Recent laws enacted by the Tax Relief Reconciliation Act give employees with 457 Deferred Compensation Plans more control over their retirement planning and the potential to build even more money for retirement.
What Is a 457 Deferred Compensation Plan?
A Section 457 plan is a deferred compensation plan available to employees of state or local governmental entities, agencies of such entities, or many of the tax-exempt organizations under Code Section 501. Although technically a non-qualified plan, an eligible Section 457 plan resembles a tax-qualified plan in that, as long as the plan meets the requirements of Code Section 457, plan participants are not taxed on their plan interests until they actually received distributions.
What Are the Types of 457 Plans?
From the standpoint of practical application, there are two types of 457 plans. In a 457 plan of a governmental entity the plan is made available to all employees, usually as a supplement to a pension plan. For other tax-exempt organizations, 457 plans are offered to only a select group of employees, in the same manner as a non-qualified plan would be in a private sector company.
What Are the Features of 457 Plans?
A primary element of a Sec. 457 plan is that the participant be a general unsecured creditor of the plan sponsor, thereby creating the “substantial risk of forfeiture” that allows the participant to avoid constructive receipt of any income in a given year. Section 457 plans, like corporate non-qualified plans, have specified contribution limits and are subject to the minimum distribution rules.
A 457 plan may be established and funded with salary deferrals at any time during the calendar year. Only compensation earned after a salary deferral agreement has been signed may be deferred into the plan. Note that a 457 plan may not accept after-tax deferrals.
How Do Recent Tax Law Changes Affect My 457 Plan?
The Economic Growth and Tax Relief Reconciliation Act of 2001 had three primary benefits for plan years beginning in 2002. The first is that the 457 maximum deferral limits and the definition of compensation are the same as for 401(k) plans. Therefore, 457 plan participants may defer the lesser of (1) $100% of compensation, or (2) $16,500 for 2011. If you are age 50 or older, you are able to contribute an additional $5,500 annually. During each of the three years prior to retirement, there is a special catch-up limit that is generally twice the deferral limit.
Second, beginning in 2002, the 457 plan maximum deferral limit was not reduced by deferrals made to another type of retirement plan such as a 401(k) or 403(b) plan. Therefore, a participant covered by a 457 plan and a 401(k) plan may defer the maximum $16,500 (for 2011) into each plan for a total of $33,000 in deferrals. A person over 50 within three years of retirement and with both a 457 and 401(k) plan could contribute $52,500 into their retirement plans.
Third, beginning in 2002, certain distributions from state and local government plans were eligible for rollover to a traditional IRA, a SEP IRA, a safe-harbor 401(k), a 403(b), a governmental 457, or other qualified retirement plan.
With the passage of the Small Business Jobs Act of 2010, 457 plan participants are allowed to treat elective deferrals as Roth contributions.
For more details on 2002 changes to 457 deferred compensation plans, and whether you may benefit from rolling your 457 plan into a qualified retirement plan, contact an annuity FYI Expert at 1-866-223-2121.