Using a 457(B) plan to satisfy the requirements should not be a problem. Of course, to the extent that deferrals under the 457(B) plan are elective, an employee would in effect be able to elect into Social Security by declining to make contributions.

Carol hit the nail on the head for 457(B) used for FICA alternative. Many states have no enabling legislation for employer contributions, nor do they have language that allows contributions, which by their nature are elective, to be made mandatory. Some collective bargaining sources use the "condition of employment" argument, however I would like to hear from a labor lawyer as to how the agreement pre-empts the state law.

An employer has opted out of Social Security and is currently providing the required retirement benefits through a thrift plan. Is there any reason why a 457(B) plan would not satisfy the requirements of Section 3121. 3121 says it must be a defined contribution retirement system and that employee contributions can be used to satisfy the requirement.

Looking at some old (1991) proposed regs. and it states that a part-time, seasonal and temporary employee's benefit provided under "retirement system" must be nonforfeitable.

Can you explain why nonforfeitable just for these employees?

The theory is that these employees are unlikely to meet vesting requirements on their own, because they will never get enough hours of service in a year or enough years. Thus, if they are to benefit at all from the replacement plan, benefits must be nonforfeitable.

The regulations require that the alternative dfined contribution plan earn a "reasonable rate of interest." Would a 401(a) plan funded by annuuity contracts allowing participants to choose among several investment options satisfy that requirement?

Absolutely! I have 7 SS Replacement Plans in Kansas alone. All have been tested and approved. All but one include and vest all employees from DOH. The one exception maintains two plans, one for part-time with non-forfeitable contributions, and one for full-time with a 4 year graded vesting schedule that meets minimum funding requirements. All 7 use variable annuity contracts. However, instead of using 457(B) for employee contributions, they use 401(a) and 414(h)(2), and make participation a condition of employment.

I have an IRS reviewer who is questioning the use of variable annuity contracts as the investment for a replacement plan. The regs require the employee's account to be "credited with earnings at a rate that is reasonable under all the facts and circumstances...or held in a separate trust... ." If variable annuity contracts are not in a trust, how does one establish that earnings are reasonable?

A 401(a) plan inherently uses a trust. The use of variable annuities is customary and appropriate. The use of a 401(a) plan is also appropriate for such an arrangment.

Customary and appropriate has nothing to do with authority.
I would refer your IRS reviewer to IRC Section 401(g) and 401(h).
We find that most general IRS representatives in different areas of the country are not familiar enough with the the Code to accept the fact that the use of an annuity contract for replacement plans is permitted, and recognized by the IRS in too many instances.