457(b) Plans

A 457(b) plan is a type of deferred compensation arrangement used for retirement planning. 457(b) plans are becoming increasingly popular and many eligible employers are establishing these plans because they provide additional avenues for retirement savings as the limits on deferrals are not tied to the limits imposed on 401(k) and

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403(b) plans.

Which Employers Are Eligible to Establish and Maintain a 457(b) Plan?

457(b) plans can be established and maintained by a state or local government (“governmental entities), and by non-governmental tax-exempt organizations under IRC Section 501 (“non-governmental entities”).

Who Can Participate?

For governmental entities, any employee or independent contractor who performs services for the employer may participate in the plan. For non-governmental entities, participation must be limited to management, and highly compensated employees and independent contractors.

What Types of Compensation Can Be Deferred?

Any compensation attributable to services performed for the employer that is includible in gross income. This may include accumulated sick pay, vacation pay, or back pay if certain requirements are met.

Who Contributes?

Contributions can be made in the form of elective employee or nonelective employer contributions.

What Is The Contribution Limit?

For 2013, the IRS limitation on contributions is $17,500.

How Does The Contribution Limit In A 401(k) or 403(b) Plan Affect

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The Limits In A 457(b) Plan?

A participant’s contribution to a 401(k) or 403(b) plan has no bearing on the amount he or she can contribute to a 457(b) plan. For example, an employee participating in a 403(b) and 457(b) plan can make contributions up to $17,500 to each plan in 2013.

Does The IRS Allow For Catch-Up Contributions?

Yes. For both governmental and non-governmental plans that qualify, there is what the IRS calls a “Special Catch-Up” available for one or more of the last three taxable years ending before the calendar year the participant reaches normal retirement age. This “Special Catch-Up” provides the potential for qualifying participants to contribute up to an additional $17,500 in 2013. Additionally, participants 50 years or older in plans sponsored by governmental entities may be eligible to contribute an additional $5,500 in 2013.[1]

Is There A Trust Requirement?

For governmental entities, the plan must be funded by a trust or insurance contract that is segregated from the claims of the employer’s creditors. However, non-governmental entities must hold 457(b) contributions as the organization’s assets that are subject to claims of the employer’s creditors.

What Are The Advantages?

Contributions to a 457(b) plan and earnings on such contributions are tax-deferred until retirement. Contributing to a 457(b) plan may also lower a participant’s current taxable income. Individuals participating in both a 403(b) and 457(b) plan are able to contribute more money towards retirement than individuals participating in only a 403(b) or 401(k) plan.

Who Should Consider A 457(b) Plan?

Any governmental or non-governmental tax-exempt entity with employees (e.g., a head master or principal) who wish to contribute additional sums toward retirement on a tax-deferred basis but are unable to do so either due to earning more than the maximum salary allowed under a 403(b) plan or reaching the deferral limits on a 401(k) or 403(b) plan.

Founded in the 1950s, Carroll Consultants, Ltd. has experienced professionals with a wealth of knowledge about retirement plans. If you have any questions about this article or our services, please contact Marcie Carroll, at mcarroll@cclbenefits.com, or (610) 225-1210.

This material is not intended to provide specific legal or other professional advice.

[1] Note that where a plan permits both the “Special Catch-Up” and the “Age 50 Catch-Up,” participants eligible for both must choose the option which yields the largest deferral.