Tag Archive for: 457(b)

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What’s My Limit? Contributions to both a 403(b) and a governmental 457(b) plan

“One of my clients participates a 403(b) plan and a governmental 457(b) plan (through a state university). Her accountant is telling her that she, potentially, could contribute $41,000 of deferrals between the two plans for 2022.  How can that be so?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans, including nonqualified plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Illinois is representative of a common inquiry related to the maximum annual limit on employee salary deferrals.

Highlights of Discussion

Generally speaking, it may be possible for her to contribute more than one would expect given the plan types she has and based on existing plan contributions rules, which are covered in the following paragraphs. Your client should rely on her tax advisor in order to determine what amounts she can contribute to her employer-sponsored retirement plans because this is an important tax question that is best answered with the help of professionals.

For 2022, 457(b) contributions (consisting of employee salary deferrals and/or employer contributions combined) cannot exceed $20,500, plus catch-up contribution amounts ($6,500) if eligible [Treasury Regulation Section (Treas. Reg. §1.457-5)]. Since 2002, contributions to 457(b) plans no longer reduce the amount of deferrals to other salary deferral plans, such as 401(k) or 403(b) plans. A participant’s 457(b) contributions need only be combined with contributions to other 457(b) plans when applying the annual contribution limit. Therefore, contributions to a governmental 457(b) plan are not aggregated with deferrals an individual makes to other types of deferral plans.

Consequently, an individual who participates in both a governmental 457(b) plan and one or more other deferral-type plans, such as a 403(b), 401(k), salary reduction simplified employee pension plan, or savings incentive match plan for employees has two separate annual deferral limits. Here’s an example.

Example

For 2022, 32-year-old Toni is on the faculty at the local state university and participates in its 457(b) and 403(b) plans. Assuming adequate levels of compensation, Toni can defer up to $20,500 in her 403(b) plan, plus another $20,500 to her 457(b) plan—for a total of $41,000.

Also, keep in mind the various special catch-up contribution options depending on the type of plan outlined next.

 

403(b) 457(b)
15-Years of Service with Qualifying Entity Option:[1]

 

402(g) limit, plus the lesser of

 

1) $3,000 or

2) $15,000, reduced by the amount of additional elective deferrals made in prior years because of this rule, or

3) $5,000 times the number of the employee’s years of service for the organization, minus the total elective deferrals made for earlier years.

 

Age 50 or Over Option

 

Employees age 50 or over can make catch-up contributions of $6,500 beyond the basic 402(g) limit.

 

Note:  Must apply the 15-year option first

Age 50 or Over Option

 

Employees age 50 or over can make catch-up contributions of $6,500 beyond the basic 457 deferral limit of $20,500.

 

Special “Last 3-Year” Option

 

In the three years before reaching the plan’s normal retirement age employees can contribute either:

•Twice the annual 457(b) limit (in 2022, $20,500 x 2 = $41,000),

 

Or

 

•The annual 457(b) limit, plus amounts allowed in prior years but not contributed.

 

Note:  If a governmental 457(b) allows both the age-50 catch-up and the 3-year catch-up, one or the other—but not both—can be used.

 

Another consideration when an individual participates in more than one plan is the annual additions limit under IRC Sec. 415(c),[2] which typically limits plan contributions (employer plus employee contributions for the person) for a limitation year [3] made on behalf of an individual to all plans maintained by the same employer. However, contributions to 457(b) plans are not included in a person’s annual additions (see 1.415(c)-1(a)(2).

 

Conclusion

Sometimes individuals who are lucky enough to participate in multiple employer-sponsored retirement plan types may be puzzled by what their maximum contribution limits are. This is especially true when a person participates in a 403(b) and 457(b) plan. That is why it is important to work with a financial and/or tax professional to help determine the optimal amount based on the participant’s unique situation.

[1] A public or private school, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches (or associated organization) and it is allowed by the terms of the plan document

[2] For 2022, the limit is 100% of compensation up to $61,000 (or $67,500 for those > age 50).

