (cont)

• Plans are required to provide participants with
  the option to have eligible rollover
  distributions transferred directly to another
  plan or IRA.
• Plans are NOT required to accept rollover
  contributions.
• Direct transfers of distributions are
  distributions for purposes of the Retirement
  Protection Act (RPA).
• The necessary spousal waivers must be secured in
  advance of the distribution.
• Distributions NOT transferred directly to another
  qualified plan or IRA are subject to a mandatory
  20 withholding requirement.
• Plans are required to provide participants with a
  written explanation of the direct transfer
  option, the mandatory withholding rule, and other
  rules relating to the taxation of the
  distribution.

32
Early Distribution Penalty

• Generally, distributions from qualified plans,
  403(b) plans, and IRAs before the owner attains
  age 59 ½ are subject to an early distribution
  penalty.
• The early distribution penalty is applied to the
  taxable portion of the distribution.
• If the distribution includes after-tax
  (nondeductible) contributions, the after-tax
  portion will NOT be subject to the penalty.
• See (BD) for an example
• For SIMPLE plans, the penalty is 25 for
  distributions occurring within the first two
  years of initial participation in the plan.
• After the first two years, the penalty for the
  SIMPLE reverts to a 10 penalty.

33
Exceptions to the Early Distribution Penalty

• The penalty must be paid unless the plan owner
  qualifies for one of the following exceptions
• After age 59 ½
• To beneficiary after death
• Disability
• Part of a series of substantially equal periodic
  payments (SEPP) made at least annually over the
  life expectancy of the owner or the owner and a
  designated beneficiary
• Made for medical expenses exceeding 7.5 of the
  owners adjusted gross income. The owner is NOT
  required to itemize deductions on his or her tax
  return to take advantage of the exception.

34
More about SEPPs

• In the case of a qualified plan or 403(b), the
  participant must separate from service before
  taking substantially equal periodic payments.
• Substantially equal payments must continue for
  the greater of
• Five years or
• Until age 59 ½

35
SEPPs (cont)

• There are three methods for calculating
  substantially equal payments. These include
• IRC Section 401(a)(9) methoddistributions are
  made over the remaining life expectancy.
• Amortization methodamortize the participants
  account balance over a period of time equal to
  the life expectancy of the participant (or joint
  life expectancy with beneficiary).
• Interest rate must be a reasonable rate of
  interest on the date the payments begin.
• Annuity Methodthe participants account can be
  divided by an annuity factor to determine a
  payment.
• A reasonable interest rate and a reasonable
  mortality table must be used in the calculation
  of the payment.

36
Exceptions to Early Distribution Penalty (cont)

• The early withdrawal penalty will NOT apply to
  the following distributions from qualified plans
  and 403(b) plans
• Made after separation from service after
  attainment of age 55.
• Made to a qualifying family member under a
  Qualified Domestic Relations Order (QDRO).
• The above does NOT apply to IRAs.

37
Exceptions to the Early Distribution Penalty for
IRAs only

• These exceptions do NOT apply to qualified plans
  or 403(b) plans.
• The exceptions
• Distributions for higher education costs for
  taxpayer, spouse, child, or grandchild.
• Distributions to pay certain acquisition costs of
  a first-time home buyer.
• Up to 10,000 lifetime maximum.
• A first-time home buyer is someone who has had no
  interest in a principal residence during the two
  years ending on the date of purchase of the new
  home.
• The home buyer can be the IRA owner, spouse,
  child, or grandchild.
• Distributions to pay health insurance premiums
  for unemployed individuals.

38
Rollovers

• An IRA can be used to receive a certain
  distribution from employer-sponsored retirement
  plans.
• Eligible Rollover distributions must be
  transferred to the IRA via a direct rollover or a
  transfer by the participant.
• A direct rollover is an eligible rollover
  distribution that is paid directly to a rollover
  IRA for the benefit of the participant.
• A direct rollover usually involves a wire
  transfer or a check that is negotiated only by
  the custodian of the IRA.
• Transfers to an IRA through a direct rollover are
  NOT subject to a mandatory withholding of 20.
• If the participant receives a distribution check
  payable to the participant, this is not
  considered a direct rollover.
• In this situation the participant must compete
  the rollover within 60 days after the check is
  received.
• Also, the check received may be subject to a
  mandatory withholding of 20.

39
Rollovers (cont)

• Loans from a rollover IRA are NOT permitted.
• Distributions from a rollover IRA do NOT qualify
  for ten-year forward averaging or lump-sum
  distributions.

