Catch UP Contributions for 457 plans

[Guest Steve C.]

Anyone have thoughts on clarifying the application of new Code section 414(v) to section 457 plans? Section 414(v)(6)(A)(iii) defines "applicable employer plan" as an eligible deferred compensation plan under section 457 of an eligible employer described in section 457(e)(1)(A). Section 457(e)(1)(A) states "a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State."

This definition specifically excludes section 457(e)(1)(B), which would include section 457 plan maintained by "any other organization (other than a governmental unit) exempt from tax under this subtitle" (i.e., tax-exempt organizations. This distinction is not mentioned in the house, senate, or conference committee reports.

What is the rationale for not providing for catch-up contributions for participants of section 457 plans maintained by tax exempt organizations?

[MGB]

One word....FUNDING.

A governmental 457 must have a trust with invested assets. A 457 plan of a tax-exempt organization is an unfunded plan by definition. Although many actually set up funds in order to compute investment income, that money is an asset of the organization, it is not in a separate trust. This is the same arrangement as a nonqualified plan of a taxable organization.

They are only allowing catch up contributions to plans where the money is actually in a trust.

[Ellie Lowder]

501© organizations are eligible to establish only Top Hat 457(B) plans because of ERISA issues. Since those plans can benefit only HCEs or select group of management employees, I rather suspect that is another reason age 50+ catch ups are not permitted.

[davef]

I would also surmise that the catch-up is available to under gov't 457(B) plans because it, in some ways, compensates for the fact that governmental entities can't maintain 401(k) plans (which also have the catch-up option). Also, because gov't 457(B) plans are available to all employees, Congress might have been more inclined to give the catch-up to these persons, rather than the top-hat group under tax-exempt 457s (as Ellie. L mentioned).