[3] Generally, the calendar year, unless the plan specifies otherwise

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Remember the Saver’s Tax Credit

“Can you remind me of the special tax credit available for individuals who make retirement savings contributions, please?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Nevada is representative of a common inquiry regarding available tax credits for personal contributions to eligible plans.

Highlights of Discussion

Absolutely, after all, it is tax time! IRA owners, retirement plan participants (including self-employed individuals) and others may qualify for the IRS’s “Saver’s Credit” for certain contributions made to eligible savings arrangements. Details of the credit appear in IRS Publication 590-A and here Saver’s Credit.

The credit

  • Equals an amount up to 50%, 20% or 10% of eligible taxpayer contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040SR or 1040NR);
  • Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan (other plans qualify so see full list below); and
  • Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.

Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to

  • A traditional or Roth IRA;
  • 401(k),
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA,
  • Salary Reduction Simplified Employee Pension (SARSEP),
  • 403(b),
  • Governmental 457(b),
  • Federal Thrift Savings Plan,
  • ABLE account* or
  • Tax-exempt, union pension benefit plan under IRC Sec. 501(c)(18)(D).

In general, the contribution tax credit is available to individuals who

1) Are age 18 or older;

2) Not a full-time student;

3) Not claimed as a dependent on another person’s return; and

4) Have income below a certain level (see table that follows).

* The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to create tax-advantaged savings programs for eligible people with disabilities (designated beneficiaries). Funds from ABLE accounts can help designated beneficiaries pay for qualified disability expenses on a tax-free basis.

2021 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $39,500 AGI not more than $29,625 AGI not more than $19,750
20% of your contribution $39,501 – $43,000 $29,626 – $32,250 $19,751 – $21,500
10% of your contribution $43,001 – $66,000 $32,251 – $49,500 $21,501 – $33,000
0% of your contribution More than $66,000 More than $49,500 More than $33,000

*Single, married filing separately, or qualifying widow(er)

The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan-related tax credits for which they may qualify.

 

 

 

 

 

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Governmental 457(b) Plans and Corrections

 “Are there any guidelines for correcting governmental 457(b) plan errors?” 

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Pennsylvania is representative of a common inquiry related to correcting governmental 457(b) plan errors.

Highlights of Discussion

Yes, there are.  The IRS gives a great deal of leeway to governmental 457 plans to self-correct many errors following the guidelines in its Employee Plans Compliance Resolution System (EPCRS) contained in Revenue Procedure 2021-30.

For a general summary, please see the IRS’s website guidance 457(b) Plan Submissions to Voluntary Compliance.  Note the section on “Governmental plan sponsors can self-correct.”  There is no IRS filing or fee associated with self correction, but the sponsoring entity should maintain adequate records to demonstrate it properly corrected the error in the event of a plan audit.

Here are the basics steps to self correction:

  1. Make any necessary corrections to put the participants in the position they would have been in if the error had not occurred.
  2. Document the steps you took to correct the error.
  3. Adjust your administrative procedures, if necessary, to make sure the mistake does not happen again.

Any reasonable and appropriate self-correction method described in Section 6 of EPCRS may be used.

Conclusion

The IRS has included correction principles in its EPCRS for 457(b) plan sponsors.  Governmental 457(b) plan sponsors have the added ability to self-correct many errors.

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“Disregarded Entities,” 403(b)s and 457(b)s

“How are subsidiaries and affiliates of an employer eligible to sponsor a 403(b) plan treated for plan participation purposes?”

Highlights of the Discussion

Generally, in order to offer an IRC §403(b) plan, the sponsor must be an “eligible employer” [e.g., a public school, church, or IRC §501(c)(3) organization as defined under Treasury Regulation (Treas. Reg) §1.403(b)-2(b)(8)(i)]. If the eligible 403(b) sponsor has a subsidiary or other affiliate; it, too, must be an eligible employer, in and of itself, in order to allow its employees to participate in the 403(b) plan [Treas. Reg. §1.403(b)-2(b)(8)(ii)].  There is an exception, however, for “disregarded entities” under Treas. Reg. §301.7701-3(b)(ii), including certain limited liability companies (LLCs) as explained in Chief Counsel Memorandum 201634021.[1] Memoranda are not formal guidance, but they do provide insight into how the IRS interprets and applies its rules and regulations.

