457(b) Plans: Processing Plan Distributions - YouTube

Welcome to our tutorial series providing quick answers on your questions regarding the executive

compensation 457(b) plans for tax-exempt co-ops, presented by the Homestead Funds’ deferred

compensation consulting team.

A key component of 457(b) plan administration, especially for your participants, is the processing

of distributions from the plan.

To help you with this process we'll cover in this session events that trigger distributions,

the available payment options, the forms required to document a distribution, how to request

and process distributions through Homestead and then the taxation and reporting requirements

involved.

There are a limited number of events that trigger a distribution from an executive compensation

457(b) plan -- the most common is severance from service of any kind including retirement,

separation or termination.

Secondly, attaining age 70.5 while still employed is also a distribution option.

This allows for participants who want to keep working to access their funds in advance of

separation.

Such distributions are not required nor are required minimum distributions involved until

the participant actually separates from the cooperative or separates from the cooperative

board.

It’s just a way of allowing for people who want to continue to work late in life to actually

have access to their funds.

Another more uncommon option is the occurrence of what's known as an unforeseeable emergency.

This is not the same as a hardship withdrawal from the 401(k) plan and the definition by

comparison is much stricter and there are very limited circumstances in which this option

might come into play, so be sure to consult your plan document for the rules and call

us at the deferred compensation program team with any questions.

Other distribution occurrences include a divorce that leads to a qualified domestic relations

order, disability if that disability leads to separation, and finally a death of the

participant which leads to distribution to the designated beneficiaries.

Two important things to know.

Loans are never permitted from a 457(b) plan tax-exempt plan because as we mentioned previously,

the assets belong to the co-op and not to the participant.

And finally, unlike 401(k) plans and IRAs, there are never any early withdrawal penalties.

So, after separation events, funds can be withdrawn and must be taxed, but there is

never any 10% penalty for withdrawing these funds at an age that’s under a specified

number, such as age 55 or 59.5.

This is because these funds are deferred compensation and are not retirement savings where these

minimum wages apply.

When a participant is eligible to take a distribution from the plan, most often, because they're

retiring or separating, they have the ability to elect how, and when they would like to

receive their assets.

Plan rules allow for the following forms of payment:

• A single cash payment also called a lump sum at separation or at a date specified in

the future by the participant.

• Installment payments over any time period as long as distributions meet the IRS rules

for required minimum distributions for tax-deferred accounts.

These mandatory distributions must begin at either age 70.5 or age 72, based on the provisions

in your plan document.

It's important to note that if your plan document is dated 2019 or earlier, your participants

will be required to comply with the age 70.5 rule.

To take advantage of the age 72 provision you would need to readopt your plan.

The deferred compensation program team can help you readopt your plan as this is a very

simple task.

• A third option is the combination of a lump sum with a series of installment payments.

For example, a single cash payment of $50,000, immediately following separation with the

remainder to be paid in installments over a three-year period.

• Finally, there is an in-kind transfer option.

In this situation, the account assets are transferred from the existing Homestead account

in the co-op’s name to an account in the name of the participant.

In-kind of transfers create the same tax consequence as a lump sum distribution, meaning the distribution

is fully taxable.

Mechanically it involves selling shares to pay the taxes and then re-registering the

after tax shares in that new account in the name of the participant.

While we often are asked, plan rules specifically forbid rollovers to a tax-deferred account,

like an IRA or 401(k).

If you’d like to keep your assets at Homestead, you can use the transfer in-kind option and

transfer the assets from your deferred compensation account to a taxable individual or joint account.

Participants designate the timing and form of how they would like to receive their plan

balances by completing a payment election form.

This form should be kept on file at the co-op and preserved for the life of the plan, even

after the participant is gone.

Our recommended best practice is to collect this form at enrollment and then periodically

reconfirm the payment election details with the participant, perhaps each year during

annual enrollment and then immediately again prior to separation.

Depending on your co-op's plan document, participants may have the ability to make one more change

within 30 days of separation and/or a window after separation to push back the first payment

30 days or more in advance of the specified start date.

Be sure to review your plan document before offering these particular options.

Once benefit payments have begun, the election becomes irrevocable and no further changes

may be made.

So, this is something that the participants needs to take very seriously.

We do periodically get calls from co-ops asking if their participant who has already decided

to delay their payments perhaps over their required minimum distribution period, we get

people asking if they can then accelerate these payments.

And unfortunately, the answer is no.

Please counsel your participants to think long and hard about their distribution option

because there are very limited options for revisions.

