A 457 plan sponsor asked me if the fact their plan was funded by annuities (issued by an insurance company) didn't already meet the new requirements of the SBJPA? Perhaps we left this line of business hastily? We did withdraw from this line of business due to our understanding of the new requirements of the SBJPA.

Would a simple plan amendment on the part of the plan sponsor (we provide only the plan funding vehicle) to their plan - combined with the fact that they are already using annuities - have made the plan compliant with the SBJPA?

Could the withholding/reporting requirements remain the responsibility of the plan sponsor/administrator - or would the SBJPA require these duties be transferred to the insurance company that issued the annuity?

Yes and no. (Is that clear?) No annuity product issued to a governmental 457 plan before the new law would comply with the new law. However, minor amendments to the annuity contracts could bring them into compliance.

The reason for this is that before I.R.C. § 457(g), a 457 plan was required to be UNfunded. (This rule still applies to 457 plans of tax-exempt employers other than governmental employers.) Thus, any annuity contract used to pay plan benefits had to be owned by the employer, or by a trust which was subject to the claims of the employer's creditors. Although the performance of the contract could be used to measure the ultimate benefit under the 457 plan, the plan participants could not have any kind of security interest in the contract itself.

Under the new rules (click here for gory details), an annuity contract undera governmental plan must be used solely for the payment of benefits to employees, and must not be subject to the claims of the employer's creditors. Thus, none of the old contracts would meet the terms of the new law. However, if the contract is amended to state that amounts set aside under the contract are to be used solely for the benefit of plan participants and beneficiaries, and not used for the benefit of the employer or its creditors, it can comply with the new law.

The rules on withholding may, however, be a stumbling block. Essentially, the entity which pays amounts from the contract is responsible for reporting on and withholding from such amounts. Thus, unless you can find a way to contract out the job of reporting and withholding, an inability to do that job yourself would be a problem if you decided to stay in (or go back to) that business.
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Employee benefits legal resource site

If you represent an insurer, be careful of the state and local laws relating to employee direction, since 404©is part of Title I of ERISA, an governmental plans are not eligible for fiduciary layoff to the employee in many states. You may find yourself and your plan sponsor in the unenviable position of being sued by a disgruntled employee who made high risk choices and now has buyers remorse after his losses.