In general, an LLC with a single owner may elect to be classified as either an association by filing Form 8832, Entity Classification Election or to be disregarded as an entity separate from its owner pursuant to Treas. Reg. §301.7701-3(b)(ii). If an entity is a disregarded entity, its activities are treated as those of a sole proprietorship, branch, or division of the owner under Treas. Reg. §301.7701-2(a). Consequently, a disregarded entity is treated as a branch or division of the 403(b) plan sponsor and not as a subsidiary or affiliate. Therefore, the employees of a disregarded entity are treated as employees of the entity sponsoring the 403(b), and must be allowed to make elective deferrals in order to satisfy the universal availability rule under Treas. Reg. § 1.403(b)-5(b).

The IRS applies similar reasoning to a governmental or tax-exempt, single-member LLC with a disregarded entity that sponsors a 457(b) plan. The disregarded entity is treated as a branch or division of the governmental or tax-exempt organization, so the employees of the disregarded entity are treated as employees of the governmental or tax-exempt organization and may, but are not required to, participate in the 457(b) plan.

Conclusion

In most cases, if a 403(b) sponsor has a subsidiary or other affiliate; it, too, must be an eligible employer, on its own, in order to allow its employees to participate in the 403(b) plan. There is an exception for certain disregarded entities. Employees of a disregarded entity are treated as employees of the entity sponsoring the 403(b), and must be allowed to make elective deferrals in order to satisfy the universal availability rule.

 

[1] Note:  General Counsel Memoranda are prepared by Chief Counsel attorneys and are intended primarily for IRS internal use. They are similar to standard attorney opinions and indicate the reasoning behind revenue rulings, private letter rulings, and technical advice memoranda.

 

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When Are Retirement Assets Protected from Creditors?

An advisor asked: “Can you give me a refresher on the creditor protection rules for retirement plan assets at the federal and state levels?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Minnesota is representative of a common question on creditor protection for retirement plan assets.

Highlights of the Discussion
• The level of creditor protection for retirement plan assets depends on

1) the type of plan assets, and

2) whether the owner of the assets has filed for bankruptcy and, if not, the governing laws of the state with jurisdiction over the assets.

• The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), effective October 17, 2005, clarified the level of creditor protection for retirement plan assets when the owner has filed for bankruptcy.

Bankruptcy
• BAPCPA amended Section 522 of the Bankruptcy Code to exempt from a debtor’s bankruptcy estate retirement assets that are held in

– IRC Sec. 401(a) plans (e.g., 401(k), defined contribution and defined benefit plans);
– 403(b) plans,
– Traditional IRAs (up to $1 million of contributory assets, indexed periodically),
– Roth IRAs (up to $1 million of contributory assets, indexed periodically),
– Simplified employee pension (SEP) plans,
– Savings Incentive Match Plans for Employees (SIMPLE) plans,
– Church plans,
– Governmental plans,
– Multiemployer plans,
– Eligible 457(b) plans of state and local governments and IRC Sec. 501(c)(3) tax-exempt organizations and
– IRC Sec. 501(a) plans of tax-exempt organizations.

• Eligible rollover distributions under IRC Sec. 402(c) retain the unlimited bankruptcy protection given to them while held in the exempt retirement plan if they are contributed to another eligible retirement plan within 60 days of distribution. Earnings on the rollover assets are protected as well.

