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Question: My client is a participant in a Section 457(b) deferred compensation plan at her non-profit employer. Are her deferral amounts and the employer contributions subject to the claims of the employer’s creditors?
Here’s an excerpt from the IRS Examination manual:
Tax Exempt Employers
1. By contrast, under IRC 457(b)(6) and Treas. Reg. 1.457-8(b), the assets of Eligible Tax Exempt 457 Plans must be unfunded. This is true for both employee and employer contributions.
2. Plan assets may not be held in trust for the exclusive benefit of participants.
A. The assets must remain the property of the employer subject to the claims of the employers’ general creditors.
B. So long as this requirement is satisfied, assets may be set aside in so called “Rabbi” trusts.
If the client is eligible to remove her money from the 457(b) plan, the distribution is not eligible for rollover to an IRA.
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