contributions to a 457 Plan

[Guest John Rose]

I administer a 457 Plan in which the employer contributes for certain executives. These employer contributions are in addition to these executives' base salaries. Should these contributions be considered in determining these executives' Final Averge Earnings in the defined benefit plan in which they also participate? FAE in the defined benefit plan is defined as the highest consecutive 36 months of earnings excluding bonuses and other allowances.

[Carol V. Calhoun]

Definitely not! Deferrals under a nongovernmental section 457(B) plan are not part of compensation for purposes of the nondiscrimination rules of Code sections 401(a)(4), 410(B), etc. Treas. Reg. § 1.415-2(d)(2); incorporated by reference in Code section 414(s). And because a nongovernmental 457(B) plan must be limited to highly compensated or management employees, adding in the deferrals would favor such employees as compared with nonhighly compensated employees, thereby creating problems under the nondiscrimination rules.

[Kirk Maldonado]

I had asssumed that, because this was posted in the governmental plans message board, this question relates to a governmental plan.

Please clarify the nature of the employer.

[Carol V. Calhoun]

In my earlier post, I had obviously made the opposite assumption, primarily because use of the term "executives" is pretty rare among governmental plans. (Since there is no separate 457 board, this one tends to get all the 457 questions.)

However, I just got an e-mail from John, saying that the plan he is discussing is a governmental plan. Given that fact, the definition of compensation is regulated by the Internal Revenue Code only for very limited purposes (e.g. the 100% of compensation limit of section 415©), the 415(B) percentage of compensation limit would not apply, and the nondiscrimination rules would not apply. Thus, you could include section 457(B) deferrals in the definition of compensation for purposes of calculating benefit accruals under a defined benefit plan.

[Guest John Rose]

Thank you for the information, and I apologize for the terminology "executives," however, I am still unclear. Would employer contributions be considered "deferrals?" Again as I have stated the contributions are in addition to these employees' salaries. So these contributions on their behalf would not be compensation to them if this Plan did not exist.

[Everett Moreland]

I sometimes deal with this question in governmental plans that have vague definitions of the compenation on which contributions or benefits are based. This is a matter of interpreting the plan document. Determining the answer generally requires collecting a lot of information from the client about such things as past adminstrative practice, whether the terms used in the plan document are similar to terms used in personnel policies or salary schedules, whether the term has a known meaning to the client, the terms of collective bargaining agreements, and on and on. After collecting this information I often have the client (who generally has authority to interpret the plan) adopt an administrative interpretation about whether the item is included or excluded from compensation.

[Guest John Rose]

Thank you so much. I believe that is the way we will proceed.

[Carol V. Calhoun]

Under 457, "deferrals" includes employer nondiscretionary contributions, as well as salary reduction contributions. This is different from the situation for 401(k) or 403(B) plans.

As Everett says, the big issue is plan interpretation; the IRS imposes few constraints.

[Guest John Rose]

Thanks Carol