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EricJ

A Few Basic(?) 457 Questions

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Thanks in advance... the help around here has been tremendous.

 

I am leaning heavily towards a 457, now that my school district employer revamped their 403(b) options and none have low enough fees to be attractive. My employer, a school district, gives me the option to contribute to the Minnesota Deferred Compensation Plan as a 457 option.

 

I want to make sure I understand the main advantages and disadvantages of a 457 plan.

  1. I have been told by my employer that they will withhold FICA from their matching contributions to a 457, but not for a 403(b). Does this sound correct? What is the reasoning behind this? I saw a very comprehensive post by John Feldt regarding this -- but honestly I didn't understand all of it. I understand that 403(b) employer matches are not made entirely out of the employers own money, aren't considered wages, and therefore are not FICA taxed. What is different about 457 matches?
  2. Because my employer is paying their half of FICA before giving me the matching contribution, does that mean my contributions are also being reported as FICA-taxable income? Are my 457 contributions not FICA exempt, but my 403(b) contributions would be?
  3. I know with some (all?) 457 plans, the security of your money is subject to the well-being of the company -- meaning that if they file bankruptcy you may have a hard time claiming your money. With this being run by the state, or some non-profit arm of the state, is my money secure up to the point of bankruptcy of the state of Minnesota? I got the impression the money is held in a trust and is protected.
  4. I understand that employer matching contributions count towards the annual contribution limit. This is a disadvantage from a 403(b), correct?
Well, I'll start with those. Thanks again!

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I have been told by my employer that they will withhold FICA from their matching contributions to a 457, but not for a 403(b). Does this sound correct?

Yes.

 

What is the reasoning behind this?

One way to explain this is because in a 457(b) plan, the entire contribution is considered as deferred by the employee, regardless of who puts the money in. So, any employer money going in is subject to FICA just like a salary deferral. Anything that goes into the 457(b) is counted against the overall 457(b) limit also ($16,500 limit for 2009, plus $5,500 catchup if you're 50 or more in 2009 and if the plan sponsor is a government). But IMHO, the real reason is that our elected representatives decided to have it taxed that way, and/or they gave the authority to someone to decide how it's taxed and they decided to tax it that way (so it's our own doing).

 

I know with some (all?) 457 plans, the security of your money is subject to the well-being of the company -- meaning that if they file bankruptcy you may be out of luck. With this being run by the state, or some non-profit arm of the state, is my money secure up to the point of bankruptcy of the state of Minnesota? I got the impression the money is held in a trust and is protected.

After the Orange County, California problem (years ago now), the law was changed, requiring Government employer sponsored 457(b) plans to place the money into a trust. So yes, you have that added safey - not that the State of MN would go bankrupt anyway... ... If the 457(b) sponsor is not a government, then the funds cannot be contained in a trust - they are company assets, thus unprotected against creditors (although if the company failed, you'd also be considered a creditor, trying to get the value of your 457(b) account). A nonprofit corp sponsored 457(b) plan therefore, must only cover primarily highly paid and upper management employees.

 

I understand that employer matching contributions count towards the annual contribution limit. Is this the same in a 403(b)?

No. In a 403(b), there is an employee salary deferral limit ($16,500 for 2009, plus any catch-up) and there is a code section 415 limit. The code section 415 limit is $49,000 for 2009 and all allocations count toward that limit, other than the age 50 ($5,500) catchup and of course investment earnings are not counted against that either. So if you defer $16,500 in 2009 plus your employer matches $8,250, and your account receives a forfeiture allocation of $250, then your total allocation of $25,000 is well under the 415 limit. A 457(b) plan does not have a "415 limit" like that.

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