Any Non-Governmental 457(b) Experts?

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fourwheelcycle
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Any Non-Governmental 457(b) Experts?

Post by fourwheelcycle »

My wife has a Non-Governmental 457(b) plan through her 501(c) employer. I have read this IRS summary and I cannot find an answer to my questions https://www.irs.gov/retirement-plans/no ... tion-plans.

When she retired, her employer told her she had to propose a specific plan for her desired withdrawals. The options were "take it all at once" or "take it in a specific sequence of equal distributions". Importantly, no mention was made regarding RMDs. My wife did not need any distributions and wanted to leave the funds to our children. As designated beneficiaries, our children will receive all remaining funds in her account upon her death. In order to maximize the remaining funds, my wife elected to receive the funds in twenty annual distributions beginning at age 99. The agreement stated she could not withdraw any funds in the account except as provided in her signed agreement or as a result of requests due to unforeseen emergencies.

Fidelity is her employer's custodian for the account. Soon after my wife retired, I realized her signed agreement did not contain any provision for RMDs. She called Fidelity and the representative she spoke to, with me on the phone, said her 457(b) plan was not subject to RMDs. This is simply not correct. Rather than pointing this out, we said thank you and the next day we called her employer's retirement plan administrator. We asked about RMDs and the administrator agreed her account is subject to RMDs. We asked how she could take her RMDs. The administrator checked with Fidelity, and advised my wife she would have to calculate her own RMD each year (the IRS agrees), fill-out Fidelity's Distribution - Non-Governmental 457(b) Plan form and submit it to the retirement plan administrator, who would approve and sign it, and forward it to Fidelity. My wife was also told she should note on the form her request was for an RMD distribution, since the form does not mention RMDs and only contemplates one-time or specifically sequenced distributions! My wife was also told to include a separate written letter to Fidelity, each year, advising them to code the distribution as an RMD since her signed agreement only provided for distributions beginning at age 99 - as if her annual RMD distribution request was something surprising that Fidelity might otherwise code incorrectly.

We also asked who, or what regulation, required retirees' Non-Governmental 457(b) distributions to be based on a signed agreement to distribute the account all at once or according to a specific sequence of withdrawals, except for requests due to unforeseen emergencies. We never got an answer to our second question, nor can I find an answer on the IRS web site or elsewhere on the internet.

I have two questions for any experts who may see this post. First, are my wife's employer and Fidelity allowed to make it so difficult for my wife to take her annual RMDs? I would think the IRS wants employers and custodians to make it easy for retirees to take their RMDs. Second, I am still looking for an answer to my question immediately above. The linked IRS summary does talk about distributions limited to unforeseen emergencies, but I presumed that only meant before an employee retires or is otherwise separated from their employer, with a penalty for non-emergency distributions before age 59 1/2.
Last edited by fourwheelcycle on Tue Feb 07, 2023 7:03 pm, edited 1 time in total.
SmoothieJ
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Re: Any Non-Governmental 457(b) Experts?

Post by SmoothieJ »

Not an expert, and probably not much help.

If you only plan to pass the money along, why not just roll into an IRA and be done with them? As a government employee, I have a 457. My retirement age will be at a younger age than typical. I can begin utilizing it for income upon retirement at whatever age that is. So if you don't need to spend it or don't want to...why not roll it over??? From there decide if it makes sense to roll over to a ROTH for the purposes of passing to heirs.
student
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Re: Any Non-Governmental 457(b) Experts?

Post by student »

SmoothieJ wrote: Tue Feb 07, 2023 7:01 pm Not an expert, and probably not much help.

If you only plan to pass the money along, why not just roll into an IRA and be done with them? As a government employee, I have a 457. My retirement age will be at a younger age than typical. I can begin utilizing it for income upon retirement at whatever age that is. So if you don't need to spend it or don't want to...why not roll it over??? From there decide if it makes sense to roll over to a ROTH for the purposes of passing to heirs.
I don't think one can roll a non-governmental 457 to an IRA. https://www.irahelp.com/slottreport/slo ... b-plan-ira
SmoothieJ
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Re: Any Non-Governmental 457(b) Experts?

Post by SmoothieJ »

That sucks. Can distributions be taken and then placed in a Roth with the max contribution?
student
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Re: Any Non-Governmental 457(b) Experts?

