Interim Relief for Federal Credit Union §457 Plans

In Notice 2005-58, the Internal Revenue Service provided, pending further guidance, relief for section 457 plans maintained by federal credit unions. The status of those plans had been called into question by PLR 200430013, which ruled that, as an instrumentality of the federal government, a federal credit union was not an "eligible employer" under section 457(e)(1) and its nonqualified deferred compensation plan was not a section 457(b) "eligible plan." Under section 457(e)(1)(A), only instrumentalities of state and local governments may be "eligible employers."

While they are organized under federal law, federal credit unions also enjoy tax exemption under section 501(c)(1), and it is the latter status on which they have relied when adopting plans intended to be governed by section 457; section 457(e)(1)(B) includes tax-exempt organizations other than governmental units as "eligible employers" for section 457 purposes.

In Notice 2005-58, the Treasury and the Service announced that they will develop guidance under the section 414(d) "governmental plan" definition with respect to federal credit unions. Pending the issuance of that guidance:

• Plans in effect on the date of publication of the Notice (scheduled for August 15, 2005) intended to be eligible plans within the meaning of section 457(b) -- and thus not subject to the new section 409A rules for most nonqualified deferred compensation plans -- will not be denied section 457(b) treatment solely because the sponsor is a federal credit union, provided that the federal credit union has consistently claimed to be a non-governmental tax-exempt organization for all employee benefit purposes, including not taking advantage of either the special tax rules for section 414(d) "governmental plans" or the "governmental plan" exception from ERISA; and
• A federal credit union that has so claimed such status may also treat section 457(f) as applying to its nonqualified deferred compensation arrangements that are not section 457(b) eligible plans. In this circumstance, section 409A will also apply.

To the extent future guidance provides that such federal credit unions are not section 457 eligible employers, a "reasonable transition period" will be provided.

© 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.