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George

Private 457b And Catchup

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Is there any additional contribution allowed in private 457s for post-age 50 or post-age 59 catchup?

 

George

 

 

5,000 catch up is not allowed. Only the catch up permitted is the 457 catch up in last 3 years before retirement.

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Here are details on the Final Three Year Catch-Up

 

The 457(b) plan contains a special "catch-up" provision called the "final three year" provision for those approaching retirement (assuming they haven't contributed the maximum amount in prior years). This provision, which used to limit participants to an additional $15,000 over a 3-year period, now permits up to 200% of the elective deferral limit, or $31,000 in 2008 This "catch-up" provision kicks in during the three years prior to "normal" retirement age (as defined in the plan). Example: If a worker is to reach "normal" retirement age in 2012, he or she can take advantage of the "final three year" provision in years 2009, 2010, and 2011. Employers are not required to offer this provision. Participants who take advantage of the "final three year" provision cannot also take advantage of the "Age 50 catch-up" provision. Note: to determine the underutilized amounts in prior years all of the prior coordination rules apply.

 

Dan Otter

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Let's explain why it's important that they haven't contributed the maximum each year already. Here goes:

 

The special catch-up (last 3 years prior to Normal Retirement Age), is the lesser of two amounts:

 

1) the current year's "annual deferral" amount, or if less

 

2) the "underutilized" amount. The underutilized amount is the difference between the prior annual deferral limits and the amount of actual annual deferral made for each of the previous years that the participant was eligible for the plan.

 

This is explained in the Treasury Regulations at §1.457-4(c )(3) Special section 457 catch-up

 

 

 

(i) In general. --Except as provided in paragraph (c )(2)(ii) of this section, an eligible plan may provide that, for one or more of the participant's last three taxable years ending before the participant attains normal retirement age, the plan ceiling is an amount not in excess of the lesser of --

 

 

 

(A) Twice the dollar amount in effect under paragraph (c )(1)(i)(A) of this section; or

 

 

 

(B) The underutilized limitation determined under paragraph (c )(3)(ii) of this section.

 

(ii) Underutilized limitation. --The underutilized amount determined under this paragraph (c )(3)(ii) is the sum of --

 

 

 

 

(A) The plan ceiling established under paragraph (c )(1) of this section for the taxable year; plus

 

 

 

(B) The plan ceiling established under paragraph (c )(1) of this section (or under section 457(b)(2) for any year before the applicability date of this section) for any prior taxable year or years, less the amount of annual deferrals under the plan for such prior taxable year or years (disregarding any annual deferrals under the plan permitted under the age 50 catch-up under paragraph (c )(2) of this section).

 

(iii) Determining underutilized limitation under paragraph (c )(3)(ii)(B) of this section. --A prior taxable year is taken into account under paragraph (c )(3)(ii)(B) of this section only if it is a year beginning after December 31, 1978, in which the participant was eligible to participate in the plan, and in which compensation deferred (if any) under the plan during the year was subject to a plan ceiling established under paragraph (c )(1) of this section. This paragraph (c )(3)(iii) is subject to the special rules in paragraph (c )(3)(iv) of this section.

 

 

 

(iv) Special rules concerning application of the coordination limit for years prior to 2002 for purposes of determining the underutilized limitation...

 

 

 

...(v) Normal retirement age

 

 

 

 

(A) General rule. --For purposes of the special section 457 catch-up in this paragraph (c )(3), a plan must specify the normal retirement age under the plan. A plan may define normal retirement age as any age that is on or after the earlier of age 65 or the age at which participants have the right to retire and receive, under the basic defined benefit pension plan of the State or tax-exempt entity (or a money purchase pension plan in which the participant also participates if the participant is not eligible to participate in a defined benefit plan), immediate retirement benefits without actuarial or similar reduction because of retirement before some later specified age, and that is not later than age 70-1/2. Alternatively, a plan may provide that a participant is allowed to designate a normal retirement age within these ages. For purposes of the special section 457 catch-up in this paragraph (c )(3), an entity sponsoring more than one eligible plan may not permit a participant to have more than one normal retirement age under the eligible plans it sponsors.

 

 

 

(B) Special rule for eligible plans of qualified police or firefighters. --An eligible plan with participants that include qualified police or firefighters as defined under section 415(b)(2)(H)(ii)(I) may designate a normal retirement age for such qualified police or firefighters that is earlier than the earliest normal retirement age designated under the general rule of paragraph (c )(3)(i)(A) of this section, but in no event may the normal retirement age be earlier than age 40. Alternatively, a plan may allow a qualified police or firefighter participant to designate a normal retirement age that is between age 40 and age 70-1/2.

If that's too confusing to read through, let's look at a simple example:

 

Joel has been eligible for the 457(b) plan since 2003. Now, in 2007, let's suppose Joel was in the first year of his 3-year period that would end prior to the year he reaches Normal Retirement Age.

 

Starting with his first year, 2003, let's suppose his "annual deferral" amounts were:

 

2003 10,000

2004 10,000

2005 10,000

2006 12,000

 

Suppose the maximums for each year were (ignore the 5,000 catchup issue for this example, as the $5,000 catch-up is only available in a government sponsored 457(b) plan):

 

2003 12,000

2004 13,000

2005 14,000

2006 15,000

 

(I did not look those limits up, this is just to explain the mechanics of the limit)

 

Joel did not use up the whole limit each year, so his underutilized amounts are:

 

2003 2,000

2004 3,000

2005 4,000

2006 3,000

 

The total unused amount is the sum of these: $12,000.

 

So, Joel's special catch-up amount for 2007 was the lesser of A) the normal 2007 "annual deferral" limit of $15,500 (or 100% of comp if less) or B) the unused prior amount of $12,000.

 

The lesser amount was $12,000.

 

So, for 2007, Joel's maximum "annual deferral" in the 457(b) plan was $27,500 ($15,500 regular amount, plus $12,000 special catch-up).

 

Remember, "annual deferrals" includes any employee elective deferrals made into the 457(b) plan PLUS any employer contributions allocated to the employee - they all count against the 457(b) limit.

 

I hope this helps!

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