40
Rollovers (cont)

• For distributions after 2001, the following rules
  will apply to rollovers
• Rollovers are allowed among qualified plans,
  403(b) plans, and Section 457 plans.
• Distributions from an IRA generally are permitted
  to be rolled over into qualified plans, 403(b)
  plans, and Section 457 plans.
• Employee after-tax contributions may be rolled
  over into another qualified plan or Traditional
  IRA.
• In the case of a rollover of after-tax
  contributions from one qualified plan to another
  qualified plan, the rollover can only be
  accomplished through a direct rollover.
• A qualified plan is NOT permitted to accept
  rollovers of after-tax contributions unless the
  plan provides separate accounting for such
  contributions and earnings.
• After-tax contributions are NOT permitted to be
  rolled over from an IRA into a qualified plan,
  403(b) plan, or Section 457 plan.

41
Minimum Distributions

• Participants in qualified plans, 403(b) plans,
  and owners of IRAs are required to take
  distributions from their plans.
• The date at which distributions must begin is the
  Required Beginning Date.
• After the required beginning date, if sufficient
  amounts are NOT withdrawn, a 50 excise tax will
  apply to any shortfall.
• See Example (BE) regarding required minimum
  distributions from an IRA.

42
Minimum Distributions (cont)

• Minimum required distributions do NOT apply to
  Roth IRAs while the Roth IRA owner is alive.

43
Minimum Distributions (cont)

• Generally, the first distribution must be made by
  April 1 of the year after the year you reach age
  70 ½.
• In subsequent years, the distributioin must be
  made by December 31.
• The participant must determine the minimum amount
  required to be distributed each year.
• The participant can always withdraw more than the
  required minimum distribution.

44
Minimum Distribution (cont)

• If the first distribution is delayed to April 1
  following the year that the person reaches age 70
  ½, there must be two distributions in that
  calendar year (the second distribution must occur
  before December 31).
• Participants in qualified plans and 403(b) plans
  can defer the required beginning date until April
  1 following the year of retirement, if the
  participant continues to work after attaining age
  70 ½. This deferral option is
• NOT available for IRAs.
• NOT available if the participant owns 5 or more
  of the business that sponsors the plan.
• Therefore, NOT available for self-employed
  individuals.
• ONLY available for the employers plan.
• See Example (BF).

45
Determining the Minimum Distribution

• The minimum required distribution (MRD) is
  determined each year by dividing the account
  balance (as of the close of business on December
  31st of the preceding year) by the distribution
  period.
• The distribution period is determined by looking
  up the participants are, as of December 31st of
  the distribution year, in the Uniform
  Distribution Table (See (CF)).
• The beneficiarys age is ignored when determining
  the distribution period (see exceptions below).
• See Example (BG).

46
Determining the Minimum Distribution (cont)

• The uniform distribution table is always used to
  calculate the minimum distribution, with one
  exception
• If the participants designated beneficiary is
  the participants spouse, and the spouse is more
  than 10 years younger than the participant then
  actual joint life expectancies are used to
  calculate the minimum distribution.
• This will result in a longer-life expectancy and
  a smaller minimum distribution.
• See Example (BH).

47
Subsequent Year Distribution

• To determine the required minimum distribution
  AFTER the first distribution year (the year the
  owner attains age 70 ½), reduce the account
  balance as of December 31 of the first year by
  any distribution for the first year made after
  December 31 of the current year.
• No adjustment is necessary if the final
  distribution is received by December 31 of the
  year in which the participant attains age 70 ½.

48
Example of Minimum Distribution

• See Example (BI).
• This amount (from BI) must be distributed by Joe
  by April 1, 2003.
• Assume Joes account balance as of December 31,
  2002 is 32000.
• To figure the minimum amount that must be
  distributed for 2003, the IRA balance of 32,000
  must be reduced by the 1,186 required minimum
  distribution for 2002 that was made on April 1,
  2003.
• Therefore, the account balance used to determine
  the required distribution for 2003 is 30,814
  (32,000 - 1,186, resulting in a required
  minimum distribution of 1,263 (30,814 / 24.4,
  the distribution period for a 72-year old).
• This distribution must be made by December 31,
  2003.
• Therefore, under this scenario, Joe will be
  making two distributiions in the 2003 calendar
  year (April 1 and December 31).
• The reduction of the account balance by the first
  years minimum distribution only occurs in the
  second year and will occur only if the first
  distribution is deferred until after December 31
  of the year in which the participant attained age
  70 ½.

49
Distributions After Death

• Determination of the designated beneficiary
• The designated beneficiary is determined as of
  the end of the year (December 31) following the
  year of the participants death.
• Plans may disregard any beneficiary eliminated by
  disclaimer or distribution of the benefits during
  the period between the participants death and
  December 31 of the following year.
• If there is more than one designated beneficiary,
  the beneficiary with the shortest life expectancy
  is used as the measuring life.

50
Determining the Designated Beneficiary (cont)

• If a trust is named as the beneficiary, the
  beneficiaries of the trust will be treated as
  designated beneficiaries as long as
• The trust is valid under state law.
• The trust is irrevocable or will be so upon the
  participants death.
• The beneficiaries of the trust are identifiable
  from the trust document, and
• Appropriate documentation has been provided to
  the plan administrator.

