New regulations for Section 457 plans

In May, the Internal Revenue Service (IRS) issued proposed regulations on Section 457 deferred compensation plans, which allow local government employees to set aside a portion of their pre-tax earnings for retirement. The IRS accepted comments on the proposed regulations until Aug. 6 and will hold a public hearing regarding the regulations on Aug. 28. Once the regulations are final, most provisions will be effective for the taxable years beginning after Dec. 31, 2001.

The proposed regulations include new rules regarding:

• Accumulated sick leave, vacation pay and back pay

  Employees could defer accumulated sick pay, vacation pay or back pay for any calendar month into their 457 plans. However, employees would have to establish an agreement providing for the deferral prior to the month in which the amounts would be paid or made available.

• Loans

  Loans from 457(b) plans would be permitted.

• Excess deferrals

  If employees exceed the permissible amount of annual deferrals, the plan manager would be required to distribute the excess to participants “as soon as administratively possible” after the manager determines the amount is excessive.

• Washington, D.C.-based ICMA Retirement Corp. and the Chicago-based Government Finance Officers Association have developed a Web site (www2.icmarc.org/xp/vl/457info) to provide additional information about the proposed regulations.