A session of the recent 2020 NTSA Summit provided an in-depth look at 457 plans.
Mark Heisler, Chief Executive Officer of ADMIN Partners, LLC, shared his insights on 457 deferred compensation plans, which offer many benefits to both sponsors and participants. Here are nine things he suggested one keep in mind when evaluating this benefit option.
1. 457(b)s are not qualified retirement plans—universal availability does not apply as it does for 403(b)s—and a sponsor can discriminate for eligibility. Employer and employee contributions are both subject to FICA/FUTA, and combined they cannot exceed the limit under Internal Revenue Code Section 402(g) limit, which is $19,500 in 2020.
2. A 457 plan needs a governing plan document. Consider resolving any conflicts between multiple plan documents if there are multiple vendors operating under different plan provisions.
3. Employees participating in both 457(b) and 403(b) plans can defer the full 402(g) limit into both plans. But loan limits are aggregated, so borrowing has to be monitored across plans.
4. A “final three year” catch-up provision can double the contribution limit—but this: (1) can’t overlap with an age 50 catch-up; (2) requires a cumulative historic contribution calculation; and (3) depends on “normal retirement age” defined in the plan document.
5. 457(b) plans allow for hardship withdrawals based on unforeseen emergencies… so watch out, tuition expenses are generally foreseen and won’t qualify!
6. In-service distributions of account balances under $5,000 without contributions for two years are also allowed, subject to plan provisions. The SECURE Act introduced in-service distributions for governmental 457(b)s at age 59½, but the plan must elect this provision.
7. If employers elect a vesting provision for employer contributions, those amounts enter into the limit calculation in the year they are vested, not in the year they are contributed.
8. Non-governmental 457(b) top hat plans must file with the Department of Labor (DOL) within 120 days of plan adoption to be exempt from ERISA.
9. Governmental 457(b) distributions are reported on Form 1099-R, but non-governmental distributions are reported on W-2s.
Amy Simonson, CPFA, is Vice President, Finance & Operations, at Verity Asset Management | Verity Investments, Inc.
- Log in to post comments