Case of the Week: A Tale of Two 457(b) Plans

Tax-Exempt 457(b) plan

Governmental 457(b) plan

Eligible employer

IRC §501 tax-exempt employer that isn’t a state or local government (or political subdivision, instrumentality, agency)

State or local government or political subdivision or instrumentality or agency

Written plan document required?

Yes

Yes

Eligible participants

Limited to select management or highly compensated employees

Employees or independent contractors who perform services for the employer may participate

Coverage; nondiscrimination testing

No

No

Salary reduction contributions (employee elective deferrals) permitted?

Yes

Yes

Ability to designate all or portion of salary reduction contribution as a Roth contribution

No

Yes

Employer contributions permitted?

Yes

Yes

Salary reduction contribution limit, in general

Lesser of applicable dollar limit ($19,000 in 2019) or 100% of participant’s includible compensation

Lesser of applicable dollar limit ($19,000 in 2019) or 100% of participant’s includible compensation

Increased salary reduction limit for final 3 years before attaining normal retirement age

Lesser of:

• 2 x applicable dollar limit ($38,000 in 2019) or
• applicable dollar limit plus sum of unused deferrals in prior years (only if deferrals made were less than the applicable deferral limits (Note: age 50 catch up contributions not allowed; no coordination needed))

Lesser of:

• 2 x applicable dollar limit ($38,000 in 2019) or
• applicable dollar limit plus sum of unused deferrals in prior years (to the extent that deferrals made were less than the applicable limits on deferrals; age 50 catch up contributions aren’t counted for this purpose)

Note: Can’t use the increased limit if using age 50 catch up contributions. Therefore, in years when an employee is eligible to take advantage of both, the employee can use the higher of the two increases to the limit.

Salary reduction contribution limits- Age 50 catch-up contributions (for individuals who are age 50 or over at the end of the taxable year)

Not permitted

Salary reduction dollar limit increased by $6,000 (up to a total of $25,000 in 2019)

Note: See above. Can’t use in years that a participant is taking advantage of the increased limit during the final 3 years before attaining normal retirement age.

Timing of election to make salary reduction contribution

Before the first day of the month in which the compensation is paid or made available

Before the first day of the month in which the compensation is paid or made available

Total contribution limits (both salary reduction and employer contributions)

Same as limit for salary reduction contributions. So, any employer contribution limits the amount of salary reduction contribution an employee can make (and vice versa)

Same as limit for salary reduction contributions. So, any employer contribution limits the amount of salary reduction contribution an employee can make (and vice versa)

Correcting excess elective deferrals

Distribute excess (plus allocable income) by April 15 following the close of the taxable year of excess deferral

Distribute excess (plus allocable income) as soon as administratively practicable after the plan determines that the amount is an excess deferral

Contributions to trust?

No

Yes

Participant loans permitted?

No

Yes

Hardship distributions permitted?

Yes, if both:
1. the distribution is required as a result of an unforeseeable emergency, for example, illness, accident, natural disaster, other extraordinary and unforeseeable circumstances arising from events beyond the participant’s (or beneficiary’s) control
2. the participant exhausted other sources of financing and the amount distributed is necessary to satisfy the emergency need (and tax liability arising from distribution)

Yes, if both:
1. the distribution is required as a result of an unforeseeable emergency, for example, illness, accident, natural disaster, other extraordinary and unforeseeable circumstances arising from events beyond the participant’s (or beneficiary’s) control and
2. the participant exhausted other sources of financing and the amount distributed is necessary to satisfy the emergency need (and tax liability arising from distribution)

Automatic Enrollmentpermitted?

No

Yes

Taxation

Earlier of when made available or distribution

Distribution

Distributable events

• Attainment of age 70 ½
• Severance from employment
• Unforeseeable emergency (see above)
• Plan termination
• Qualified domestic relations order
• Small account distribution (not to exceed $5,000)

• Attainment of age 70 ½
• Severance from employment
• Unforeseeable emergency (see above)
• Plan termination
• Qualified domestic relations order
• Small account distribution ($5,000 or less)
• Permissible Eligible Automatic Contribution Arrangement (EACA) withdrawals

Required minimum distributionsunder Internal Revenue Code Section 401(a)(9)

Yes

Yes

Rollovers to other eligible retirement plans (401(k), 403(b), governmental 457(b), IRAs)

No

Yes

Availability of statutory period to correct plan for failure to meet applicable requirements

No

Yes, until 1st day of the plan year beginning more than 180 days after notification by the IRS

Availability of IRS correction programs including the Employee Plans Compliance Resolution System (EPCRS) under Revenue Procedure 2019-19

Generally, not available to correct failures for an unfunded plan benefiting selected management or highly compensated employees. May consider closing agreement proposals when nonhighly compensated are erroneously impacted.

Can apply for a closing agreementwith a proposal to correct failures. Proposal is evaluated according to EPCRS standards.