Post by student »

SmoothieJ wrote: Tue Feb 07, 2023 8:45 pm That sucks. Can distributions be taken and then placed in a Roth with the max contribution?
If one has sufficient earned income, then yes as it doesn't matter where the money is from.
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ram
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Re: Any Non-Governmental 457(b) Experts?

Post by ram »

Non government 457 B funds are exposed to the creditors of the employer in case of bankruptcy of the employer. As such most employees take the money fairy soon after retirement.
My employers options are:
-All at one time upon retirement. (Can result in a large tax burden)
-In 5 equal installments over 4 yrs. (first one right after retirement) ( I believe it is 1/5 balance, 1/4 balance etc each yr)
-In 10 equal installments over 9 years.

As such your wife's request is probably very unusual and the average employee at the HR office or fidelity may not know the right answers and is likely to make mistakes now or in the future.
Ram
desiderium
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Re: Any Non-Governmental 457(b) Experts?

Post by desiderium »

Fidelity has good experts, but they are embedded more deeply in the organization and are not the ones that answer the phone. There are people assigned to your wife's company plan; they have access to plan documents and are knowledgable about what you can do. My suggestion is to call fidelity workplace services, and tell them you need to make an appointment to speak with the retirement specialist responsible for xxx company 457 plan.
rmdashrfsplat
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Re: Any Non-Governmental 457(b) Experts?

Post by rmdashrfsplat »

Sounds like a poorly-run plan that doesnt factor in RMDs and allows for that interesting distribution setup. My non-gov 457(b)'s current SDP clearly states distributions must begin prior to 70.5, and equal distribution amounts will automatically match current RMD tables if they are too low.

Is there a way to recast your decision with the employer's benefits team, since the initial one was done in error?

In my experience non-gov 457(b) plans are simply deferred comp plans, so the money is available to you penalty-free as soon as you separate. You just pay income tax on any annual distributions at your marginal income tax rate for that year.

Lastly, I'm no expert, but I would personally not leave non-gov 457(b) assets to a beneficiary in this fashion. Assets are subject to employer creditors if the business declares bankruptcy, so this risk grows the longer they sit in the account. Also, what if heirs are in prime earning years when the inheritance happens? They would likely need to either take a lump sum with corresponding tax hit, or kick the can down the road and re-defer these assets, leaving them subject to potential employer creditors even longer.
Topic Author
fourwheelcycle
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Re: Any Non-Governmental 457(b) Experts?

Post by fourwheelcycle »

desiderium wrote: Wed Feb 08, 2023 9:16 am Fidelity has good experts, but they are embedded more deeply in the organization and are not the ones that answer the phone. There are people assigned to your wife's company plan; they have access to plan documents and are knowledgable about what you can do.
We have talked to these people, at the top of Fidelity's retirement plan department and at the top of my wife's employer's retirement plan department. The multi-step annual RMD request process I described in my post is what they came up with. It is very cumbersome, and very demanding of our extra time each each year.

I have not found any federal reg that says employers can (or must?) impose tight rules for withdrawals, or cumbersome rules for RMD requests, on retired employees who are over age 59 1/2. My best guess, absent insights from expert responses to my post, is since non-governmental 457(b) plans are non-qualified retirement plans, employers must be eligible 501(c) organizations in order to offer them, but otherwise they might not be subject to any CFR rules except they must have a written statement of their plan requirements.

My wife does want to defer all distributions except RMDs, but our preference would be for her employer's plan to offer an option for "distribution of RMD amounts only" in addition to the two options I described in my post.
Topic Author
fourwheelcycle
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Re: Any Non-Governmental 457(b) Experts?

Post by fourwheelcycle »

rmdashrfsplat wrote: Wed Feb 08, 2023 10:00 am My non-gov 457(b)'s current SDP clearly states distributions must begin prior to 70.5, and equal distribution amounts will automatically match current RMD tables if they are too low.
That would be great!
Is there a way to recast your decision with the employer's benefits team, since the initial one was done in error?
So far, her employer has said no.
I would personally not leave non-gov 457(b) assets to a beneficiary in this fashion.
We are willing to gamble her employer will still be solvent when she dies. If we decide the tax bomb (one year distribution, not over ten years) would be too much based on our children's circumstances, she may leave her 457(b) funds to charity and we could leave other funds to our children.
NotWhoYouThink
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Re: Any Non-Governmental 457(b) Experts?

