A pending IRS rule has some credit unions worried about the fate of their deferred compensation plans. For some eight years now, the IRS has been considered the tax status of non-qualified deferred compensation plans offered by federal credit unions (FCUs). At issue is whether FCUs are entities of the federal government. In its analysis, the IRS concluded that FCUs are not because they are not federal instrumentalities. More info at: www.nafcu.org/BFB

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services
Some Good News About Deferred
Compensation
By Tom Telford
A
pending IRS rule has some as a 457(b) plan until the IRS issued new are subject to 457(f), a rule that requires
credit unions worried about the guidance clarifying how credit unions excess deferrals from tax-exempt plans
fate of their deferred compen- will be treated for purposes of section to be distributed no later than April 15
sation plans. 457. following the close of the taxable year.
For some eight years now, the IRS has Good News On the Way n Further, the move by the IRS should
been considering the tax status of non- mean few, if any, adjustments to current
qualified deferred compensation plans Recently, the IRS issued an advance notice plans will be required, and 457(b) plans
offered by federal credit unions (FCUs). of proposed rulemaking that includes designed to meet 409A requirements,
At issue is whether FCUs are entities of a new facts-and-circumstances test for which subject deferred compensation
the federal government. In its analysis, the determining if an entity is a “governmen- arrangements to IRS scrutiny (such as
IRS concluded that FCUs are not because tal entity” or an “instrumentality of a annual rather than monthly deferral
they are not federal instrumentalities. The governmental entity.” The conclusion, as elections and five-year delays for chang-
IRS also had the option of finding that applied to an example credit union, was: ing a benefit form of payment).
FCUs are eligible to offer these compensa- “[The FCU] is not an agency or instru-
tion plans because they are tax exempt n New plans can be installed with
mentality of the United States because
organizations. greater confidence in the 457(b)/457(f)
its board of directors is elected by its
approach.
These plans have historically been an own members and the directors are not
additional option for retirement plan-
ning above and beyond traditional 401(k)
plans. Credit unions should consider the potential
A brief history of the dispute: outcome of the IRS’ final issuance as they
n In 2004, the IRS issued a private letter consider adopting a 457(b) deferred
that said a credit union that requested
the ruling was an “instrumentality of compensation plan.
the federal government” and, therefore,
not eligible to sponsor 457(b) deferred responsible to the United States, except to Credit unions and their board members
compensation plans. the limited extent set forth in the Federal should consider this information and the
Credit Union Act and regulated by the potential outcome of the IRS’ final issu-
n In a subsequent notice, the IRS NCUA. Thus, [the FCU] is not a govern- ance as they consider adopting a 457(b)
attempted to clarify the private ruling mental entity within the meaning of … deferred compensation plan. They may
by stepping back from that position, this section.” wish to consider whether there is a com-
but only to the extent the credit union’s
pelling reason to adopt the plan immedi-
457(b) plan was in effect on or before We think credit unions can take away the ately in light of this advanced notice; or if
Aug. 15, 2005. following interpretations from the IRS delaying until final issuance would have a
advance notice: significant impact on their organizational
n The IRS said that if the credit union had
consistently taken the position that it n Assuming there are no major changes as objectives.
was a non-governmental, tax-exempt the IRS finalizes the rules on this topic,
organization for all employee benefit credit unions can have greater confi- Tom Telford is executive vice president for
plan purposes, then any plan in effect on dence that they are proper 457(b) plan Burns-Fazzi, Brock
Aug. 15, 2005, could continue to operate sponsors and that any excess deferrals
46 The Federal Credit Union may–June 2012