Nonbankruptcy
• In nonbankruptcy situations, assets held in ERISA plans are fully protected under the anti-alienation provision of the law [see Section 541(c)(2) of the Bankruptcy Code pursuant to Patterson vs. Shumate, 504 U.S. 753 (1992) and Section 206(d)(1) of ERISA].
• The protection of IRA assets (including rollover amounts) from general creditors of the IRA owner in nonbankruptcy situations falls under applicable state law, with many states—but not all—providing some level of exemption. (Link to State Government Websites for more information)
• Keep in mind that any qualified retirement plan or IRA (including traditional, Roth, rollover, SIMPLE or SEP plan IRAs) may be subject to an IRS tax levy.

Conclusion
The amount of creditor protection for retirement assets depends on whether the investor has filed for bankruptcy or not, and the type of retirement savings arrangements involved. For specific situations, individuals should consult legal counsel.

 

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Two Plans–Two Limits?

“My client is a fireman who participates in the department’s 457(b) plan. He also runs his own electrical business. Can he set up a 401(k) plan and contribute to both plans?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Massachusetts is representative of a common inquiry related to multiple retirement plans.

Highlights of Discussion

This is an important tax question that your client should discuss with his tax professional to make sure all the facts and circumstances of his financial situation are considered. Generally speaking, however, the IRS rules would allow your client to contribute to both his 457(b) plan and 401(k) plan up to the limits in both.

For 2020, 457(b) contributions (consisting of employee salary deferrals and/or employer contributions combined) cannot exceed $19,500, plus catch-up contribution amounts if eligible [Treasury Regulation Section (Treas. Reg. §1.457-5)]  and 457(b) contribution limit].  The same maximum deferral limit applies for 401(k) plans in 2020 (i.e., $19,500, plus catch-up contributions). The catch-up contribution rules differ slightly between the two plan types.

401(k) and 457(b) Catch-Up Contribution Rules

401(k) 457(b)
Age 50 or Over Option

 

Employees age 50 or over can make catch-up contributions of $6,500 beyond the basic 402(g) limit of $19,500 for 2020.

 

Age 50 or Over Option

 

Employees age 50 or over can make catch-up contributions of $6,500 beyond the basic 457 deferral limit of $19,500 for 2020.

 

Special “Last 3-Year” Option

 

In the three years before reaching the plan’s normal retirement age employees can contribute either:

 

•Twice the annual 457(b) limit (in 2020, $19,500 x 2 = $39,000),

 

Or

 

•The annual 457(b) limit, plus amounts allowed in prior years not contributed.

 

Note:  If a governmental 457(b) allows both the age-50 catch-up and the 3-year catch-up, one or the other—but not both—can be used.

Since 2002, contributions to 457(b) plans no longer reduce the amount of deferrals to other salary deferral plans, such as 401(k) plans. A participant’s 457(b) contributions need only be combined with contributions to other 457(b) plans when applying the annual contribution limit. Therefore, contributions to a 457(b) plan are not aggregated with deferrals an individual makes to other types of deferral plans. Consequently, an individual who participates in both a 457(b) plan and one or more other deferral-type plans, such as a 403(b), 401(k), salary reduction simplified employee pension plan (SAR-SEP), or savings incentive match plan for employees (SIMPLE) has two separate annual deferral limits.

Another consideration when an individual participates in more than one plan is the annual additions limit under IRC Sec. 415(c),[1] which typically limits plan contributions (employer plus employee contributions for the person) for a limitation year [2] made on behalf of an individual to all plans maintained by the same employer. It this situation, the annual additions limit is of no concern for two reasons:  1) there are two separate, unrelated employers; and 2) contributions to 457(b) plans are not included in a person’s annual additions [see 1.415(c)-1(a)(2)].

Conclusion

IRS rules would allow a person who participates in a 457(b) plan and a 401(k) plan to contribute the maximum amount in both plans. However, it is important to work with a financial and/or tax professional to help determine the optimal amount based on the participant’s unique situation.

[1] For 2020, the limit is 100% of compensation up to $57,000 (or $63,500 for those > age 50).

[2] Generally, the calendar year, unless the plan specifies otherwise.

