New Rules for the Treatment of Non-Qualified Plans Maintained by Federal Credit Unions

The IRS has issued Notice 2005-58 to clarify the tax treatment of nonqualified deferred compensation plans maintained by federal credit unions and in effect on the date the Notice is published (expected to be August 15, 2005) ("Effective Date").  The Notice provides that any plan established and maintained by a federal credit union that was intended to be an eligible nonqualified deferred compensation plan of a non-governmental tax-exempt entity under Section 457(b) of the Internal Revenue Code ("Code") will be considered as such if it was in effect on the Effective Date.  In addition, because eligible § 457(b) plans are not subject to Code § 409A (which provides strict new requirements for most nonqualified deferred compensation plans), if the federal credit union treats its plan as an eligible § 457(b) plan in accordance with this Notice, the plan will not be subject to the Code § 409A requirements.  Such deferred compensation plans established after the Effective Date by federal credit unions will not qualify under Code § 457(b) and then will be subject to § 409A.

The Notice also states that a federal credit union may treat Code § 457(f) (relating to the tax treatment of participants under a plan that is not an eligible deferred compensation plan) as applying to any nonqualified plan it maintains (except an eligible § 457(b) plan) that provides for a deferral of compensation if it has consistently claimed status as a non-governmental tax-exempt organization for all employee benefit plan purposes.  However, § 409A would still apply to such § 457(f) plans.

The Treasury and IRS expect to publish guidance regarding the definition of the term "governmental plan" under Code § 414(d). Such guidance may change the Treasury's and IRS' position on the treatment of federal credit unions under this Notice. Until future guidance is issued, however, this Notice will be valid and apply to any nonqualified deferred compensation plan that is in effect on August 15, 2005 and maintained by a federal credit union.

Go here to view Notice 2005-58 and learn more.

For more information about Notice 2005-58 and how it may impact your business, please call or e-mail your contact in the Employee Benefits Group at Ice Miller. If you do not have a contact at Ice Miller, please call or e-mail James D. Kemper, or visit us at www.icemiller.com to view a complete listing of our attorneys.