Post by NotWhoYouThink »

My wife was also told to include a separate written letter to Fidelity, each year, advising them to code the distribution as an RMD since her signed agreement only provided for distributions beginning at age 99 - as if her annual RMD distribution request was something surprising that Fidelity might otherwise code incorrectly.
Your wife has made a choice that probably her employer and plan administrator didn't contemplate, and that frankly shocks me. I had a 457(b) through Megacorp, and it was made abundantly clear to me, through the plan documents, that the decision to take distributions had some very strict rules, and that once that decision was made the only change would be to take distributions LATER, never earlier. She may well be the only one they have seen take RMDs from the plan, and each event may be a new phenomenon for whichever employee handles it each year.

You probably should look through the plan documents from the employer, and see what IRS regulations they reference, and then you might have to go into the wording of the legislation authorizing the plans to figure out what the rule is - the requirements would be through Congress, the IRS only implements them.

Since the non-government 457(b) plans cannot, by law, be funded, but must be paid out based on the employers ability to pay in the year the payments are made, most of us don't just leave the money behind indefinitely, but take it after we leave the job and presumably schedule it for when the tax hit wouldn't be too high.
desiderium
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Re: Any Non-Governmental 457(b) Experts?

Post by desiderium »

fourwheelcycle wrote: Wed Feb 08, 2023 10:12 am
desiderium wrote: Wed Feb 08, 2023 9:16 am Fidelity has good experts, but they are embedded more deeply in the organization and are not the ones that answer the phone. There are people assigned to your wife's company plan; they have access to plan documents and are knowledgable about what you can do.
We have talked to these people, at the top of Fidelity's retirement plan department and at the top of my wife's employer's retirement plan department. The multi-step annual RMD request process I described in my post is what they came up with. It is very cumbersome, and very demanding of our extra time each each year.

I have not found any federal reg that says employers can (or must?) impose tight rules for withdrawals, or cumbersome rules for RMD requests, on retired employees who are over age 59 1/2. My best guess, absent insights from expert responses to my post, is since non-governmental 457(b) plans are non-qualified retirement plans, employers must be eligible 501(c) organizations in order to offer them, but otherwise they might not be subject to any CFR rules except they must have a written statement of their plan requirements.

My wife does want to defer all distributions except RMDs, but our preference would be for her employer's plan to offer an option for "distribution of RMD amounts only" in addition to the two options I described in my post.
Bummer. Nongovernmental 457 plans are messy and all a little different, it seems.
Topic Author
fourwheelcycle
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Re: Any Non-Governmental 457(b) Experts?

Post by fourwheelcycle »

NotWhoYouThink wrote: Wed Feb 08, 2023 10:52 am
My wife was also told to include a separate written letter to Fidelity, each year, advising them to code the distribution as an RMD since her signed agreement only provided for distributions beginning at age 99 - as if her annual RMD distribution request was something surprising that Fidelity might otherwise code incorrectly.
Your wife has made a choice that probably her employer and plan administrator didn't contemplate, and that frankly shocks me. I had a 457(b) through Megacorp, and it was made abundantly clear to me, through the plan documents, that the decision to take distributions had some very strict rules, and that once that decision was made the only change would be to take distributions LATER, never earlier. She may well be the only one they have seen take RMDs from the plan, and each event may be a new phenomenon for whichever employee handles it each year.

You probably should look through the plan documents from the employer, and see what IRS regulations they reference, and then you might have to go into the wording of the legislation authorizing the plans to figure out what the rule is - the requirements would be through Congress, the IRS only implements them.

Since the non-government 457(b) plans cannot, by law, be funded, but must be paid out based on the employers ability to pay in the year the payments are made, most of us don't just leave the money behind indefinitely, but take it after we leave the job and presumably schedule it for when the tax hit wouldn't be too high.
I am sorry my wife's decision shocks you. The fact is, her employer's ability to make good on her 457(b) account will definitely survive until she leaves her net-of-RMDs balance to our children. When she made her distribution election her employer's plan document did say her decision was subject to very strict rules, and once her election was made the only possible change would be to take distributions later, never earlier. However, she made the election before her age made her she subject to RMDs and she was not aware of their implications regarding her election. Her plan document did not mention RMDs (although is does now, three years later) and, unfortunately, her husband did not catch this problem before she made her election.

