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Guest Sierra

Can individual employees of a qualifying tax-exempt entity set up their own 457 plan if their employer does not offer/sposnor a 457?

 

 

No! There must be material employer involvement. The Investment Plan account may only be funded by salary reductions. Please give us the particulars of your employment situation.

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A tax-exempt organization can establish a 457(b) plan, as long as that plan intentionally discriminates regarding who gets to participate (believe it or not).

 

That means the plan may only cover employees who are primarily a select group of management or highly compensated employees (HCEs).

 

So, if your nonprofit company really only has one management employee or highly compensated employee, then it is possible that they might be the only person eligible to have annual deferrals in the 457(b) plan.

 

Remember, when a tax-exempt (not a governmental agency) sponsors a 457(b) plan, the amounts placed into the 457(b) plan must still be considered company money and must be accessible to creditors! That's a big reason only the management and HCEs are the primary ones allowed to risk their money in that fashion.

 

Before EGTRRA passed in 2001, 457(b) plans of governments were also like this - remember Orange County, California? Well, because of that, EGTRRA required that 457(b) plans sponsored by governments must place the money in a protected trust. This was not applied to 457(b) plans sponsored by tax-exempt companies.

 

I hope this helps.

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Guest Sierra

Can individual employees of a qualifying tax-exempt entity set up their own 457 plan if their employer does not offer/sposnor a 457?

 

 

John: Based on the tone of the question I fail to see the relevance of your answer. It seems to me that the "individual employees" referred to in the question are not HCE. But let's ask Ray. Ray, are the "individual employees" you refer to HCE?

 

Joel

 

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Can individual employees of a qualifying tax-exempt entity set up their own 457 plan if their employer does not offer/sposnor a 457?

 

 

No! There must be material employer involvement. The Investment Plan account may only be funded by salary reductions. Please give us the particulars of your employment situation.

 

 

Joel:

 

Contributions to a 457 plan can be funded by employer contributions instead of salary reductions but the maximum amount from both sources cannot exceed 15,500 (with an additional 5,000 catch up for a govt 457 plan). See reg 1.457-2(b)(1) .

 

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Exactly.

 

Joel,

 

Many times the "perception" might be that they set up their own plan, when in reality the employer truly is the sponsor - but just that one person is eligible. So, although your response is technically correct, it does not discuss the possibility of this common misperception. I thought to help the OP with that as well to avoid the foot-in-mouth syndrome, which I frequently stumble into as well.

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Guest Sierra

 

 

Can individual employees of a qualifying tax-exempt entity set up their own 457 plan if their employer does not offer/sposnor a 457?

 

 

No! There must be material employer involvement. The Investment Plan account may only be funded by salary reductions. Please give us the particulars of your employment situation.

 

 

Joel:

 

Contributions to a 457 plan can be funded by employer contributions instead of salary reductions but the maximum amount from both sources cannot exceed 15,500 (with an additional 5,000 catch up for a govt 457 plan). See reg 1.457-2(b)(1) .

 

 

Thank you for the headsup. I meant to say that the only method that can be used for employee constributions is via salary reductions.

 

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Guest Sierra

 

 

 

Can individual employees of a qualifying tax-exempt entity set up their own 457 plan if their employer does not offer/sposnor a 457?

 

 

No! There must be material employer involvement. The Investment Plan account may only be funded by salary reductions. Please give us the particulars of your employment situation.

 

 

Joel:

 

Contributions to a 457 plan can be funded by employer contributions instead of salary reductions but the maximum amount from both sources cannot exceed 15,500 (with an additional 5,000 catch up for a govt 457 plan). See reg 1.457-2(b)(1) .

 

 

Thank you for the headsup. I meant to say that the only method that can be used for employee constributions is via salary reductions.

 

Intruder:

 

The maximum combined contribution (employee and employer) to a 457 Plan for 2007 is $45,000.

 

 

 

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$45,000? 457(b)?

 

Sorry. No. Incorrect. The ultimate maximum for 2007 for a 457(b) plan contribution is $31,000 which includes catch-up. Welcome to 457(b) plans.

