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Employer Contributions To 457 Plans

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Can a governmental employer contribute to an employee's 457 plan as long as the total combined contributions (salary reductions and employer contributions) do not exceed the annual limits ($15,500 if under 50)? If an employer can contribute, what is the tax treatment. Is it just not reported on the W-2 at all and taxable to the employee when distributions from the plan are made?

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Can a governmental employer contribute to an employee's 457 plan as long as the total combined contributions (salary reductions and employer contributions) do not exceed the annual limits ($15,500 if under 50)?

 

Let's assume this is in regards to an eligible 457(b) plan. Yes, they may contribute. True, the total Employer plus Employee contribution combined must not exceed the applicable annual deferral limit plus any applicable catch-ups (the greater of the age 50 $5,000 catch-up or the special last 3-yeasr catch-up).

 

 

If an employer can contribute, what is the tax treatment. Is it just not reported on the W-2 at all and taxable to the employee when distributions from the plan are made?

 

For income tax purposes, it is not taxable as income, but for FICA taxes, the answer is more complicated. I will quote my source on this first: The 457 Answer Book and the Code and Regulations regarding 457 Plans and income and FICA taxes.

 

The total amount is treated as an annual deferral, so if the government employer is covered by FICA, then the entire contribution should also taxed for FICA, not just the "deferral" elected by the employee. In that case the employer should report the total amount as FICA wages and pay FICA taxes on those wages. Plus, each participant is liable for payment of their portion of the FICA taxes (usually the amount contributed gets grossed up to cover for that). See Private Letter Ruling 9540057.

 

However, if the Employer itself is exempt from FICA, then these contributions are also not subject to FICA. For FICA purposes, employment for a state or local government employer is included unless the employee is a "member of a retirement system" with respect to service performed after July 1, 1991 (see below). Effective July 2, 1991, Congress generally made FICA coverage mandatory for state and local government employees who are not covered by a Section 218 Agreement and are not participants in a public retirement system. So, wages for services performed after July 1, 1991, that are received by an employee of a state or local government employer who is not a member of a qualifying retirement system usually will be subject to FICA taxes.

 

A qualifying retirement system may include a pension, annuity, retirement, or similar fund or system within the meaning of Section 218 of the Social Security Act [42 U.S.C. §418] if the plan is maintained by a state, political subdivision, or instrumentality of a state or political subdivision to provide retirement benefits to its employees who are participants. The definition of retirement system is limited. Under the regulations, for service in the employ of a state or local government employer to qualify for the exception from employment under Code Section 3121(b)(7), the employee must be a member of a qualifying retirement system that provides certain minimum retirement benefits to that employee. An eligible plan 457(b) may meet this requirement and serve as a "FICA alternative" plan.

 

"Annual Deferrals" made as matching or nonelective contributions are also considered as FICA taxable wages unless the employment is not treated as service subject to FICA taxes. Deferrals under an eligible or ineligible plan are wages for FICA tax purposes when the participant's deferred compensation no longer is subject to an employment-based substantial risk of forfeiture. [i.R.C. §§3121-(a)(5), 3121(v)(2), 3306(b)(5), 3306(r ); Treas. Reg. §§31.3121(v)(2)-1, 31.3306(r )(2)-1; I.R.S. Notice 2003-20, 2003-19 I.R.B. 894 (May 12, 2003)]

 

I hope this helps!

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Can a governmental employer contribute to an employee's 457 plan as long as the total combined contributions (salary reductions and employer contributions) do not exceed the annual limits ($15,500 if under 50)? If an employer can contribute, what is the tax treatment. Is it just not reported on the W-2 at all and taxable to the employee when distributions from the plan are made?

 

 

Yes, thank you very much that helps a lot. This particular local government is not covered by a retirement plan, so they are subject to FICA. Therefore, it appears that FICA will need to be paid on the employer contibutions.

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Can a governmental employer contribute to an employee's 457 plan as long as the total combined contributions (salary reductions and employer contributions) do not exceed the annual limits ($15,500 if under 50)? If an employer can contribute, what is the tax treatment. Is it just not reported on the W-2 at all and taxable to the employee when distributions from the plan are made?

 

 

Yes, thank you very much that helps a lot. This particular local government is not covered by a retirement plan, so they are subject to FICA. Therefore, it appears that FICA will need to be paid on the employer contibutions.

 

 

Governmental plans can also offer the regular age 50 catch-up.

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