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Practice Management

Know Your 457s

A retirement plan offered under Internal Revenue Code Section 457(b) permits certain employers or employees to contribute money for retirement on a tax-deferred basis, subject to annual limits the IRS sets. But not all 457(b)(s) are the same, as a human resources and employee benefits firm outlines in a recent newsletter.

In its newsletter, Findley reminds that 457(b)s are sponsored by governmental entities and tax-exempt organizations. And while they do share some characteristics, there are differences between the 457(b)s each sponsors.

What They Share

All 457(b) plans, regardless of whether they are established by a governmental entity or a tax-exempt organization, share these common requirements and characteristics:

  • earnings on contributions are tax-deferred;
  • they are not subject to coverage or nondiscrimination testing;
  • the plan must be in writing;
  • a participant may be permitted to elect to increase salary reductions for the final three years before reaching normal retirement age up to the lesser of (1) two times the applicable dollar limit ($38,000 for 2019), or (2) the applicable dollar limit plus the sum of unused deferrals in prior years provided the prior deferrals were less than the applicable deferral limits (not counting any age 50 catch-up contributions (permitted only in governmental plans);
  • the election to make contributions through salary reduction must be made before the first day of the month in which the compensation is paid or available.
  • employer and employee contributions in the aggregate are measured against the limit set under Internal Revenue Code Section 402(g);
  • hardship distributions are permitted if: (1) the distribution is required due to an unforeseeable emergency beyond the participant’s or beneficiary’s control, (2) all other sources of financing have been exhausted, and (3) the amount distributed is necessary to satisfy the need (and the tax liability arising from the distribution);
  • Internal Revenue Code Section 401(a)(9) rules apply to required minimum distributions; and
  • distributable events include attainment of age 70½, severance from employment, hardships, plan termination, qualified domestic relations orders, and small account distributions (with a minor difference).

How They Differ

Governmental and tax-exempt 457(b) plans differ in the following ways:

 

Feature/Requirement Governmental Tax-Exempt
Eligible employees Can include any employee or independent contractor who performs services for the employer Can make only certain management or highly compensated employees eligible
Automatic enrollment Allowed Not allowed
Roth contributions May provide for the designation of Roth contributions for all or part of salary reductions Not allowed
Catch-up contributions May permit age 50 catch-up contributions Not allowed
Correction of excess deferrals Must distribute any excess contribution (plus income) as soon as practicable after the plan determines that an amount is in excess Must distribute the excess by April 15 following the close of the taxable year in which the excess deferral was made
Loans Allowed Not allowed
Contributions to a trust Allowed Not allowed
Rollovers May provide for rollovers to other eligible retirement plans (401(k), 403(b), governmental 457(b), and IRAs) Not allowed
Taxation Occurs at the time of distribution Occurs at the earlier of when amounts are made available or distributed
Statutory period for correction of plan failures Have until the first day of the plan year beginning more than 180 days after notice from the IRS regarding failure to meet applicable requirements Not avaiable
Correction programs Can apply for a closing agreement with a proposal to correct failures that will be evaluated under EPCRS standards Generally not available