A political sub-division (not educational) has a 403B plan that was started over 10 years ago to be in lieu of Social Security when the mandatory Social Security was enacted. We have recently learned that this plan is not a legal option for this political sub-division and need to know what to do now. Can this 403B be transferred into a 457? Is 457 the only option for a plan in lieu of Social Security?

By not a legal option, do you mean that the subdivision didn't have the legal authority to eastablish a 403(B) plan or that the plan does not satisfy the standard for the subdivision (and it s employees) to avoid paying FICA taxes, or both ?

This political subdivision is a soil and water conservation district, it does not meet the requirements for an educational institution to have the authority to set up a 403b plan, however, one was set up and now they need to know what to do.

I believe the decesion should be made by the "employer" ...meaning the primary political entity (city or state I presume)

Assuming a large political entity and trying to correct an error and not cheat any employee .... I would think IRS and DOL would be willing to make some sort of accomodation

Do not assume that a 401 solution is not possible

The employer can formally correct under VCT by make a submission to the IRS (see Rev. Proc. 2001-17). Contributions to the 403(B) plan must be stopped; however, the IRS will permit all past contributions to be considered 403(B) contributions. Any other "defects" have to be identified and included in submission. There will be fees/sanctions involved.