457(b) limited catch-up

[Guest mike webb]

Employer X, who has maintained a 403(B) plan for several years establishes a 457(B) plan in 2002. For purposes of the utilization of the "limited catch-up" rule under Treas Reg. 1.457-2(f), would employees who deferred the maximum to the 403(B) in all prior years of employment be considered to have used up their prior year limitations, due to the coordination requirements for 403(B) and 457(B) deferrals that exisited prior to 2002? Or would such employees be considered to have used up none of their prior year limitations, since these deferrals were made to a 403(B) plan as opposed to a 457(B) plan? Treas Reg 1.457-2(f)(2)(ii) seems to imply the latter scenario, which would enable virtually everyone who is new to a 457(B) plan and is within three taxable years of the retirement age under the plan to defer double the exisitng 457(B) limit, beginning in 2002 ($22,000 in 2002). However, I have seemed some published guidance that would imply that the former scenario is correct (i.e., the 403(B) deferrals "count" toward the catch-up limitation, and thus employees who had previously maximized deferrals to the 403(B) would not be permitted to use the limited catch-up).

Would appreciate anyone's thoughts on this subject.

Thanks in advance.

[Guest lmrice]

First of all, I am no expert in this field. However, we do have a 403(B) and a 457 plan. I had an in-depth conversation last week with our 457 plan provider regarding the new tax laws and how the catch up provision will be affected. I was given the same information you have.

A) 403b contributions will NOT be counted towards the limit; b) The maximum 457 limit is being increased to $11k; C) The employee, within 3 years of retirement, can double the maximum ($11k x 2 = $22), regardless of past contributions to 457 or 403(B).

Hope this helps confirm what you've heard.

[Guest mike webb]

Thanks, Imrice; all published guidance has indicated that your statements A) and b) are quite true. However, the 1.457-2(f) regulations run counter to your C) statement, (at a minimum, the regulations state that past 457(B) contributions are counted in determining eligibility for the limited catchup (within 3 years of retirement) election. I have yet to see any published guidance that indicates that these regulations have been repealed by EGTRRA.

If your C) statement is indeed true, it presents an incredible opprotunity to all employees of governmental employers (and certain management and highly compensated employees of private tax-exempts) who maintain both a 403(B) and 457(B) plan and are within three years of the retirement age of the 457(B) plan, regardless of their past contributions to either plan. Such employees could defer up to $34,000 in 2001 ($12,000 to the 403(B) plan--$11,000 plus the $1,000 age-50 catch-up, and $22,000 via the limited catch-up election to the 457(B) plan). In addition, if the employee is employed by a public school (or another qualfiying tax-exempt organization) and has been employed at least 15 years with that organization, up to an additional $3,000 could possibly be deferred to the 403(B) plan, for a total possible deferral of $37,000! Staggering...

Can anyone confirm Imrice's statement with a regulatory cite that past contributions to a 457(B) plan will no longer be a factor in determining elgibility for the limited catch-up election under 1.457-2(f) in 2002 and beyond, and that past contributions to a 403(B) plan are not a limiting factor with regard to the election, even though coordination of the two limits is required prior to 2002?

Imrice, Thanks for you assistance in this regard.

[Ellie Lowder]

The most recent publication 571, dated June, 2001, says that 403(B) Contributions (for the years you are eligible to participate in BOTH a 457(B) and a 403(B) plan) do count as contributions for purposes of the 457(B) catch up election. It also says that if "you elect to defer the maximum amount to your 403(B) account, you cannot use the catch-up limit" in the last 3 tax years before retirement. Even if you don't elect to defer the maximum amount to the 403(B) plan, the amounts you did contribute to the 403(B) plan are taken into consideration for purposes of the 457 catch up.

However, if you weren't eligible to participate in the 457(B) plan (which many public school employees aren't), no 403(B) contributions are counted.

Unless otherwise clear in regulation to dispute it, this would be the position the IRS would take, I would think.

Bummer!

[Guest Harvey Carruth]

In the previous post to this thread, Ellie Lowder referred to the most recent IRS Publication 571 (Revised June 2001) and concluded that the amounts a participant contributed to a 403(B) plan must be taken into consideration for purposes of the 457 catch up when the participant is eligible to participate in both a 457(B) and a 403(B) plan.

I concur with Ellie's conclusion for simultaneous eligibility up through 2001. My interpretation of EGTRRA 2001 is that, beginning in 2002, when calculating "underutilized 457(B) contributions in previous years" 403(B) contributions would be taken into account for years 1979-2001, but would not be taken into account for 2002 and beyond.

For completeness, the June 2001 version of Publication 571 and the complete text for EGTRRA 2001 may be found at the following websites, respectively:

Publication 571 (Rev. June 2001)

EGTRRA 2001

Many of the comments I hear and read suggest that there is a widespread misconception that an eligible employer can start up a 457(B) plan in 2002, not having sponsored one during any of the years 1979-2001, and immediately allow participants for whom 2002 is one of their three years preceding normal retirement age to contribute $22,000 during 2002 (e.g., see the original post to this thread by Mike Webb). My understanding of the pertinent Code and Regulation sections, even as adjusted for EGTRRA 2001, is that such contributions will not be allowed.

Reg. Section 1.457-2(f)(2) includes the following statement:

"A prior taxable year shall be taken into account under subdivision (ii) of this subparagraph (2) only if (A) it begins after December 31, 1978, (B) the participant was eligible to participate in the plan during all or any portion of the taxable year, and © compensation deferred (if any) under the plan during the taxable year was subject to a plan ceiling established under paragraph (e)(1) of this section."

In fact, these three requirements are reiterated in Chapter 8 of the new Publication 571 in the subsection entitled Catch-Up Limit. Clearly, if no 457(B) plan was offered during a pre-2002 taxable year, such prior taxable year shall not be taken into account when determining "underutilized amounts" for purposes of the limited catch-up provision of 457(B), irrespective of whether or not the employee contributed to a 403(B) plan for such taxable year.

Moreover, if an employee becomes eligible to contribute to a 457(B) plan for the first time in 2002 and contributes the maximum allowable under the regular 457(B) limits each year from that point forward, that employee will never be able to take advantage of the limited catch-up provision, since there will never be any "underutilized amounts."

Section 611(e)(1)(B) of EGTRRA 2001 amends IRC 457(B)(3)(A) by striking "$15,000" and inserting "twice the dollar amount in effect under subsection (B)(2)(A)". To my knowledge, EGTRRA 2001 is silent with respect to IRC 457(B)(3)(B), so one must assume that IRC 457(B)(3)(B) and regulations pertaining thereto will remain in effect [specifically Reg. Section 1.457-2(f)(2)].

[Guest mike webb]

Thanks Harvey and Ellie, for your thoughtful and well documented replies. I believe that you have provided important clarification as to when the limited catch-up can and cannot be used, in light of the design opportunities created by EGTRRA.

Thanks again!