Combined eligible 457/403(b) elective deferral limit

[Guest mike webb]

Scenario: Employee A is a particpant in a 403(B) plan and a eligible 457 plan with two separate employers in 1999. Employee A defers $8,000 into the 457 plan, thus reducing his combined elective deferral limit for the 403(B) and 457 plans to $8,000 in 1999.Employee A also receives an employer discretionary (non-salary reduction) to the 403(B) of $5,000.

I know that the employee cannot make any deferrals into the 403(B) and, depending on the other limitations, may have better off not deferring at all into the 457, since he/ she would have had a greater 402(g)limit of $10,000 on elective deferrals to the 403(B).

My problem is with the 403(B) employer contribution. 1.457-1(B)(2)(B), Example 6, seems to imply that the employer contribution of $5,000 would be an excess, since the 457©(1) $8,000 limit would apply to the combined amount of deferrals to the 457 and 403(B) plans, as well as employer contributions to the 403(B).

In fact, the 403(B) Answer Book, Section 3:73, expressly states that "if an individual is participating in a Section 403(B) contract and a Section 457(a) plan and makes an $8,000 (beginning January 1, 1998) deferral contribution (the individual's applicable Section 457 limit for that year) to the Section 457(a) plan, neither the individual nor the employer may make any contributions (elective or nonelective) to the Section 403(B) contract for that year."

However, this logic seems to fly in the face of the fact that the 402(g) limit is an elective deferral limit, and that the reduction in that limit to $8,000 under 457©(2) would logically apply only to elective deferrals, not employer contributions to the 403(B) (though I do realize that it would apply to employer contributions to the 457, since all contributions to the 457 are considered to be "deferrals" of compensation).

Do 403(B) employer nonelective contributions reduce, dollar for dollar, the $8,000 limit on combined deferrals for an employee who is a particpant in a 457 and a 403(B) plan? Or is the 403(B) Answer Book incorrect on this point? Or am I missing something entirely (certainly a possibility)?

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Mike W.

[Michael Devault]

It is my understanding that all 403(B) contributions, whether elective or nonelective, reduce the elective deferral limit for qualified 457 plans.

I've tried to figure out why this is so, and have concluded that the purpose of 457 plans is to allow employees an opportunity to save money for their retirement when their employer may not be inclined to provide a nice retirement plan due to budget constraints, etc. that state & local governments face all the time. In those instances where employers DO contribute to a retirement plan, it theoretically reduces, on a dollar for dollar basis, the need for the employee to defer their current income.

My theory may not be correct, but at least it makes a believable story! Hope this is of some benefit to you.

[Dowist]

Unfortunately, it's in the statute. See IRC ss 457©(2). "Any amount excluded" under 403(B) reduces the 457 amount.

(Note also that the amounts excludable under 457 could be attributable to either employer or elective contributions.)

[Guest Brent Rowell]

I do not believe that 403(B) non-elective contributions from another employer should count toward 457

FINAL-REG, 99FED ¶21,533, §1.457-2, Eligible State deferred

compensation plan defined.--

(ii) 331/3% of the participant’s includible compensation for

the taxable year,

reduced by any amount excludable from the participant’s gross

income for the taxable year under section 403(B) on account of

contributions made by the State.

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It's the last word in the regulation that I'm trying to stress

In other words I believe the employee could contribute $2000 elective to the 403(B) and continue $8000 contribution to 457

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Brent

[Guest mike webb]

Unfotunately, Brent (at least for me, since I am of the opinion that the inclusion of 403(B) nonelective contributions as part of the $8,000 limit defies logic), I believe that the regulation you cite only applies to the reduction of the contribution to the 457 plan itself under 457©(1) not the combination of 403(B) and 457 plans under 457©(2). In other words, the regulation that you cite indicates that the "lesser of the 33 1/3 percent or $7,500(now $8,000)" limit of a 457 plan itself is reduced only by State (public school)403(B) plan contributions, not by those of a non-State 501©(3).

457©(2) specifically address a combined limit of $8,000 that applies to the combination of contributions in both plans. Note the different phrasing in 457©(2)(A), which states that "any amount" (not just state contributions, and presumably not just elective deferrals) "excluded from gross income under section 403(B) for the taxable year" reduces that $8,000 limit. Reg. 1.457-1(a)(3) cites a similar combined limit, and 1.457-1(B)(2)(B) provides an actual example (Example 6) that utilizes employer non-elective contributions to a 403(B) plan.

Brent (or anyone else), let me know if you disagree, since I personally think that 457©(2) and the 457 regs. are logically flawed in applying 457 logic (that all monies contributed to a 457 are "elective defrrals", whether contributed by the particpant or the employer-- see Michael Devault comment, above) to what is clearly an elective deferral limit under 403(B), reducing a $10,000 402(g) elective deferral limit to a combined employer/employee contribution limit of $8,000.

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Mike W.

[Guest Brent Rowell]

My logic went in the opposite sequence ...

Employee has $2000 elective 403(B) at company 1.

Employee wishes to defer maximum into 457 plan at company 2 (might be governmental)

I see nothing precluding using $8000 as the limit. (assuming wages are high enough to cover % rules at both companies

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Brent

[Guest mike webb]

Brent, I do not disagree with your logic. However, I think the code and regs. appears to disagree with our mutual logic. In fact, the specific example you give (with a 403(B) elective deferral instead of my initial example of a 403(B) nonelective employer contribution), is cited in the IRS examination guidelines for 403(B) plans. Section V.A.1(1), Limit on Elective Deferrals (General), Example 9, cites a a partipant who defers $2,000 into a 403(B) plan and $8,000 into a 457 plan at two separate employers. The example goes on to state that the particpant in this scenario would have an excess deferral of $2,000 under the 457 plan because of 457©(2). Unfortunately, the examination guidelines are silent on whether there would be a similar excess if the 403(b)plan contribution were nonelective. However, the code and regs. cited above seem to point in that direction.

Any dissenters to this train of thought would be appreciated, because, as previously stated I have a hard time believing the 403(B) employer nonelective contributions would apply against a limit that was clearly intended for elective deferrals.

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Mike W.

[Guest Brent Rowell]

I read 457© again...

I totally hate and disagree with the result, but I guess that the law really does not like a 457 403(B) combination. I put up a good fight ... but I am afraid I must concede

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Brent