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457(b) and 2001 Tax Bill


Guest WilliamC

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Guest WilliamC

We are a not-for-profit (a 403©6). We already have a 401(k) plan and a DB plan. We are looking at putting in a NQDC arrangement. We had been looking at 457(f) and its substantial risk of forfeiture because contributions to 457(B) would be offset by our 401(k) plan.

Under the new tax bill, however, it appears that contributions to 457(B) plans would NOT be reduced by 401(k) contributions. What's more, the limit under 457 (B) is being increased to $11,000 and balances will be eligible for rollover! These changes are all be effective in 2002.

Am I missing something? Can I really give my executives the opportunity to defer $11,000 in the 401(k) and another $11,000 in a 457(B) -- all eligible for rollover?

I am also wondering this: can my plan have both a 457(B) side and a 457(f) side to allow executives to defer amounts in excess of $11,000 -- understanding, of course, that any amount that goes over into the 457(f) side is subject to the substantial risk of forfeiture rules?

Thanks for your help.

WilliamC

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457(B) plans of tax-exempt employers must be unfunded and maintained primarily for "a select group of management or highly compensated employees." Participants can contribute the full amount to both a 401(k) plan and a 457(B) plan. Participants cannot rollover payments from a 457(B) plan of a tax-exempt employer; these payments will be taxed as wages.

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Guest WilliamC

Thanks, Everett!

Will only government 457(B) plans be permitted to provide rollovers?

WilliamC

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Guest JPotosky

Let me understand the implications of this. When calculating the limits for contributions to retirement plans under 402(g), 403(b)and 401(k) deferrals are lumped together to reach the 2002 cap of $11,000. However, 457(B) plans are treated separately and contributions to other accounts have no impact on what you can contribute to a 457(B). So you are saying that executives of non-profit and educational entities could have a 403(B) or 401(k) and a 457(B) and that the executives of those entities could have total deferrals of $22,000 in the two plans. Sounds like an extremely attractive perk for a non-profit executives.

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Guest Taxwoman

I disagree.

Under the old rules, if someone participated in a 457 plan and a 401(k) plan, the maximum deferral amount between plans would be limited to the 457 deferral amount, which is usually less than the 401(k) and 403(B) deferral amount.

Now, under the new rules, the limits are not combined- however the individual deferral limit still does. Which means that between both plans, one individual cannot defer in excess of the deferral limit. Participating in both plan types will not give individuals two separate limits.'

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Following is Section 615 of the Act:

SEC. 615. REPEAL OF COORDINATION REQUIREMENTS FOR DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.

(a) In General.--Subsection © of section 457 (relating to deferred compensation plans of State and local governments and tax-exempt organizations), as amended by section 611, is amended to read as follows:

"© Limitation.--The maximum amount of the compensation of any one individual which may be deferred under subsection (a) during any taxable year shall not exceed the amount in effect under subsection (B)(2)(A) (as modified by any adjustment provided under subsection (B)(3))."

(B) Effective Date.--The amendment made by subsection (a) shall apply to years beginning after December 31, 2001.

Following is the Conference Committee report on Section 615 of the Act:

(e) Repeal of coordination requirements for deferred compensation plans of state and local governments and tax-exempt organizations (sec. 205 of the House bill, sec. 615 of the Senate amendment, and sec. 457 of the Code)

Present Law

Compensation deferred under an eligible deferred compensation plan of a tax-exempt or State and local government employer (a "section 457 plan") is not includible in gross income until paid or made available. In general, the maximum permitted annual deferral under such a plan is the lesser of (1) $8,500 (in 2001) or (2) 33 1/3 percent of compensation. The $8,500 limit is increased for inflation in $500 increments. Under a special catch-up rule, a section 457 plan may provide that, for one or more of the participant's last three years before retirement, the otherwise applicable limit is increased to the lesser of (1) $15,000 or (2) the sum of the otherwise applicable limit for the year plus the amount by which the limit applicable in preceding years of participation exceeded the deferrals for that year.

The $8,500 limit (as modified under the catch-up rule), applies to all deferrals under all section 457 plans in which the individual participates. In addition, in applying the $8,500 limit, contributions under a tax-sheltered annuity ("section 403(B) annuity"), elective deferrals under a qualified cash or deferred arrangement ("section 401(k) plan"), salary reduction contributions under a simplified employee pension plan ("SEP"), and contributions under a SIMPLE plan are taken into account. Further, the amount deferred under a section 457 plan is taken into account in applying a special catch-up rule for section 403(B) annuities.

House Bill

The House bill repeals the rules coordinating the section 457 dollar limit with contributions under other types of plans.70

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70The limits on deferrals under a section 457 plan are modified under other provisions of the House bill.

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Effective date.-- The House bill is effective for years beginning after December 31, 2001.

Senate Amendment

The Senate amendment is the same as the House bill.

Conference Agreement

The conference agreement follows the House bill and the Senate amendment.

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Guest JPotosky

Your reading of the legislation is identical to some of the informal responses that I have heard. However, I have yet to see any formal analysis of the tax law from the accounting firms, consulting firms, or law firms supporting that position. In addition, I have not seen anything formal from any financial services firm (mutual fund, insurance company, or brokerage firm) taking this position. This concerns me. All I have seen is a restatement of the new law without any analysis of the implications. If you have seen anything that looks halfway like an analysis supporting this analysis, I am very interested in seeing it.

Joe P

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Joe, I'd like to know which analyses from accounting firms, consulting firms and law firms you HAVE been reading. I have 27 of them (7 consulting firms, 4 accounting firms, 12 law firms and 4 professional associations) that clearly state this in their analysis, including our own (I know, because I write ours).

Also having been involved in the crafting of the legislation, I KNOW this was the intent and there is no ambiguity whatsoever.

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Guest JPotosky

I appreciate your direct response. My intention is not be obtuse, but rather to make sure I have a correct answer before I advise anybody. I have seen a number of overviews of the legislation which state that 457(B) deferrals will not limited by deferrals in other programs. None of them state specifically that the implication is that a non-profit executive in 2002 could possibly defer a total of $22,000 between the two programs (ie 403(B) and a 457(B)). Admittedly, the reviews I have looked at are all web based via links from benefitslink. If your overview or the reviews you are referring to state specifically that nonprofit executives could potentially defer $22,000 in 2002 or something similar to that effect, I would be interested in seeing them.

Joe Potosky

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