Reg. § 1.457-8 Funding rules for eligible plans.
(a) Eligible governmental plans
(1) In general In order to be an eligible governmental plan, all amounts deferred under the plan, all property and rights purchased with such amounts, and all income attributable to such amounts, property, or rights, must be held in trust for the exclusive benefit of participants and their beneficiaries. A trust described in this that also meets the requirements of through is treated as an organization exempt from tax under section , and a participant's or beneficiary's interest in amounts in the trust is includible in the gross income of the participants and beneficiaries only to the extent, and at the time, provided for in section and through .
(2) Trust requirement
(i) A trust described in this must be established pursuant to a written agreement that constitutes a valid trust under State law. The terms of the trust must make it impossible, prior to the satisfaction of all liabilities with respect to participants and their beneficiaries, for any part of the assets and income of the trust to be used for, or diverted to, purposes other than for the exclusive benefit of participants and their beneficiaries.
(ii) Amounts deferred under an eligible governmental plan must be transferred to a trust within a period that is not longer than is reasonable for the proper administration of the participant accounts (if any). For purposes of this requirement, the plan may provide for amounts deferred for a participant under the plan to be transferred to the trust within a specified period after the date the amounts would otherwise have been paid to the participant. For example, the plan could provide for amounts deferred under the plan at the election of the participant to be contributed to the trust within 15 business days following the month in which these amounts would otherwise have been paid to the participant.
(3) Custodial accounts and annuity contracts treated as trusts
(i) In general For purposes of the trust requirement of this , custodial accounts and annuity contracts described in section that satisfy the requirements of this are treated as trusts under rules similar to the rules of section . Therefore, the provisions of will generally apply to determine whether a custodial account or an annuity contract is treated as a trust. The use of a custodial account or annuity contract as part of an eligible governmental plan does not preclude the use of a trust or another custodial account or annuity contract as part of the same plan, provided that all such vehicles satisfy the requirements of section and (3) and and of this section and that all assets and income of the plan are held in such vehicles.
(ii) Custodial accounts
(A) In general A custodial account is treated as a trust, for purposes of section and and of this section, if the custodian is a bank, as described in section , or a person who meets the nonbank trustee requirements of of this section, and the account meets the requirements of and of this section, other than the requirement that it be a trust.
(B) Nonbank trustee status The custodian of a custodial account may be a person other than a bank only if the person demonstrates to the satisfaction of the Commissioner that the manner in which the person will administer the custodial account will be consistent with the requirements of section and (3). To do so, the person must demonstrate that the requirements of through (relating to nonbank trustees) are met. The written application must be sent to the address prescribed by the Commissioner in the same manner as prescribed under . To the extent that a person has already demonstrated to the satisfaction of the Commissioner that the person satisfies the requirements of in connection with a qualified trust (or custodial account or annuity contract) under section , that person is deemed to satisfy the requirements of this .
(iii) Annuity contracts An annuity contract is treated as a trust for purposes of section and of this section if the contract is an annuity contract, as defined in section , that has been issued by an insurance company qualified to do business in the State, and the contract meets the requirements of and of this section, other than the requirement that it be a trust. An annuity contract does not include a life, health or accident, property, casualty, or liability insurance contract.
(4) Combining assets [Reserved]
(b) Eligible plans maintained by tax-exempt entity
(1) General rule In order to be an eligible plan of a tax-exempt entity, the plan must be unfunded and plan assets must not be set aside for participants or their beneficiaries. Under section and this , an eligible plan of a tax-exempt entity must provide that all amounts deferred under the plan, all property and rights to property (including rights as a beneficiary of a contract providing life insurance protection) purchased with such amounts, and all income attributable to such amounts, property, or rights, must remain (until paid or made available to the participant or beneficiary) solely the property and rights of the eligible employer (without being restricted to the provision of benefits under the plan), subject only to the claims of the eligible employer's general creditors.
(2) Additional requirements For purposes of of this section, the plan must be unfunded regardless of whether or not the amounts were deferred pursuant to a salary reduction agreement between the eligible employer and the participant. Any funding arrangement under an eligible plan of a tax-exempt entity that sets aside assets for the exclusive benefit of participants violates this requirement, and amounts deferred are generally immediately includible in the gross income of plan participants and beneficiaries. Nothing in this prohibits an eligible plan from permitting participants and their beneficiaries to make an election among different investment options available under the plan, such as an election affecting the investment of the amounts described in of this section.
[T.D. 9075, 68 FR 41240, July 11, 2003; 68 FR 51447, Aug. 27, 2003]