Must a 457 plan for a governmental hospital terminate and distribute funds to participants when it is acquired by a tax-exempt entity and loses its governmental status or can the plan be frozen holding distributions until payable?

The real question here is whether the plan will automatically become subject to ERISA when the tax-exempt entity takes it over. There have been some recent favorable Department of Labor rulings regarding a situation in which a governmental entity continues to hold assets for the benefit of employees who have now been transferred to a private employer. But as far as I know, they have not dealt with the situation in which the plan itself is transferred to the private employer.

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Employee benefits legal resource site

Does the hospital have its own 457(B) plan, or does it participate in a plan sponsored by a larger entity (for example, a state wide plan)?

There is an IRS letter ruling that may be close to your situation.

A hospital operated as a facility of county government was reorganized as a non-government charitable corporation.

Because the hospital employees' jobs did not change, the IRS, applying "same desk" rulings, found that the hospital employees did not have a separation-from-service, and therefore could not get a 457(B) plan distribution. (Unlike 401(k), plan termination is not a distribution event in 457(B). In effect, it's impossible to terminate the plan without making it an ineligible plan.)

The lawyer who represented the hospital caused the county to agree, as a condition to closing the hospital reorganization, that the county would accept the plan's assets and liabilities (the ruling assumed then-current IRC 457(B)(6) before amendment by SBJPAof1996) and responsibility to administer the plan. The new charitable corporation began life with no responsibility for its predecessor's plan. (Based on IRC 457(g) added by SBJPAof1996, there may be additional ways to accomplish the same or better results.)

I don't know the citation for the ruling (I remember the ruling's facts and conclusions because I represented the service provider both before and after the plan's reorganization), but a boolean logic search should find it.

Ms. Snyder, since I'm familiar with AUL annuity contracts (my client, Copeland Associates, Inc. is an AUL agent), I may be able to help you further with the mechanics of such a transaction. Feel free to call me at (732) 514-2008.




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