[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.457-8]

[Page 178-180]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 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 paragraph (a) that also meets the requirements 
of Sec. Sec. 1.457-3 through 1.457-10 is treated as an organization 
exempt from tax under section 501(a), and a participant's or 
beneficiary's interest in amounts in

[[Page 179]]

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 457(a) and Sec. Sec. 1.457-4 through 1.457-10.
    (2) Trust requirement. (i) A trust described in this paragraph (a) 
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 paragraph (a), 
custodial accounts and annuity contracts described in section 401(f) 
that satisfy the requirements of this paragraph (a)(3) are treated as 
trusts under rules similar to the rules of section 401(f). Therefore, 
the provisions of Sec. 1.401(f)-1(b) 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 
457(g)(1) and (3) and paragraphs (a)(1) and (2) 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 457(g)(1) and paragraphs 
(a)(1) and (2) of this section, if the custodian is a bank, as described 
in section 408(n), or a person who meets the nonbank trustee 
requirements of paragraph (a)(3)(ii)(B) of this section, and the account 
meets the requirements of paragraphs (a)(1) and (2) 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 457(g)(1) and (3). To do so, the person must 
demonstrate that the requirements of Sec. 1.408-2(e)(2) through (6) 
(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 Sec. 1.408-2(e). To the extent that a person has 
already demonstrated to the satisfaction of the Commissioner that the 
person satisfies the requirements of Sec. 1.408-2(e) in connection with 
a qualified trust (or custodial account or annuity contract) under 
section 401(a), that person is deemed to satisfy the requirements of 
this paragraph (a)(3)(ii)(B).
    (iii) Annuity contracts. An annuity contract is treated as a trust 
for purposes of section 457(g)(1) and paragraph (a)(1) of this section 
if the contract is an annuity contract, as defined in section 401(g), 
that has been issued by an insurance company qualified to do business in 
the State, and the contract meets the requirements of paragraphs (a)(1) 
and (2) 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

[[Page 180]]

participants or their beneficiaries. Under section 457(b)(6) and this 
paragraph (b), 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 paragraph (b)(1) 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 paragraph (b) 
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 paragraph (b)(1) of this section.

[T.D. 9075, 68 FR 41240, July 11, 2003; 68 FR 51447, Aug. 27, 2003]