History
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Deferred compensation plans for state and local public employees represent one of the most beneficial and least expensive benefits available for public employees. Their rapid growth over the past decade is testament to their value for public employees and their governmental employers. State and local government deferred compensation plans, or Section 457 plans, (so-called because they are established in Section 457 of the Internal Revenue Code), are tax deferred plans available to state and local public employees. These plans are voluntary, supplemental, long-term retirement programs that give employees of states, counties, cities, towns and special purpose local governments an opportunity to defer receipt of income until retirement or termination of employment. Employees pay taxes when they receive the money, not when they earn it. Thus, they reduce their current taxable income and receive such income at a later date when the income may be taxed at a lower rate. The concept of public deferred compensation developed from Private Letter Rulings of the Internal Revenue Service for individual private sector deferred compensation plans. The primary ruling used for this purpose was IRS ruling 60-31, a discussion of the application of the doctrine of "constructive receipt" to five specific deferred compensation arrangements. The consistent point made was the application of Section 1.451-2(a) of the Income Tax Regulations which provided, in part:
"Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account or set apart for him so that he may draw upon it at any time. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitation or restriction." This type of deferred compensation was seldom used as a broad-based benefit for private sector employees because, in order to comply with the "constructive receipt" doctrine, private employers had to retain ownership of the deferred compensation funds and were responsible for related tax obligations. As a consequence, this type of benefit was typically offered only to key individuals. Applications of deferred compensation arrangements for the public sector began developing in the late 1960's. A government unit in Utah was the first public jurisdiction to activate a deferred compensation plan in 1968. By 1977, 22 states and a limited number of city and county governments had activated plans. By mid-1977, the IRS issued a moratorium of approval of new plans and placed limits on existing plans. A group of public and private sector organizations combined efforts to counter the moratorium by seeking legislation that would codify public sector deferred compensation. A bi-partisan bill was introduced early in the 1978 Congressional session. The U.S. Conference of Mayors, National Association of Counties, National Governors Association, National League of Cities, International City Mangers Association, National Conference of State Legislators, Council of State Governments, Government Finance Officers Association, and the Assembly of Governmental Employees all provided major support for the legislation. Those organizational efforts, together with strong support from industry interests involved in deferred compensation, proved to be a powerful combination. By the fall of 1978, legislation was passed and signed into law to be effective January 1, 1979. The new law, (P.L. 95-600, Section 131) which became Section 457 of the Internal Revenue Code, was introduced and passed in the same year, a rare accomplishment for legislation affecting taxes or benefits, much less both. A parallel provision, added late in the legislative development of public sector deferred compensation, addressed the concept for the private sector. This last-minute addition became Section 401(k) and authorized creation of the many plans now used by private industry. While Congress supported the concept of deferred compensation plans for public employees, it imposed limits on the amount which could be deferred. In order to qualify under the provisions of Section 457, the plan was required to be an "eligible State deferred compensation plan." Section 457 defined "State" as "a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State." Following enactment of the original legislation, Congress amended three relatively minor provisions of Section 457, concerning rural electric cooperatives (P.L. 96-222, Section 101(a)(4)), state judges (P.L. 97-248, Section 252), and the definition of non-eligible plan (P.L. 93-369, Section 491). The IRS published proposed regulations on December 24, 1980, and later promulgated the existing final regulations on September 27, 1982. Congress made no other changes to Section 457 until the Tax Reform Act of 1986 (TRA '86). Section 1107(a) of the Tax Reform Act of 1986 (TRA '86) amended Section 457 to provide that its provisions were applicable to tax exempt organizations. In addition, the amendment changed the rules regarding distributions as well as enlarging the universe of Section 457 plans among which funds could be transferred. With the enactment of the deferred compensation law, in 1978, and its later amendments, state and local governments developed deferred compensation plans in record numbers. While there is no central information point which records the number or nature of active deferred compensation plans, research indicates that there are literally thousands of local plans and that all 50 states now offer this benefit.
While the new Code Section 457 provided the basic structure for the plans, many areas were legally vague and operational procedures needed to be resolved. Recognizing that states shared the need to discuss common concerns and resolve the detailed issues, the Illinois Department of Personnel applied for and was granted an Intergovernmental Personnel Act Grant from the U.S. Office of Personnel Management in 1980. As stated in the original grant proposal, "investment carriers and private deferred compensation administrators are always willing to help the states solve problems and to explain the issues, but because the carriers and the private administrators have a vested interest, their help can be one-sided." The grant proposed a national conference, a quarterly newsletter, and funding for a project assistant. Total federal funds requested for this effort were $27,033. The Illinois Department of Personnel planned to spend an additional $36,672 as its match. The first conference under the grant was held in September, 1980, in Chicago, and drew more than 150 attendees. During the final session of the conference, the government attendees voted to form a national organization of state government deferred compensation administrators, naming the new association the National Association of State Deferred Compensation Administrators, or NASDCA. A steering committee directed the organization through 1981. In the association's first collective action, the steering committee solicited comments on Proposed Treasury Regulation §1.457 and presented a summary at a hearing on the proposals in May 1981. The association held its second conference in September 1981 in Chicago. The attendees voted unanimously to adopt the constitution drafted by the steering committee, which called for providing ongoing services and an annual conference. The association's membership and services have continued to grow. Local governments gradually became involved in the association and members voted to change the name of the association to the National Association of Government Deferred Compensation Administrator in 1986. The right to vote on association business was extended to local governments in 1989. In 1995, NAGDCA had 49 state members, 74 local government members, and 74 industrial members. For more information on the association, please contact NAGDCA staff at 859/514-9161.