Finally, if no payment election is on file at separation or within 30 days following

separation, the default option is a single sum cash payment sometimes referred to as

a lump sum.

This is of course, a fully taxable distribution paid per the plan document within a range

of 60 to 90 days from separation.

One thing to note is that if a participant leaves one NRECA member co-op with a 457(b)

plan offered through Homestead and joins another with a 457(b) plan, this may not count as

a separation event.

So be sure to check your plan document and contact us at the deferred compensation program

team if you have a participant who is separating but yet moving immediately to another co-op

and we can talk you through the options that you and your participant may have.

So let’s talk through the payment election form for a minute.

So, completing the payment election form is a two-step process.

The first step involves a participant designating when they would like distributions to start:

either in the year of retirement, the following year or in a subsequent year.

The second step is for participants to specify how payments are to be made.

As we just discussed: as a single payment, in installments, a combination of single cash

payment installments, or a transfer of assets.

As a reminder, the form Homestead provides is just a sample and can be modified by your

co-op.

Participants should be reminded that the information set forth in the form does not constitute

advice.

Prospective participants should consult an attorney or personal tax advisor to develop

a tax strategy before electing their time and form of payment.

To ensure there is no confusion at separation, we suggest that your co-op’s plan administrator

carefully review each participant’s payment election form to ensure that it clearly states

his or her wishes.

Sometimes participants provide their own options or create additional language that, while

not necessarily a problem, could be difficult to understand.

Once the participant decides to separate and completes or has on file a valid signed and

dated payment election, the distribution process begins.

The first step is to contact Homestead and request a distribution or to set up a series

of distributions based on the payment election form.

This requires the co-op to complete and sign distribution paperwork to confirm the details

of the request.

So there is a payment election form that the co-op has in their files, but then there are

also additional forms that the co-op will need to complete to start the withdrawal with

Homestead Funds.

Since the assets belong to the co-op, Homestead will send each distribution amount requested

to the co-op.

The co-op will then pay the participant after withholding the appropriate income taxes which

we will discuss in a minute.

A few points about tax withholding and reporting on distributions.

Employee contributions to the plan are subject to payroll taxes -- Social Security and Medicare

-- at the time of deferral and not at the time we are talking about now which is the

time of distribution.

Distributions to employees are considered deferred wages, so they are reported on IRS

Form W2 in box 1 “wages, tips, and other compensation” as well as box 11, non-qualified

plans and if applicable the distribution will appear in the state and local reporting boxes

as well.

As 457(b) distributions are considered deferred wages, tax withholding is mandatory based

on the employee’s W4 on file or, if that is not available, at the current year’s

withholding rate for “supplemental income” which is subject to change from year-to-year.

While many retired employees prefer to pay estimated taxes, this is not an option for

457(b) Plan distributions.

For directors, as the IRS classifies them as independent contractors, not co-op employees,

tax withholding is not the responsibility of the co-op.

Distributions are reported on IRS form 1099-NEC, which stands for non-employee compensation,

in boxes 1 and 7 (if applicable for state income taxes).

As non-employee compensation, it is the director's responsibility to report the income on their

tax return.

One last reminder, if you have a new or existing 457(b) plan one of the things you may consider

doing is modifying the payment election form to meet your co-op's particular administrative

needs and wishes.

To create your co-ops payment election form, start with the sample provided by Homestead.

Options you may wish to modify include the maximum number of installments (some co-ops

limit this to say 5 or 10 years) and the frequency of payments.

By allowing for monthly or quarterly distributions this can create more administrative work for

the co-op.

Many plan sponsors elect to offer annual payments only as a result.

This still retains the ability for the participant to manage their taxes on a year-to-year basis,

but does not require additional processing of monthly or quarterly payments by the administrative

staff at the co-op.

Prior to finalizing this form, we suggest that you contact Homestead’s deferred compensation

team to discuss any changes.

We can help you verify that the changes are consistent with your plan document as well

as to answer questions on other topics.

If you have an active plan, check to be sure you have a completed form on file for each

participant in the plan.

If not, contact the participant and have them complete one.

If you decide to modify the form, you might want to contact all your participants and

have them complete an updated form so that you have a consistent form on file for each

member of your plan.

Thanks for spending a few minutes learning about the processing of distributions for

457(b) plans.

This represents the final installment of our tutorial series on these plans.

We hope you’ve enjoyed them and we welcome any feedback you may have.

If you joined us for the entire series, thank you very much.

And if you haven't viewed the other segments we encourage you to do so to answer any specific

questions you might have, or just to learn more about how these plans can play an important

role in attracting, rewarding, and retaining key co-op employees.

Thanks again.