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In-Service Distributions from Gov’t. 457(b) Plans

“Can a governmental 457(b) plan permit participants to take plan withdrawals while they are still working?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from North Carolina is representative of a common inquiry related to in-service distributions from retirement plans.

Highlights of the Discussion

Yes, as a result of a law change effective in 2020, governmental 457(b) plans now have the ability to offer in-service distributions to participants starting at age 59 ½, if the sponsor has chosen to implement the provision.

Allowing age-59 ½ distributions was a significant change brought about by the Setting Every Community Up for Retirement Enhancement (SECURE) Act for plan years beginning after December 31, 2019. [See Division M: Bipartisan American Miners Act (Section 104) of the Further Consolidated Appropriations Act, 2020) for authorizing language.]

In the past, 457(b) plan participants could only access their plan assets upon

  • Reaching the age for required minimum distributions,
  • Severing employment,
  • Experiencing an unforeseeable emergency,
  • Qualifying for a one-time cash-out (i.e., the account balance was $5,000 or less, and there had been no employee contributions for at least two years),
  • Termination of the plan, or
  • Divorce, pursuant to a qualified domestic relations order.

Governmental 457(b) plan sponsors who offer these early withdrawals can implement them immediately, and amend their plan documents to authorize them later. Formal amendments to incorporate age-59 ½, in-service distributions are due by the end of the 2024 plan year.

A governmental 457(b) plan distribution would be taxable to the recipient, generally, unless the individual rolled it over to another eligible plan or IRA.

Conclusion

The list of distributable events for governmental 457(b) plans now includes in-service distributions at age 59 ½ for sponsors that choose to offer them.

 

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A tale of two 457(b) plans

“Are there differences between 457(b) plans for tax-exempt entities and governmental entities and, if so, what are the differences?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Wisconsin is representative of a common inquiry related to 457 plans.

Highlights of the Discussion

A plan established under IRC §457(b) allows employees of eligible sponsoring employers to set aside a portion of their income on a tax-deferred basis for receipt and taxation at a later date (similar to a 401(k) or 403(b) plan). You may sometimes hear them referred to as “eligible deferred compensation plans” because they follow the rules of subsection (b) under IRC §457 as opposed to “ineligible” plans as defined under IRC §457(f).

Two types of employers can establish 457(b) plans:  1) state or local governmental entities; or 2) tax-exempt organizations pursuant to IRC §501. While there are some similarities between a governmental 457(b) plan and a tax-exempt 457(b) plan, there are some very important differences, including, but not limited to, funded status, plan loans, catch-up contributions, when amounts are taxable, and eligibility for roll over to another plan.

The IRS has compiled this handy comparison chart (recreated below) to help those who work with or participate in 457(b) plans understand in more detail the similarities and differences between plan operations for the two types of employers that sponsor them.

  Tax-Exempt 457(b) plan Governmental 457(b) plan
Eligible employer IRC §501 tax-exempt employer that isn’t a state or local government (or political subdivision, instrumentality, agency) State or local government or political subdivision or instrumentality or agency
Written plan document required? Yes Yes
Eligible participants Limited to select group of management or highly compensated employees Employees or independent contractors who perform services for the employer may participate
Coverage; nondiscrimination testing No No
Salary reduction contributions (employee elective deferrals) permitted? Yes Yes
Ability to designate all or portion of salary reduction contribution as a Roth contribution No Yes
Employer contributions permitted? Yes Yes
Salary reduction contribution limit, in general Lesser of applicable dollar limit ($19,000 in 2019) or 100% of participant’s includible compensation Lesser of applicable dollar limit ($19,000 in 2019) or 100% of participant’s includible compensation
Increased salary reduction limit for final 3 years before attaining normal retirement age Lesser of:

  • 2 x applicable dollar limit ($38,000 in 2019) or
  • applicable dollar limit plus sum of unused deferrals in prior years (only if deferrals made were less than the applicable deferral limits (Note: age 50 catch up contributions not allowed; no coordination needed))
Lesser of:

  • 2 x applicable dollar limit ($38,000 in 2019) or
  • applicable dollar limit plus sum of unused deferrals in prior years (to the extent that deferrals made were less than the applicable limits on deferrals; age 50 catch up contributions aren’t counted for this purpose)

Note: Can’t use the increased limit if using age 50 catch up contributions. Therefore, in years when an employee is eligible to take advantage of both, the employee can use the higher of the two increases to the limit.

