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Can a municipality sponsor a 457 plan for all employees and make an em


Guest PLHart

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We have not had much experience with governmental plans and wish to find a quick answer to question posed above. Thanks.

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Your subject line got a bit garbled. But if you are trying to figure out whether a municipality can match contributions to a 457 plan, the answer is yes. This can be done within the context of the 457 plan itself, but that is usually not a good idea. The reason is that all contributions, employer and employee, to a 457 plan are counted in computing the 402(g) limit.

To maximize contributions, the employer can set up a 401(a) defined contribution plan. The employees can then make their contributions to the 457 plan, and the employer can put its match into the 401(a) plan.

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Employee benefits legal resource site

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Guest KClarke

If a plan is set up along these lines, what are the limits for contributions by the employee and the employer? And can the employee make contributions to both the 457 and the 401(a)? If the answer to that is yes, would the employee's contribution to the 401(a) have to be a post-tax contribution or can it be pre-tax as well?

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And Carol will correct me if I'm wrong, but I believe the employer can pick and choose who gets the matching contribution to the 401(a) plan without worrying about Code nondiscrimination issues since TRA '97 repealed nondiscrimination rules for most governmental employers.

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JWK, you're right in this instance, since the employer is a municipality. But people should bear in mind the possibility of 401(m) being applied to governmental plans other than those of state and local governments (e.g., plans of the federal government or international organizations). See Notice 99-40. Obviously, you wouldn't need to worry about 457 matches in such situations, since those types of governmental units are not subject to 457. However, you do need to take into account the general issue of 401(m) and other nondiscrimination rules eventually applying to such plans.

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Employee benefits legal resource site

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Essentially, the limit on the employer's contributions to the 401(a) plan is the 415© limit--the lesser of 25% of compensation or $30,000. The limit on the employee's contributions to the 457 plan would be the normal 457 limit--the lesser of 25% of compensation before the contribution, or $8,000.

Employees could make after-tax contributions to the 401(a) plan, if the employer set things up so as to permit this. However, in order to make pretax contributions to the 401(a) plan, they would have to make the irrevocable election called for by 414(h)(2) and the rulings thereunder, unless the employer was grandfathered for purposes of the rule that normally prohibits governmental entities from maintaining 401(k) plans. And of course, either pretax or after-tax employee contributions would be counted against the 415© limits under the 401(a) plan, thereby reducing the amount the employer could contribute.

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Employee benefits legal resource site

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Guest JPCMPLS

I just installed a plan like this. As these plans are not governed by ERISA Title I, you need to consult with the applicable state laws governing municipal pensions. My state, for example, limits employer contributions (including matching) to $2000 annually. There may be other state law restrictions as well.

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  • 2 weeks later...
Guest PeterGulia

A plan sponsor should get its counsel's advice (or an Attorney General opinion) on whether the applicable enabling statute even permits employer-provided contributions.

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  • 2 years later...
Guest lforesz

So, it sounds like the 457(B) deferrals do not count towards the 415© limit of $40,000. So, that, effectively, a participant in a 401(a) and 457 Plan could receive $52,000 in contributions for the year.

$40,000 + $1,000 catch-up ctb + $11,000 457(B) deferrals.

Does this sound right?

Thanks for your help!

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Plus another $1,000 in catch up to the 457 plan (this catch up is not coordinated with other catch ups). And, if the person is within 3 years of NRA, this catch up can be replaced with another $11,000 for a total of $63,000.

And then, don't forget the DB plans and the 403(B)'s. (Private industry needs to start making more noise about parity - everyone would love to have these numbers.)

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Guest lforesz

Thanks so much, that really helps. One more favaor, where is the IRS cite for the $11,000 catch-up if within three years of retirement?

Thanks again!

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Guest lforesz

Oops. I found the cite under IRC 457(B)(3). However, it appears that the 402(g) limit applies to the combination of 457, 401(k) and 402(B) deferrals from reading 457©(2)(B). I find it odd, howefer, that when you read 402(g), it doesn't mention 457 plans under 402(g)(3). Am I misinterpreting 457(B)(3)?

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Guest lforesz

Yes, I do have an old Code book. However, does 457(B)(2)(A) still apply? That subsection seems to say that 403(B) deferrals count towards the 457(B) limit. Is that correct?

Thanks again for your help!

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