Employer contributions to 457

[Guest Jennifer Beason]

What are some ways that a government can make contributions to a retirement plan? Can a matching contribution be made to a 457 Plan?

[Guest Kathleen Meagher]

Your question is pretty general, so here's a pretty general answer:

A governmental employer can establish a tax-qualified defined contribution plan (either a profit sharing or money purchase pension plan) to which it contributes a defined amount annually. Generally, this is a percentage of compensation. If the plan is a profit sharing plan, (ok to have even though gov'ts. don't have profits) the employer can decide each year how much to contribute, In a money purchase pension plan, there is a fixed annual contribution amount.

The government could also establish a tax qualified defined benefit plan. Here, the plan gives each participant a monthly benefit amount at retirement, which the participant earns or "accrues" based on service. The employer contributes an actuarially determined amount necessary to fund the accrued benefits--the contribution amount can vary from year to year. Or, the employer could contribute to a statewide pension system or to a multiemployer plan sponsored by a union. In a statewide system, each agency typically has a separate contract under which its contribution amount is searately established. Multiemployer plans have contribution rates established by the trustees.

Tax qualified plans must satisfy certain IRS requirements, but these are much less stringent for governmental plans than for plans of private employers. Because there is no requirement that the plan avoid discrimination in favor of the highly compensated, these plans can be targeted to cover, or provide higher benefits to, particular groups, including execs. and managers.

If the govermental employer is an educational institution it can permit employees to make deferral contributions to a tax sheltered annuity under Code section 403(B). The employer can also make its own, non-deferral contributions. These are aggregated with deferrals in applying section 403(B) contribuition limits. Govermental agencies that perform the function of a private charity (like hospitals) can also apply to the IRS for the ability to sponsor 403(B) plans.

Governmental employers can permit employees to defer salary under a 457 plan, and the employer can also make non-deferral contributions. Matching contributions are permitted, or non-deferral contributions can be made as a percentage of salary. Employer 457 contributions can be subject to a vesting schedule (if permitted by state law). It is even possible to structure a 457 plan as a defined benefit plan, although I do not think this is very common. 457 plans may be designed to benefit only certain employees, and they are not subject to any discrimination requirements. It's important to remember that employee deferrals and employer non-deferral contributions must be aggregated when applying the 457 annual limits--there is $8,000 dollar limit and a limit of 33.3% of compensation.

It's also important to bear in mind the fact that these plans are subject to state law, which may impose limits on the kind of contributions employers can make and the way plans can be structured.

That's a long-winded answer! Hope it helps.

[This message has been edited by Kathleen Meagher (edited 08-19-98).]

[Guest Jennifer Beason]

Thanks for the info on governmental plans.

On a 457 Plan - can a plan that previously excluded elected officials be modified to allow them to make contributions?

I understand that older 457 plans have to be changed so that the assets are held in a trust for the benefit of the employees and not subject to the creditors of the gov't.

I know of a 457 plan established prior to 8/20/96 funded by an annuity. Does this plan have to be revised to that the assets are held in a trust? Does the name on the group annuity contract have to be changed or is the very nature of the annuity considered a trust?

Thank you for any information you can provide.

[Guest CVCalhoun]

The annuity can still be used, but will probably need to be modified to meet the new requirements. Before the change in law, 457 plans could theoretically not be funded. Thus, the annuities under them were typically owned by the governmental employer, and subject to the claims of its creditors. To meet the new requirements, the annuities must not be subject to the claims of the employer's creditors.

As for elected officials, they can be added to an existing 457 plan. However, if the plan is one which does not meet the requirements of present-day section 457 (e.g., because it allows deferrals of more than the maximum dollar limit), but is grandfathered, the elected officials would not be grandfathered.

With regard to matching contributions, they are permissible but typically not a good idea. The reason is that all contributions to a 457 plan (including matching contributions) are aggregated in applying the maximum dollar limits. A better idea would be to have employee contributions made to the 457 plan, but to have the employer match made to a qualified plan. That way, only the employee contributions would be subject to the dollar limits on contributions to a 457 plan.

[Guest Ralph Amadio]

457 plans are subject to the specifics of State law, particularly in the matter of contributions. Since it appears that after January 1, 1999, we will be be dealing with a "governmental" plan, we may assume that the state law would preempt federal law in this matter. In California, for instance, there is no provision for anything other than employee deferral in the Government Code.

The law also specifically deals with "mandatory plans" as "pension trusts".

I would request an opinion of the public agencies counsel, or possibly of the state attorney general before jumping in with a employer contribution to a 457.

As to other plans, 401(a) plans provide more flexibility, including collective bargaining flexibility for different bargaining units, different classes of employees, etc.