Salary reduction contribution limits- Age 50 catch-up contributions (for individuals who are age 50 or over at the end of the taxable year) Not permitted Salary reduction dollar limit increased by $6,000 (up to a total of $25,000 in 2019)

Note: See above. Can’t use in years that a participant is taking advantage of the increased limit during the final 3 years before attaining normal retirement age.

Timing of election to make salary reduction contribution Before the first day of the month in which the compensation is paid or made available Before the first day of the month in which the compensation is paid or made available
Total contribution limits (both salary reduction and employer contributions) Same as limit for salary reduction contributions. So, any employer contribution limits the amount of salary reduction contribution an employee can make (and vice versa) Same as limit for salary reduction contributions. So, any employer contribution limits the amount of salary reduction contribution an employee can make (and vice versa)
Correcting excess elective deferrals Distribute excess (plus allocable income) by April 15 following the close of the taxable year of excess deferral Distribute excess (plus allocable income) as soon as administratively practicable after the plan determines that the amount is an excess deferral
Contributions to trust? No Yes
Participant loans permitted? No Yes
Hardship distributions permitted? Yes, if both:
1. the distribution is required as a result of an unforeseeable emergency, for example, illness, accident, natural disaster, other extraordinary and unforeseeable circumstances arising from events beyond the participant’s (or beneficiary’s) control
2. the participant exhausted other sources of financing and the amount distributed is necessary to satisfy the emergency need  (and tax liability arising from distribution)
Yes, if both:
1. the distribution is required as a result of an unforeseeable emergency, for example, illness, accident, natural disaster, other extraordinary and unforeseeable circumstances arising from events beyond the participant’s (or beneficiary’s) control and
2. the participant exhausted other sources of financing and the amount distributed is necessary to satisfy the emergency need (and tax liability arising from distribution)
Automatic Enrollment permitted? No Yes
Taxation Earlier of when made available or distribution Distribution
Distributable events
  • Attainment of age 70 ½
  • Severance from employment
  • Unforeseeable emergency (see above)
  • Plan termination
  • Qualified domestic relations order
  • Small account distribution (not to exceed $5,000)
  • Attainment of age 70 ½
  • Severance from employment
  • Unforeseeable emergency (see above)
  • Plan termination
  • Qualified domestic relations order
  • Small account distribution  ($5,000 or less)
  • Permissible Eligible Automatic Contribution Arrangement (EACA) withdrawals
Required minimum distributions under Internal Revenue Code Section 401(a)(9) Yes Yes
Rollovers to other eligible retirement plans (401(k), 403(b), governmental 457(b), IRAs) No Yes
Availability of statutory period to correct plan for failure to meet applicable requirements No Yes, until 1st day of the plan year beginning more than 180 days after notification by the IRS
Availability of IRS correction programs including the Employee Plans Compliance Resolution System (EPCRS) under Revenue Procedure 2019-19 Generally, not available to correct failures for an unfunded plan benefiting selected management or highly compensated employees. May consider closing agreement proposals when nonhighly compensated are erroneously impacted. Can apply for a closing agreement with a proposal to correct failures. Proposal is evaluated according to EPCRS standards.

 

Conclusion

While there are some similarities between governmental 457(b) plans and a tax-exempt 457(b) plans, there are some very important differences of which to be aware.

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Correcting governmental 457(b) plans

“Does the IRS have a correction program that covers 457(b) plans for governmental employers under the Employee Plans Compliance Resolution System (EPCRS)?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Ohio is representative of a common inquiry related to correcting 457(b) plan errors.

