©2015, College for Financial Planning, all rights reserved.

Session 10403(b) and 457 Catch-Ups

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits

Session DetailsModule 6Chapter(s)

1, 5

LOs 6-1 Explain the basic provisions of a 403(b) tax-sheltered annuity (TSA) plan.

6-7 Explain the basic provisions of a Section 457 plan.

10-2

403(b) Fundamentals

Qualified employers • Public educational systems• 501(c)(3) organizations• Ministers performing religious services for

for-profit companies• 403(b) plans are not considered to be

qualified, were around before ERISATwo basic types of 403(b)

arrangements• Employee deferral only• Employer contribution and employee

deferral10-3

403b: Age and Service Requirements

Typical• Minimum age 21• One year of service• If a plan has a two-year service

requirement, 100% immediate vesting• If a plan has a minimum age 26

requirement, 100% immediate vesting and the two-year service requirement cannot be used

10-4

Salary Reduction Agreement

• Multiple agreements with same employer in a taxable year are allowed

• Agreement is legally binding and irrevocable as to amounts already earned

• Employee may terminate agreement at any time for amounts not yet earned

• Employer may require $200 minimum annual deferral to meet nondiscrimination safe harbor

10-5

Employer 403(b) Contributions

Nonelective Employer Contributions• Require the plan to meet coverage and

participation tests:o Ratio percentage testo Average benefits test

Matching Contributions• Require the plan to satisfy only the ACP

test

10-6

Maximum 403(b) Salary Deferrals

The lesser of the following two limits:

• The annual deferral limit: $18,000 in 2015 plus the long service catch-up ($3,000 limit)

• Section 415(c) limit: lesser of 100% of compensation or $53,000 (2015) plus age 50 catch-up if eligible

10-7

403(b) Catch-Up Contributions

• Age 50 catch-up provision• Long-service rule exception

o must have worked for the same employer for 15 years or more

o must be a “HER” organizationo additional annual catch-up allowed up to the

lesser of:• $3,000• $15,000, reduced by increases to the general

limit that were allowed in previous years due to 15-year rule

• $5,000 times the number of years of service, subtracted by the total elective deferrals made by employee for earlier years

10-8

403(b) Withdrawals & Loans

In-service withdrawals generally not

permitted, except for• attainment of age 59½ • separation from service• death• disability (Soc. Sec.

definition)• hardship (employee

deferrals only)• loans (same terms as

401(k) loans)

10-9

Section 457 Deferred Compensation Plan

A 457 plan is a deferred compensation plan, not a

qualified plan, and therefore not subject to many of

the qualified plan rules. Two main categories of 457 plans:• 457(f) (nongovernmental)

o participation limited to a select group of highly paid or management employees (“top hat” plan)

• 457(b) – “eligible” o governmental o nongovernmental 10-10

Eligible Employers for 457(b) Plans & Deferral Amounts

Eligible employers are either

• State and local governments • Tax-exempt (501(c)) organization

Deferral amounts allowed

• Lesser of $18,000 in 2015 or 100% of compensation ($6,000 age 50 catch-up)

• Amount is not reduced by contributions made to 403(b), 401(k), SARSEP, or SIMPLE plans

10-11

Funded & Unfunded 457(b) Plans

Nongovernmental 457(b) plans:• Unfunded (money may be set aside, but is

available to creditors)• Participant does not have constructive

receipt• Since unfunded, no loans allowed• No rollovers allowed (such as to an IRA)Governmental 457(b) plans:• Funded (funds are not at risk)• Loans are allowed• Can be rolled over to an IRA, Roth IRA, SEP,

403(b), or qualified plan10-12

Catch-up Provisions of 457(b) Plans

Age 50 catch-up• Additional $6,000 for those age 50 and older not

in the final three years prior to retirementFinal three years catch-up• Available for each year of the three years

preceding normal retirement age• Catch-up contribution up to the allowable

deferral for the current year, resulting in total deferrals up to two times the allowable deferral for the current year

• From unused deferrals only • Cannot use with age 50 catch-up

10-13

Question 1Which one of the following is not a provision of TSAs?a. The contract between the employer and

the employee must be legally binding.b. The employee can execute more than one

contract per employer per year.c. Salary reduction contributions generally

are subject to a $18,000 limit in 2015.d. The annual TSA contract is irrevocable;

the employee may not terminate the agreement during the year.

e. Loans are permitted in accordance with qualified plan rules.

10-14

Question 2Which one of the following is not a provision of the special limits that are available to certain employees in a TSA plan?a. It is available to employees of health,

education, and religious organizations (HER organizations).

b. It may use both catch-up provisions if qualified.

c. It may typically defer at least $200 to their TSA during the first year of service.

d. With 15 or more years of service, a participant may increase each year’s deferral limit by $3,000 (up to $15,000 of cumulative increases).

e. If prior salary reductions exceed $5,000 times years of service, no increase to the deferral amount is available to employees with more than 10 years of service.

10-15

Question 3Which one of the following is not a provision of Section 457 plans?a. Elective deferrals are subject to a $18,000

limit in 2015.b. Employees of tax-exempt organizations

and state/local governments may establish Section 457 plans.

c. An employee retiring at age 65 is not permitted to receive payments until age 70½.

d. An additional deferral catch-up of up to twice the regular deferral, less any deferral for the current year, is allowed in the three years prior to retirement. 10-16

Question 4John Billups, age 53, participated in his former employer’s 457 plan. He terminated several weeks ago and just received his distribution check. Which of the following statements is true?a. He will pay no tax and no penalty on the

distribution.b. He will pay tax and a 10% penalty on the

distribution.c. His distribution is subject to the

mandatory 20% withholding.d. He will pay tax with no penalty on the

distribution.10-17

Question 5Rita, age 63, has worked for the local animal rescue shelter for the past 17 years. The shelter offers a 403(b) plan for all of its full-time employees. Rita is currently the senior accountant, and plans to retire within the next three years. Her current annual compensation is $75,000. What is the maximum amount that Rita could defer this year (2015)?a. $18,000b. $21,000c. $24,000d. $27,000e. $36,000 10-18

©2015, College for Financial Planning, all rights reserved.

Session 10End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits