Advanced Underwriting Consultants

Ask the Experts – September 22, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: Do Section 457(b) plans allow the age 50 catch-up contribution?

Answer: Yes and no—it depends on the type of employer maintaining the plan.

Section 457(b) plans may be established by only two types of employers: (1) states, agencies, or any political subdivision of a state (referred to as governmental 457(b) plans); or (2) tax-exempt entities (referred to as nongovernmental 457(b) plans).

Under the general rules, the contribution limit to a 457(b) plan is $17,500 (for 2014), which is equal to the elective deferral limit for Section 401(k) and 403(b) plans. Also similar to these employer-sponsored plans, governmental 457(b) plans allow an extra catch-up contribution of $5,500 for participants who are age 50 and older. However, this catch-up contribution is not offered to participants in a nongovernmental 457(b) plan.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Expert – September 5, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client is retiring this year and he has a nongovernmental 457(b) plan that he would like to roll over to an IRA. Is this possible?

Answer: No, nongovernmental Section 457(b) plans (also referred to as “Top Hat” plans) are not eligible for rollover treatment to other types of retirement plans.

A Section 457(b) plan is a deferred compensation plan available for certain state and local governments and nongovernmental, tax-exempt entities. Governmental 457(b) plans are eligible for rollover into other retirement accounts like IRAs, qualified plans and 403(b) annuities. This leads many to mistakenly believe that all 457(b) plans are eligible for rollover.

When a nongovernmental 457(b) participant retires, he should consult with the plan documents to see what his options are. The participant’s options can range from cashing the account out completely, annuitizing, installment distributions, and deferring distributions until a predetermined age but not later than age 70.5.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – June 19, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: What is the maximum amount that may be contributed to a section 457(b) plan in 2014?

Answer: The contribution limits for 457(b) plans are different from other employer-sponsored plans, such as 401(k) plans and 403(b) annuities, which both have $52,000 limits with a $17,500 limit on elective deferrals. For example, if an individual participates in two separate 401(k) plans, each plan may generally receive up to $52,000 in combined employer and employee contributions, but the participating employee may only defer a combined $17,500 between the two plans.

The overall contribution limit for 457(b) plans is generally limited to a total of $17,500—this includes both employee deferrals and any employer matching or nonelective contributions. There are three primary modifications to the normal limit.

First, an employee cannot contribute more to the 457(b) plan than compensation from the employer. For example, if he earns $12,000 for the year, the limit is reduced to $12,000.

Second, similar to 401(k) plans and 403(b) annuities, participants age 50 or older may make a catch-up contribution of $5,500, bringing the total to $23,000.

Finally, there’s a special catch-up provision that’s unique to 457(b) plans that allows a participant to make up for previous years in which the participant did not contribute the maximum amount. Under this provision, the annual contribution limit is increased to the lesser of (a) twice the normal limit (generally, $35,000 in 2014); or (b) the sum of the current year’s limit ($17,500) and any unused portion of previous years’ limits.

The $17,500 contribution limit for 457(b) plans is independent from the $17,500 elective deferral limit for other employer-sponsored plans. This means that if an individual defers $17,500 to his 457(b) plan, he may also defer $17,500 to his 401(k) or 403(b) annuity.

Sources: I.R.C. § 457(b); IRC 457(b) Deferred Compensation Plans, http://www.irs.gov/Retirement-Plans/IRC-457(b)-Deferred-Compensation-Plans

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – May 9

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: When an IRA is rolled over to a Section 457(b) plan, do the RMD rules for IRAs or for Section 457(b) plans govern the separately-accounted-for IRA funds?

Answer: The RMD rules for Section 457(b) plans would apply—not the RMD rules for IRAs—even though IRA rollovers to Section 457(b) plans must be separately accounted for.

This question comes up because if an individual rolls an IRA into a Section 457(b) plan, the plan must separately account for the rollover contribution inside of the Section 457(b) plan. However, the fact that rollover contributions are separate does not affect the distribution rules for Section 457(b) plans.

Under Section 457(d)(2), the same distribution rules that apply for Section 401(a)/(k) plans also apply for Section 457(b) plans. Therefore, if an IRA is rolled over to a Section 457(b) plan, the funds are not required to be distributed until the later of the plan participant turning 70 ½ or his retirement. This is different from IRA required distributions which must commence by the date the owner turns 70 ½.

The separate accounting rule was not enacted so the IRA rollover contribution would retain all of the IRA rules. Instead, the separate accounting rule is on the books to make sure participants can’t avoid the 10% penalty rule under Section 72(t), which applies to IRAs—not Section 457(b) plans.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Ask the Experts – March 14

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has a governmental 457(b) account to which he rolled over funds from his former employer’s retirement account. Under the old plan, he could receive distributions after he reached age 59 ½, but under his current 457(b) plan, he cannot access the funds until he is age 70 ½. If the rollover amounts are separately accounted for in the 457(b) plan, can my client still access the rolled over funds after he reaches age 59 ½?

Answer: Yes, he can access the rollover contributions prior to age 70 ½ as long as the governmental 457(b) plan documents allow it.

The general rule is that 457(b) accounts cannot be accessed until the participant:

  • Reaches age 70 ½;
  • Stops working with the employer; or
  • Is faced with an unforeseeable emergency.

However, the IRS issued Revenue Ruling 2004-12, holding that the restrictions on distributions do not apply to rollover contributions:

If the receiving plan is a § 457 eligible governmental plan or a tax-sheltered annuity described in § 403(b)(7) or (11), amounts attributable to rollovers that are maintained in separate accounts are permitted to be distributed at any time even though distribution of other amounts under the plan or contract is restricted pursuant to § 457(d)(1)(A) and § 403(b)(7) or (11), respectively (emphasis added).

Therefore, the client could receive a distribution of that money prior to age 70 ½ (or severance from employment or an emergency). However, keep in mind that the 10-percent penalty under section 72(t) still applies if your client is younger than age 59 ½.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.