Basic Question Re: 457(b) Deferrals

Our TPA firm has just been engaged by our first client that makes employer contributions to their non-governmental Section 457(b) plan. (We have 5 other clients with non-governmental Section 457(b) plans, but none have employer contributions.)  The plan also permits the participants to make deferrals from their salaries.

I have a very basic question for which I have not been able to find the answer--does the participant in this 457(b) plan need to make a deferral election with respect to the employer contribution?  If so, must the election be made the month before that employer contribution is made to the Section 457(b) plan, just like deferrals from their paychecks?

The deferral form that this new client has been using does not seem to address a deferral election for the employer contribution because it requires the participant to elect either a dollar amount or a percentage of his/her compensation for each payroll period.

Thank you for any guidance to which you can point me.

No, they are employer nonelective contributions. No deferral election is required by the employee. Think of them like profit-sharing contributions to a 401(k) plan - employer can decide how much, when, and to whom with no involvement or election by the employee. Note that these still count toward the annual contribution limit.

To reiterate: make sure the sum of the vested employer amount plus the employee amount, in total do not not exceed the 457(b) annual deferral limit for the year. 

The employer amount is deemed to automatically meet the 1st of the month rule.

Excellent point on vesting. I have seen this one missed too many times. 

EBECatty and John Feldt gave you the answers.

If you also want primary sources, some rules for points mentioned above are:

26 C.F.R. § 1.457-2(b) (definition for “annual deferrals”).

26 C.F.R. § 1.457-2(i) (definition for “nonelective employer contribution”, defining it as all deferrals other than an elective deferral, and specially defining it to include what under IRC § 401(k)-(m) would be classified as a matching contribution).

https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRf2be51fac065c2d/section-1.457-2

26 C.F.R. § 1.457-4 (describing an agreement as a condition for a deferral “by salary reduction”).

https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRf2be51fac065c2d/section-1.457-4

Employers, advisors, and service providers practically think of amounts set aside for retirement, older age, or severance-from-employment as contributions.  Yet, it’s deliberate that these tax-law rules use (even for nonelectives) the word deferral, rather than contribution.  For a non-governmental employer’s plan, all “amounts deferred” are an unsecured obligation to pay wages at some later time.

26 C.F.R. § 1.457-8(b) (“In order to be an eligible plan of a tax-exempt entity, the plan must be unfunded and plan assets must not be set aside for participants or their beneficiaries.”).

https://ecfr.federalregister.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRf2be51fac065c2d/section-1.457-8

EBECatty and Mr. Feldt, thank you for this explanation.  Mr. Gulia, thank you for these citations. 

We did think that the employer contribution was more like the profit sharing contribution, but the fact that both the employee contribution and the employer contribution are referred to as "deferrals" made us question whether an actual deferral election for the employer contribution needs to be made. 

Mr. Feldt, thank you-- I had already found your response to a question in 2014 regarding what amounts apply toward the annual limit each year--"Employee deferrals, vested employer contributions, and any prior non-vested balances that now become vested during the year - all of these add together and count against the annual 457(b) deferral limit ($17,500 ignoring any last-3 years catchups)." [my emphasis]  This statement has been added to our work-papers for this client, of course with respect to the current years' 457(b) deferral limit!

Just want to add what a lot of people miss.  FICA.  Employer Contributions are really deferrals, even though the employer makes them, and are therefore subject to FICA like any other deferral.  Therefore, the employer and the employee need to pay FICA taxes on the amounts contributed.  If they don't, they will pay FICA taxes on the way out of the plan - on the whole amount distributed which includes all of the earnings!  Nice way to lose a lot of your gains.  So put the employer contribution as a bonus on the paycheck and process them like deferrals, then the taxation will be correct, and you can avoid going over the $19,500 limit.  It took me a long time to figure this out because I've never seen it in writing anywhere.