Working for a municipality, can an employee have a 457 TSA and also a

[Guest Curtis L. Walsh]

I work for a minicipal fire department which offers a 457 TSA of which the city matches 4% of top step firefighter. Several members of the dept. are contributing the maximum amount of $8k afforded by the 457 plan so they are wanting to start a 401k so more of there earnings may be tax deferred. I understand the maximum contribution to a 401k is $10.5k annually. My question is can the employee contribute the maximum into both plans or is there an aggregate contribution cap for deferred comp. no matter how many plans you are subscribed to.

[Guest Harvey Carruth]

Under current law the short answer is no. If a qualified 401(k) plan were established in which firefighters were eligible to participate, then elective deferrals made to the 401(k) plan would be aggregated with employee and employer contributions to the 457 plan when applying the $8,000 Standard 457 Dollar Limit [see IRC 457©(2)b)(i)]. Hence, if contributions are made to both the 457 plan and the 401(k) plan, the aggregate of all such contributions are limited to $8,000. On the other hand, if contributions are made only to the 401(k) plan, the total elective deferral can be as large as $10,500.

However, keep in mind that 457 contributions are limited to one-third of the participant's includible compensation as defined in IRC 457, which in many circumstances is equal to 25% of gross salary, and 401(k) contributions are limited to 25% of the participant's includible compensation as defined in IRC 415, which also is equal to 25% of gross salary in many circumstances. Moreover, if the 401(k) plan involves employer matching or discretionary contributions, then total employee and employer 401(k) contributions are limited to $30,000.

Perhaps the most important consideration here is whether the city government is eligible to offer a qualified 401(k) plan. According to IRC 401(k)(4)(B)(ii), a State or local government or political subdivision thereof is not authorized to maintain a qualified cash or deferred arrangement under IRC 401(k).

As a final note, ordinarily the abbreviation "TSA" is reserved for Tax Sheltered Annuity arrangements under IRC 403(B), so it might be less confusing to describe the 457 plan as a State or Local Government Deferred Compensation Plan and use the abbreviation "DCP."

[Guest Barney Byrd]

I just want to add a couple of points to Harvey's excellent reply.

Yesterday, the U.S. House of Representatives passed H.R. 1102, The Comprehensive Retirement Security and Pension Reform Act (also known as the Portman-Cardin bill), by an unexpected lopsided margin 401-25. It's unclear whether the Senate will consider the bill before the clock runs out on the 106th congress. And even if the Senate does vote on this legislation, the White House is threatening a veto, although the margin of passage in the House is plenty big enough for a veto override.

Were H.R. 1102 to become law, the IRC 457 deferral limitation would be increased to conform to the limitation for other types of deferred compensation arrangements, such as 401(k) plans. The limit for 2001 would be $11,000, and would increase in increments of $1,000 to $15,000 in 2005. Thereafter, the limit would be indexed to inflation in $500 increments. A higher limit would apply in the three years prior to retirement.