Regulators are telling federal credit unions not to panic about the status of their 457 nonqualified deferred compensation plans.[@@]

The Internal Revenue Service has released soothing words for credit union managers in IRS Notice 2005-58, which advises the managers to take a 2004 private letter ruling on the issue with a grain of salt.

The IRS official who wrote the letter ruled that federal credit unions cannot offer 457 plans because at least 1 section of federal law defines federal credit unions as being “federal instrumentalities.”

Section 457 of the Internal Revenue Code lets state governments, municipal governments and tax-exempt employers that are not government agencies offer 457 nonqualified deferred compensation plans, but Section 1.457-2(e) of the income tax regulations states that the term “eligible employer” does not include “the federal government or any agency or instrumentality thereof,” John Tolleris, an IRS official, writes in Notice 2005-58, which appears today in the Federal Register.

But the Internal Revenue Code “provides that a private letter ruling applies only to the taxpayer who requested it and is not to be cited or treated as precedent with respect to any other taxpayer,” Tolleris writes.

The IRS plans to publish guidance on the issue soon, and, meanwhile, it will not disqualify a 457 plan simply because the sponsor is a federal credit union, Tolleris writes.

Even if the IRS decides that federal credit unions are not eligible to sponsor 457 plans, it will offer a transition period to allow federal credit unions to revise 457 plan arrangements to avoid adverse tax consequences, Tolleris writes.

A copy of the IRS notice is on the Web at http://a257.g.akamaitech.net/7/257/2422/01jan20051800/edocket.access.gpo.gov/2005/pdf/05-14318.pdf