Repeal of 457 offset

[jlf]

Effective 1-01-02 one may use either a 401(k) or a 403(B) along with a 457 to contribute a combined maximum of $22,000.00.

What other types of plans can be used along with a 457 to accomplish the same objective?

Best wishes.

Joel L. Frank:)

[davef]

Old Code Section 457© listed the types of deferrals that were subject to the offset. They are deferrals under 401(k) plans, 403(B) TSAs, SARSEPs, and SIMPLE plans. The elective deferral limits for 401(k) plans, 403(B)s and SARSEPs will be $11,000 next year. But the limit for SIMPLEs will only be $7,000, so the combo limit for a SIMPLE and a 457(B) will be $18,000 (not counting any catch-ups). Hopefully you won't run into too many employers with SARSEP/457(B) combinations, since gov'tal entities and tax-exempts can't have SARSEPs.

[jlf]

Dave, according to your post a governmental 401(a) DC plan is currently not subject to the offset. So one may currently place $8500.00 in the same employer's 457 plan and make additional contributions, subject to the Plan's limit, to his individual account in the 401(a) plan.

Is the following allowed for 2002? Salary $50,000.00

Plan Document permits a contribution of up to 10% of salary to the 401(a) plan.

401(a) contribution .....................$ 5,000.00

457 contribution.......................... 11,000.00

403(B)/401(k) contribution............. 11,000.00

Total Deferral for 2002 ................ $27,000.00

Best wishes,

Joel L. Frank

[davef]

Your example would only apply to an employer that was eligible to have either a 401(k) or 403(B) plan and a 457 plan. So, it would not apply to a governmental employer, since they can't have 401(k) plans. In that case, you would only have the 401(a) and 457 contributions to deal with. The 401(a) contribution could be as high as $40,000 (100% of pay) in 2002 due to the new 415© limits.

The example would, however, apply to a tax-exempt employer, since it can sponsor a 401(k) plan or a 403(B) plus a 457(B) plan.

[jlf]

Dave....

So, as I understand your last post, one who is eligible for a governmental 401(a) DC Plan may defer, effective 1/1/02, the lesser of $40,000 or 100% of pay. Does this mean that a public employee that is offered a 401(a) plan and a 457 plan may defer a maximum of $51,000.00?

Best wishes,

Joel L. Frank

[davef]

I believe you are correct as to the maximum $$ that could be contributed for a participant who is in a gov't 401(a) plan and a 457(B) plan of the same employer. You could add another $1,000 under the 457(B) plan if the person qualifies for the catch-up contribution. I'm somewhat cautious about referring to all of these amounts as "deferrals" since that term, to me, means pre-tax employee contributions. I would consider the amounts contributed to the 457(B) plan to be deferrals, but not those to the 401(a) plan. (In all of these discussions, I am assuming that we are not talking about a grandfathered gov't 401(k) plan.)

One issue that arises if a plan allows a person to defer 100% of pay into a 401(k) plan or a 457(B) plan is how other things are "paid for", such as FICA taxes and any pre-tax cafeteria plan contributions.

[jlf]

Dave..........a public school district may offer a 401(a), a 457(B) and a 403(B). Under this scenario could an employee max out at $40,000+11,000 +11,000 for a total of $62,000.00?

Best wishes,

Joel L. Frank:)

[davef]

Looking at new Code Sec. 415(k)(4) [added by EGTRRA], I believe that the School District could contribute more to the 403(B) plan -- up to the 415 limits. Of course employee deferrals would be subject to the 402(g) limits.

That section appears to codify what is currently in Reg. Sec. 1.415-7(h). The individual is considered to maintain the 403(b)contract and, thus, a separate 415 limit will apply to the 403(B) contract (assuming there are no controlled group rules that come into play). So, the employee would have two 415 limits -- one under the School District's 401(a) plan and one under the 403(B) TSA. Many 403(B)s allow only employee deferrals and no employer contributions (such as matches), so your example is likely to be the norm. But I think the ultimate limit in your example is $91,000 (40 + 11 + 40). Sounds too good to be true.

Do you agree, or have I overlooked something?

[jlf]

Dave.........now I know how Christopher Columbus must have felt when he came upon the "new world"!! Is this a great country or what?

Please permit me to request a clarification. For 2002, what is the maximum amount one may electively contribute on a tax-sheltered basis to a governmental 401(a) DC plan?

Best wishes,

Joel L. Frank

[davef]

Other than "pick-up" contributions under Code Sec. 414(h), or a grandfathered gov't 401(k) plan, I would say that no dollars can be electively deferred on a tax-sheltered basis under a governmental 401(a) plan.