 

Let's walk through this.

 

1. The maximum "annual deferral" in a 457(b) plan is $15,500. This includes all employee elections and employer contributions.

 

2. After this, we add catch-up. Let's start with the "Last 3 Years Catch-up". An additional annual deferral can be made during the last 3 years before the participant reaches normal retirement age (if the plan document allows). This extra annual deferral (catch-up) is equal to the current annual deferral limit ($15,500 for 2007) or, if less, their "unused" prior amount. The unused prior amount is the difference between the annual deferral limit and the amount of their actual annual deferral for each of the previous years that they were eligible for the plan.

 

3. If the participant is not within the 3 years prior to normal retirement age, then there is NO catch-up if the plan sponsor is a tax-exempt (nongonvernmental) company. If the sponsor is a government, then employees who are age 50 or more are eligible for the $5,000 catch-up, and when they get to their last 3 years before normal retirement age, their catch-up is the greater of the $5,000 or the "Last 3 Years Catch-up" - the $5,000 is not added on top of the last 3 years catch-up.

 

I hope this helps. Let me know if you want an example or the Treasury Regulation cites.

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Guest Sierra

$45,000? 457(b)?

 

Sorry. No. Incorrect. The ultimate maximum for 2007 for a 457(b) plan contribution is $31,000 which includes catch-up. Welcome to 457(b) plans.

 

Let's walk through this.

 

1. The maximum "annual deferral" in a 457(b) plan is $15,500. This includes all employee elections and employer contributions.

 

2. After this, we add catch-up. Let's start with the "Last 3 Years Catch-up". An additional annual deferral can be made during the last 3 years before the participant reaches normal retirement age (if the plan document allows). This extra annual deferral (catch-up) is equal to the current annual deferral limit ($15,500 for 2007) or, if less, their "unused" prior amount. The unused prior amount is the difference between the annual deferral limit and the amount of their actual annual deferral for each of the previous years that they were eligible for the plan.

 

3. If the participant is not within the 3 years prior to normal retirement age, then there is NO catch-up if the plan sponsor is a tax-exempt (nongonvernmental) company. If the sponsor is a government, then employees who are age 50 or more are eligible for the $5,000 catch-up, and when they get to their last 3 years before normal retirement age, their catch-up is the greater of the $5,000 or the "Last 3 Years Catch-up" - the $5,000 is not added on top of the last 3 years catch-up.

 

I hope this helps. Let me know if you want an example or the Treasury Regulation cites.

 

 

John:

 

John, you are wrong and I am right. But no need to be sorry, be happy!!.

 

Your first item is where you screwed up because it does not include the employer limits under Code section 415. Carol V. Calhoun, a Benefits Attorney has it right at: http://benefitsattorney.com/modules.php?name=415

 

Now, we know for sure our "intruder" participant likes to second guess attorneys writings but what say you?

 

Peace and hope,

Joel

 

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Carol Calhoun is author of Chapter 14 of the 457 answer book.

 

If you look at the book, you'll see that the book agrees with the 457(b) limit exactly as I described, with the added limitation that the annual deferral amount cannot exceed 100% of compensation (which is rare enough that I did not include it the prior post to avoid confusion, but it is indeed an additional limit to note).

 

Your link goes to a chart of limits. A 457(b) plan does not get the advantage of the DC plan limit of $45,000, because a 457(b) plan operates under a different Code section, namely 457(b), not 401(a).

 

Look again, Joel. I have left Carol a message so we can verablly to confirm this with her. I recommend that you do the same.

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Guest Sierra

Carol Calhoun is author of Chapter 14 of the 457 answer book.

 

If you look at the book, you'll see that the book agrees with the 457(b) limit exactly as I described, with the added limitation that the annual deferral amount cannot exceed 100% of compensation (which is rare enough that I did not include it the prior post to avoid confusion, but it is indeed an additional limit to note).

 

Your link goes to a chart of limits. A 457(b) plan does not get the advantage of the DC plan limit of $45,000, because a 457(b) plan operates under a different Code section, namely 457(b), not 401(a).