About NAGDCA and §457 Plans The National Association of Government Defined Contribution Administrators (NAGDCA) was founded in 1980. NAGDCA is a non-profit organization comprised of sponsors and administrators of deferred compensation plans for government employees. Private entities that serve the deferred compensation/retirement services industry, such as plan administrators, consultants and investment providers, also participate in NAGDCA as industry members. The first deferred compensation/retirement savings plans for government employees began in the mid-1970s through a series of private letter rulings issued by the I.R.S. The rulings allowed governments to establish plans under which employees elect to postpone (hence "defer") part of their salary. The deferred salary is then held within the plan, and invested in one or more investment options selected by the employee. Income tax on the salary and investment gain is deferred until the money is paid out at retirement. In 1978 Congress enacted I.R.C. §457, which authorized and regulated this type of retirement plan, and placed annual limits on the amount of employee contributions. A major tax law change occurred in 1996. As originally structured, tax benefits in 457 plans required assets contributed by employees to remain the "property" of the employer, and subject to claims by the employer's creditors. For most governments this was a hypothetical requirement, but the bankruptcy of Orange County, California in 1994 caused significant concern among employees about the safety of retirement plan assets. NAGDCA played a leading role in encouraging Congress to protect those assets, and this occurred with the enactment of the 1996 Small Business Job Protection Act. Under the Act's amendments to §457, plan assets must be held in a trust or custodial account for the exclusive benefit of participating employees. State and local government deferred compensation plans have a variety of administrative formats, the structure of which is decided by the sponsoring government. Some are overseen or managed by a governments personnel/benefits department, others by a retirement agency or board of trustees. Some governments perform all administrative functions (enrollment, record keeping, disbursement and cash management) internally, with government personnel; others contract with specialized firms, insurance companies or mutual fund sponsors, to perform these services. The typical investment menu for a NAGDCA plan includes some combination of insurance annuity contracts and mutual funds. In most cases the administrative expense of the plan is borne by the participating employees. In overall function and design 457 plans are similar to the more common 401(k) plans maintained by private employers. One distinction is that employer subsidy, such as contributions that match those made by employees, are less common. Another distinction is that 457 plans are often multi-employer arrangements, under which employees of numerous local governments participate in a single statewide plan. Membership and Organizational Structure:
Government membership in the association is held in the name of a political subdivision (city, county, state, etc.) or association. Government members receive all publications and correspondence free of charge. Government members may also attend the annual meeting and are entitled to participate fully in all association meetings, hold office and serve on committees. Membership also includes free access to NAGDCA's information clearinghouse and Web site. Government members hold voting privileges in the association. The NAGDCA constitution is structured so that control of the association is vested in an executive committee of government members, elected solely by government members at the Annual Conference. Industry membership is organized at two levels. The chairperson for a company participating in NAGDCA holds the vote at the industrial members meeting during the Annual Conference. Additional employees within the company can also be members, but without a vote. An elected individual from the industrial membership serves each year as a member of the Executive Committee. NAGDCA Activities: NAGDCA (organized under I.R.C. 501(c)(6)) is headquartered in Lexington, Kentucky and conducts a wide range of activities. These include: - a clearinghouse of plan documents and related materials to enable members to research practices in other jurisdictions; - an extensive series of publications, including a newsletter, and in-depth research guides for tax and related issues; - a Web site http://www.nagdca.org; - a biennial national survey of plan detail, design and cost; - employment of a representative in Washington to promote fair and effective legislation for the benefit of NAGDCA members, and to provide liaison with relevant congressional committees and government departments; - participation in one or more coalitions with numerous organizations including such groups as FOP (Fraternal Order of Police), NACO (National Association of Counties), NASRA (National Association of State Retirement Administrators), and NEA (National Education Association) to promote legislation that benefits plan members; - a partnership with InFRE (International Foundation for Retirement Education) to develop education and certification programs for people in the retirement savings industry; and - an annual convention for over 650 people that features speakers, panels and discussion groups on a wide range of topics everything from Washington to Wall Street, how to procure investment options or administrative services, and recent legal and investment developments. Members: NAGDCA has over 670 government members and 389 industrial members representing 105 private companies. The governments (and government administrators) who participate in NAGDCA represent 47 states, 1 territory, and over 134 cities, counties and other special-purpose entities and districts. A 1997 snapshot of deferred compensation plans shows 47 state and 47 local plans had over 5.03 million participants and held more than $38.6 billion in total plan assets. Total 457 plan assets (within and without NAGDCA) are approaching $100 billion in 1999. Industrial members include entities and individuals with significant involvement in the government retirement savings industry, such as insurance companies, mutual fund sponsors, and independent plan administrators. |
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