For 2023, we called her employer's benefit manager and asked if was really necessary to submit her Fidelity 457(b) RMD distribution request form every year for their signature. The individual agreed it seemed unnecessary and suggested we call Fidelity to see if they would rethink their previous advice. This time, a senior Fidelity rep (I could give their name but I won't) said it would be OK to submit the form and add "Not Applicable" by the section that asks for the plan sponsor's approval signature. We did that, and yesterday my wife received a letter from Fidelity stating they could not process her RMD distribution request form because it did not have the required plan sponsor's signature. We called Fidelity and explained the named rep had told us, on a recorded phone call, to write "Not Applicable". The rep we spoke to yesterday said (a) the previous rep was just wrong, and (b) "your wife's 457(b) plan does not require RMDs because it is an unqualified plan and unqualified plans are not subject to RMDs". We told him he was simply wrong on the IRS rule and asked him to send my wife a letter from Fidelity stating their position and citing an appropriate IRS regulation. He said they would send her a letter, but I doubt we will ever receive it.

Contrary to Fidelity's advice to us, I rely on this resource from the IRS: https://www.irs.gov/retirement-plans/co ... 457b-plans
Joe Public
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Re: Any Non-Governmental 457(b) Experts?

Post by Joe Public »

fourwheelcycle wrote: Tue Feb 07, 2023 6:51 pm [. . .]

We also asked who, or what regulation, required retirees' Non-Governmental 457(b) distributions to be based on a signed agreement to distribute the account all at once or according to a specific sequence of withdrawals, except for requests due to unforeseen emergencies. We never got an answer to our second question, nor can I find an answer on the IRS web site or elsewhere on the internet.

[. . .] Second, I am still looking for an answer to my question immediately above. The linked IRS summary does talk about distributions limited to unforeseen emergencies, but I presumed that only meant before an employee retires or is otherwise separated from their employer, with a penalty for non-emergency distributions before age 59 1/2.
This may no longer be a question for the OP, but I'll add some thoughts:

IRC Sec. 457(a) - In contrast to governmental 457 plans, for which participants recognize income only when distributions are paid to them, nongovernmental 457 plan participants must include all deferrals in income when they are either paid or made available.

IRC Sec. 457(e)(9)(B) - Nongovernmental 457 plan participants have all deferrals made available to them upon separation of employment, so the default treatment is that all deferrals are immediately includible in income. However, participants may avoid that treatment if they elect to defer the commencement of distributions from the plan. The election may only be made once, and it must occur before the commencement of distributions.

Treasury Regulation Sec. 1.457-7 fleshes this out a bit more, and each nongovernmental 457 plan will have its own nuances within the boundaries set by law. For example, they may require a signed election form for substantiation and recordkeeping purposes.
Topic Author
fourwheelcycle
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Re: Any Non-Governmental 457(b) Experts?

Post by fourwheelcycle »

Joe Public wrote: Wed May 15, 2024 11:42 am
fourwheelcycle wrote: Tue Feb 07, 2023 6:51 pm [. . .]

We also asked who, or what regulation, required retirees' Non-Governmental 457(b) distributions to be based on a signed agreement to distribute the account all at once or according to a specific sequence of withdrawals, except for requests due to unforeseen emergencies. We never got an answer to our second question, nor can I find an answer on the IRS web site or elsewhere on the internet.
This may no longer be a question for the OP, but I'll add some thoughts:

IRC Sec. 457(a) - In contrast to governmental 457 plans, for which participants recognize income only when distributions are paid to them, nongovernmental 457 plan participants must include all deferrals in income when they are either paid or made available.

IRC Sec. 457(e)(9)(B) - Nongovernmental 457 plan participants have all deferrals made available to them upon separation of employment, so the default treatment is that all deferrals are immediately includible in income. However, participants may avoid that treatment if they elect to defer the commencement of distributions from the plan. The election may only be made once, and it must occur before the commencement of distributions.

Treasury Regulation Sec. 1.457-7 fleshes this out a bit more, and each nongovernmental 457 plan will have its own nuances within the boundaries set by law. For example, they may require a signed election form for substantiation and recordkeeping purposes.
Thanks! That answers my question, and that is exactly how my wife's choices were presented to her when she retired.

Unfortunately, this happened before her employer, Fidelity, my wife, or me, realized these plans are subject to RMDs. My wife's written plan now recognizes the need for RMDs. Her plan says to call Fidelity for advice, but Fidelity stills gives mixed answers on whether RMDs are even required. For example, today she logged-in to her account and went to Fidelity's RMD calculator. It said "You do not have any accounts that are subject to RMDs".
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