 

Look again, Joel. I have left Carol a message so we can verablly to confirm this with her. I recommend that you do the same.

 

 

John: Mr. Participant, age 22, just starts his worklife. His deferral limit is $15,500 for 2007 which he takes in full. Are you saying the employer is not allowed to add a dime to his account because he alone has contributed the combined maximum allowed by the employee AND employer which you assert is $15,500?

 

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Let’s go to the source of course:

 

1.457-2(b)(1) Annual deferral(s) means, with respect to a taxable year, the amount of compensation deferred under an eligible plan, whether by salary reduction or by nonelective employer contribution...

 

1.457-4(a) Annual deferrals that satisfy the requirements of paragraphs (b) and (c ) of this section are excluded from the gross income of a participant...

 

1.457-4(b) is the silly rule that you can only change deferrals on the first day of the month or date of hire.

 

1.457-4(c ) Maximum deferral limitations

 

 

(c )(1) Basic annual limitation

 

 

(c )(1)(i) Except as described in paragraphs (c )(2) and (3) of this section, in order to be an eligible plan, the plan must provide that the
annual deferral
amount for a taxable year (the plan ceiling) may not exceed the lesser of --

 

 

(c )(1)(i)(A) The applicable annual dollar amount specified in section 457(e)(15): $11,000 for 2002; $12,000 for 2003; $13,000 for 2004; $14,000 for 2005; and $15,000 for 2006 and thereafter. After 2006, the $15,000 amount is adjusted for cost-of-living in the manner described in paragraph (c )(4) of this section; or

 

 

(c )(1)(i)(B) 100 percent of the participant's includible compensation for the taxable year.

 

 

(c )(2) is the Age 50 catch-up

 

 

(c )(3) is the Special section 457 catch-up which I called the Last 3 years catch-up

1.457-4(e) Excess deferrals under an eligible plan

 

(e)(1) In general. --Any amount deferred under an eligible plan for the taxable year of a participant that exceeds the maximum deferral limitations set forth in paragraphs (c )(1) through (3) of this section, and any amount that exceeds the individual limitation under §1.457-5, constitutes an excess deferral that is taxable in accordance with §1.457-11 for that taxable year. Thus, an excess deferral is includible in gross income in the taxable year deferred or, if later, the first taxable year in which there is no substantial risk of forfeiture.

 

 

So, based on the excerpt from the regulations shown above, or from your own cite of regs, law, or other official treasury department guidance, please point out to us where it somehow allows someone to go all the way up to $45,000 under a 457(b) plan. I wish you much success! Many 457(b) sponsors across the country will be very happy -- just show us the way please!

 

 

John: Mr. Participant, age 22, just starts his worklife. His deferral limit is $15,500 for 2007 which he takes in full. Are you saying the employer is not allowed to add a dime to his account because he alone has contributed the combined maximum allowed by the employee AND employer which you assert is $15,500?

 

Correct, not a dime more to the 457(b) plan, but it would be ok to add to his 403(b) plan or other 401(a) plan.

 

And it's not my assertion really, it's the Treasury Department's assertion as found in the regulations (see above), which was drawn to interpret the Code, and as you know, the Code was of course enacted by a law passed by Congress (something like that).

 

edited for grammatics

Edited by John Feldt

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Guest Sierra

John: You are ignoring the section 415 limits. Here it is, as published by our IRS: Please look at item "3"

 

Peace and Hope and Happy New Year!

 

Joel L. Frank

Pension Columnist

The Chief-Civil Service Leader

NYC

=====================================================================

 

EP Examination Process Guide - Section 2 - Compliance Monitoring Procedures - Top Ten Issues - IRC 403(b)/457 Plans

 

Top ten issues identified during examinations of IRC 403(b)/457 plans.