51
Death Before Required Beginning Date

• Distribution rules differ depending on whether
  there is
• Spouse beneficiary
• Non-spouse beneficiary
• No designated beneficiary
• (rules for each follow)

52
Death Before Required Beginning Datespouse
beneficiary

• The surviving spouse can receive distributions
  over his/her remaining single-life expectancy,
  recalculated each year.
• The surviving spouse can roll the plan balance
  over, and wait until he/she attains age 70 ½ to
  begin taking minimum distributions.
• The surviving spouse can elect to distribute the
  entire account balance within five years after
  the year of the owners death (five-year rule).
• This election can only be made if the plan
  provision allows the five-year rule.

53
Death Before Required Beginning Datenon-spouse
beneficiary

• Distribution period is the remaining life
  expectancy of the designated beneficiary.
• life expectancy is calculated using the age of
  the designated beneficiary in the year following
  the year of the employees death, reduced by one
  for each subsequent year.
• Beneficiary can elect to distribute the entire
  balance within five years after the year of the
  owners death (five-year rule).
• This election can only be made if the plan
  provision allows the five-year rule.

54
Death Before Required Beginning DateNO
designated beneficiary

• The account must be fully distributed before the
  end of the fifth year following the year of death.

55
Death AFTER Required Beginning DateSpouse
Beneficiary

• Surviving spouse can receive distributions over
  his or her remaining single-life expectancy,
  recalculated each year.
• Distributions must begin in the year following
  the year of death.
• Surviving spouse can rollover the plan balance
  and wait until he or she attains age 70 ½ to
  begin taking minimum distributions.
• This election may only be made if the surviving
  spouse is the sole beneficiary.

56
Death AFTER Required Beginning DateNon-spouse
Beneficiary

• Distribution period is the remaining life
  expectancy of the designated beneficiary.
• Life expectancy is calculated using the age of
  the designated beneficiary in the year following
  the year of the employees death, and is reduced
  by one for each subsequent year.

57
Death AFTER Required Beginning DateNo Designated
Beneficiary

• Distribution must continue over the remaining
  distribution period of the deceased owner.
• The distribution period is reduced by one each
  year (do NOT use the Uniform Distribution Table).
• See (BJ) for a summary of all the distribution
  rulesbefore and after death.

58
Choosing A Retirement Plan

• Steps are
• First, Establish Objectives of the Plan.
• Second, Identify the types of plans that can meet
  the objectives.
• Third, evaluate the list of plans for financial
  feasibility.
• Fourth, forecast costs and benefits for the
  foreseeable future for each different plan.

59
Sample Objectives for Plans

• Benefit all employees.
• Benefit a select group (nonqualified plans).
• Attract, retain, or retire workers.
• Tax-advantaged tool.

60
Types of plans that can meet objectives

• Prepare an employee census to forecast the
  financial impact of alternative plans.
• Assess each plans financial characteristics
• Contribution costs.
• Costs of administration.
• Flexibility of contribution.
• Burden of investment risk.
• Risk of benefit account.
• Company profits and stability of cash flows.

61
Examples of Choosing a Plan

• See Examples (BK) through (BO).

62
Section 457 Plans

• Definition A deferred compensation plan of
  government units, governmental agencies, and
  non-church controlled, tax exempt organizations.
• NOT a qualified plan.

63
457 Plan Characteristics

• The amount deferred annually by an employee
  cannot exceed the lesser of
• 12,000 (2003) or
• 100 (2003) of the employees compensation
  currently includible in gross income.
• Individuals who have attained age 50 may make
  additional catch-up contributions.
• The additional catch-up amount is 2,000 (2003),
  3,000 (2004), 4,000 (2005), and 5,000 (2006).
• Table (BP) summarizes the contributions allowed
  for 457 plans.

64
Additional 457 Contribution Rules

• The contribution limit is doubled in the three
  years prior to an individuals retirement.
• During this three-year period (before
  retirement), the catch-up rule does NOT apply.
• An income tax credit is allowed for certain
  taxpayers with respect to elective contributions
  to a 457 plan.
• See Table (AE) and 401(k) discussion earlier.

65
457 Salary Reduction Elections

• Employee elections to defer compensation monthly
  under Section 457 must be made under an agreement
  entered into prior to earning the compensation.

66
457 Distribution Requirements

• Plan distributions CANNOT be made before one of
  the following
• Calendar year in which the employee attains age
  70 ½.
• Separation from service.
• An unforeseeable emergency as defined in the
  regulations.
• In-service withdrawals ARE allowed for accounts
  
• Distributions must begin no later than April 1st
  of the calendar year following the year in which
  the plan participant attains age 70 ½.
• Minimum distributions must be made under the
  rules of Code Section 401(a)(9).