How do you de-trust the benefits of a 457b plan incident to its sponsor (a hospital) going from being an agency of a local governmental unit (457b benefits must be trusteed) to being a 501c3 non-profit (457b benefits must not be trusteed)?

You might get your answer when you think about how eligiblity will change.

John, the government (whatever political subdivision has power over the hospital employees’ compensation) must NOT undo the exclusive-benefit aspect of a governmental employer’s eligible deferred compensation plan.

If the next employer is nongovernmental, the choices concerning the “old” governmental employer’s § 457(b) plan are:

(1) Maintain the plan (without further payroll deferrals after the workers become no longer government employees), and continue to administer the plan according to its terms.

If the local-government unit that has been the plan sponsor will no longer exist, find a related political subdivision to serve as the plan sponsor and, if necessary, the successor plan trustee. This approach is a variation on the facts of an IRS letter ruling I was involved with. (The IRS ruled that substituting a county for a no-longer-operating county hospital district did not impair the eligible status of an unfunded governmental § 457(b) plan. Because this was in the early 1990s, the plan was unfunded before and after the transfer of responsibility.) The letter ruling’s idea, with some new conditions, now is in the regulations. 26 C.F.R. § 1.457-10(b)(3).

After 2001, even a worker who takes a similar job with the new charitable-organization employer is likely to have a severance-from-employment regarding the “old” governmental employer, and so might be entitled to choose a distribution.

(2) If it’s desirable to pay immediate final distributions of all plan amounts, terminate the plan. 26 C.F.R. § 1.457-10(a)(2)(ii).

Choosing between (1) and (2) usually is most influenced by the facts and circumstances of the existing plan’s investment and service arrangements.

(Some human-resources people don’t like option 2 because they worry that too many people will undo their retirement savings: some might “opt out” from a default rollover, and non-responders and others might later take money from an IRA.)

If I can help, let me know. I’ve done these solutions (and some others) with several different governmental and charitable hospitals.

Thank you, Peter and QDROphile.