Highlights of the Discussion

Effectively, yes. The two avenues of correction for governmental 457(b) plans are 1) self correction (without a submission); and 2) voluntary compliance (VC) with a formal submission. The IRS accepts VC submissions for governmental plans on a provisional basis under standards that are similar to EPCRS, but that are, technically, outside of the correction system. Qualifying governmental entities are listed in Internal Revenue Code (IRC) § 457(e)(1)(A), and include a

  • State;
  • Political subdivision of a state (e.g., a county, city, town, township, village or school district); and
  • Any agency or instrumentality of a state or political subdivision of a state.

Sponsors of governmental 457(b) plans may self-correct their plans without a formal IRS submission if they did not comply with the Internal Revenue Code (IRC) or regulations in some way. A sponsor has until the first day of the plan year that begins more than 180 days after the IRS notifies it of the failure (IRC Section 457(b)(6) and Treasury Regulation Section 1.457-9(a)). Considering the amount of time governmental entities have to self-correct plan errors, they may not need to make voluntary submissions to the IRS under the following procedures.

The IRS will accept VC submissions for some errors related to 457(b) plans for governmental employers (see Section 4.09 of Revenue Procedure 2016-51 through 2018 and Section 4.09 of Revenue Procedures 2018-52 effective January 1, 2019.) Note, however, the IRS, generally, will not address any issues 1) related to the form of a written 457(b) plan document; nor 2) problems associated with top-hat[1] plans of tax-exempt entities. However, the IRS may consider a submission where, for example, the top hat plan was erroneously established to benefit the entity’s nonhighly compensated employees and the plan has been operated in a manner that is similar to a qualified plan.

The IRS’s VC unit retains complete discretion to accept or

or reject any requests for correction approval. If accepted, VC will issue a special closing agreement.

The steps to voluntary correction are

  1. Complete IRS Form 8950, Application for Voluntary Correction Program (VCP).
  2. Compose a cover letter that describes the problem and includes a proposed solution.
  3. Mail both the form and cover letter to the address listed in the instructions to Form 8950.

Sponsors will receive IRS Letter 5265 acknowledging the submission along with a control number for reference.

Conclusion

The IRS has two avenues of correction for governmental 457(b) plans: self correction without a submission; and voluntary compliance with a submission. Sponsors can refer to IRS Form 8950 and its instructions, along with Revenue Procedure 2016-51 through 2018, and 2018-52 beginning in 2019 for complete details.

 

[1] Nongovernmental 457(b) “Top Hat” plans must limit participation to groups of highly compensated employees or groups of executives, managers, directors or officers. The plan may not cover rank-and-file employees.

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Retirement Savings Tax Credit

“What contributions are eligible for the retirement savings tax credit?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Oklahoma is representative of a common inquiry regarding available tax credits for retirement contributions.

Highlights of Discussion

IRA owners and retirement plan participants (including self-employed individuals) may qualify for a retirement savings contribution tax credit. Details of the credit appear in IRS Publication 590-A and here Saver’s Credit.

The credit

  • Equals an amount up to 50%, 20% or 10% of the taxpayer’s retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040A or 1040NR);
  • Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan; and
  • Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.

Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to

  • A traditional or Roth IRA;
  • 401(k),
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA,
  • Salary Reduction Simplified Employee Pension (SARSEP) IRA,
  • 403(b) or
  • Governmental 457(b) plan.

In general, the contribution tax credit is available to individuals who

1) Are age 18 or older;

2) Not a full-time student;

3) Not claimed as a dependent on another person’s return; and

4) Have income below a certain level.

2018 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $38,000 AGI not more than $28,500 AGI not more than $19,000
20% of your contribution $38,001 – $41,000 $28,501 – $30,750 $19,001 – $20,500
10% of your contribution $41,001 – $63,000 $30,751 – $47,250 $20,501 – $31,500

*Single, married filing separately, or qualifying widow(er)

The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan related tax credits for which they may qualify.

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