2001 Developments in 457(b) Plans of State and Local Governments (Posted on December 6, 2001 by )

Carol V. Calhoun, Counsel
Venable LLP
600 Massachusetts Avenue, NW
Washington, DC 20001
Phone: (202) 344-4715
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Carol V. Calhoun

  1. Elective contributions limits

    1. Limits raised:

      1. From $8,500 in 2001 to $11,000 for 2002, rising to $15,000 for 2006.

      2. Catch-up limits for governmental 457(b) plans:

        1. For each of the three years prior to retirement, the catch-up becomes double the dollar limit.

        2. Employees age 50 and over can get an extra (catch-up deduction) of $1,000, going to $5,000 by 2006. However, this special catch-up does not apply in the three years of the special 457(b) catch-up.

        3. Although these are referred to as “catch-up” limits, and the legislative history indicates that they are intended to “enhanc[e] fairness for women,” they are not dependent on having made less than the permissible contributions for any prior year.

      3. 33-1/3% of compensation limit rises to 100% of compensation.

      4. Definition of compensation for 457(b) purposes is not modified, and excludes elective contributions to 457(b) plans themselves.

        1. Although legislative history refers numerous times to desire to make 457(b) limits equal to those for 403(b) and 401(k) plans, limit on elective contributions to 457(b) plans is only 50% of pre-deferral compensation, rather than 100% that will now apply to 403(b) and 401(k) plans.

        2. Possibility of technical correction?

      5. Limit continues to apply to all contributions to 457(b) plans, but only to elective contributions to 403(b) and 401(k) plans. Thus, matching elective 457(b) deferrals with employer contributions to a 401(a) plan rather than a 457(b) plan continues to be a good strategy for governmental employers.

    2. Coordination among elective contribution limits for 401(k)/403(b) plans, and limits for 457(b) plans, eliminated.

  2. Other Legislative Changes

    1. Requirement of one-time election on timing of distributions from 457(b) plans is eliminated.

    2. Rollovers of distributions will be permitted among 401(a) plans, 403(b) plans, governmental 457(b) plans, and IRAs, if the receiving plan permits such rollovers.

    3. Money from a governmental 457(b) plan can be used to purchase service credit in a 401(a) defined benefit plan, even at a time when a distribution is not otherwise allowed, if both the transferring and receiving plan permit such transfers.

    4. Domestic relations order rules for 457(b) plans coordinated with current rules for qualified plans.

  3. Practical Effects

    1. Increased pressure for 457(b) plans, even among those who already have 403(b) or 401(k) plans.

    2. Increased pressure for employer and/or statewide plan involvement in structuring of 457(b) plans, because most of the new options are not mandatory.

    3. May help with traditional problems of how to allow individuals to purchase service credit over a long period of time, since money can now be accumulated in a 403(b) or 457(b) plan.