 

1. Excess IRC 402(g) Contributions, Including Violating the 15-Year Rule Limitations

 

The amount of salary reduction contributions exceeds the annual dollar limitation of $15,000 for 2006 ($15,500 for 2007). The excess may be the result of poor internal controls or failure to aggregate deferrals made to other 403(b) or 401(k) plans. IRC 457 plans do not have to be aggregated with these other plans, but are still found to violate these limits. Violations of the 15-year catch up rule occur where the employee has exceeded the $15,000 lifetime limitation or where the employee is not employed by an eligible employer.

 

2. Universal Availability, IRC 403(b)(12)(A) Excluding Eligible Employees From Participation, Usually Part-Time Employees That Would Qualify to Participate

 

Eligible employees are not given the right to make salary reduction contributions. Employers often misapply ERISA eligibility and coverage conditions to employees who are otherwise eligible to make salary reduction contributions under IRC section 403((b)(12).

 

3. Excess 415 Contributions Made

 

Generally, the sum of elective deferrals and employer contributions cannot exceed the lesser of $44,000 ($45,000 in 2007) or 100% of Includible Compensation for 2006.

 

4. Plan Loans That Violate IRC Section 72(p)

 

Common violations include: failure to make required payments when due, resulting in default of the entire loan; poor documentation; and loans from multiple vendors that in the aggregate exceed the IRC 72(p) limits.

 

5. Hardship Distribution Failures (IRC Section 403(b)(11)(B))

 

Common violations include: inadequate documentation that the distribution is the result of a financial hardship and distributions from multiple vendors that in the aggregate exceed the amount needed to relieve the hardship.

 

6. Unforeseeable Emergency Distribution (IRC Section 457(d)(1)(A)(iii))

 

Common violations include: inadequate documentation of the unforeseeable emergency, lack of proper internal controls, and distributions that exceed the amount needed for the unforeseeable emergency.

 

7. IRC Section 457(f) Plan Failures in Operation

 

IRC section 457(f) plans that do not have any real substantial risks of forfeiture for substantial services performed. For example, a 457(f) plan that has non-compete language as one of the risks of forfeiture but in operation that is not likely to ever be applied, such as allowing for voluntary termination then adhering to a short non-compete period and collection of benefits.

 

8. IRC Section 457(f) Plan Cafeteria Style Benefits

 

IRC section 457(f) plans that allow participants to chose from a number of different types of benefits with a default selection into a 457(f) plan. These types of arrangements usually do not contain a true risk of forfeiture and contain devices such as unrealistic non-compete clauses, rolling risk of forfeiture, flexi-choices and options that do not add a real risk of losing a benefit and appear to vest the benefit to the participant immediately.

 

9. IRC Section 403(b) Annuity Contract Problems

 

The Annuity Contract is outdated and has not been updated for current requirements such as for IRC 402(g) contribution limitations, IRC 401(a)(9) required distributions, and IRC 401(a)(31) eligible rollover requirements. Also new endorsements not being given out to all annuity contract holders.

 

10. Ineligible Plan Sponsors of IRC Section 403(b) and IRC Section 457 Plans

 

IRC 403(b) - The organization must qualify as a public educational organization or be exempt under IRC 501©(3).

 

IRC 457 - The organization must be a state or local government or a tax exempt organization under IRC 501©.

 

Some examples of failures are of a charitable hospital with a 403(b) plan being taken over by a local government entity and not terminating the 403(b) plan and of quasi-federal government organizations adopting IRC 457 type plans.

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Sorry, that is a 403(b) issue, which as you can see, the list is for 403(b) and 457(b) issues. They are correct that the DC annual addition limit is certainly a top 10 issue for 403(b) plans. Please re-read the long post that I included earlier and focus on the bold and italic items.

 

From cite of regs, law, or other official treasury department guidance specific to 457(b) plan only, please point out to us where we can go up to $45,000 under a 457(b) plan. Again, I wish you much success!

 

As mentioned already, many 457(b) sponsors across the country will be very happy -- just show us the way please!

 

Read the "Basic Contribution Limits" column of the third row (that's the 457(b) plan row).

 

http://www.irs.gov/pub/irs-pdf/p4406.pdf

 

Have a great weekend. Might want to explain this in one of your columns.

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