by Ryan Frandsen
on March 25, 2019
The new year is already upon us and the world is full of people making resolutions to become healthier, smarter, happier, better looking, better family members, and of course, to get their finances on a more solid path. The number one inquiry we receive in our Nonqualified Plan Division during this time of year revolves around that last resolution – how to best use the non-governmental 457(b) plan to gain wealth. Non-governmental 457(b) plans are unique. As far as compliance goes, these plans are squished in no man’s land, sharing some traits with 401(k) plans, some with governmental 457(b) and 403(b) and some with 409A plans, though not fully like any of these. For a little refresher, feel free to check out my earlier blog on non-governmental 457(b) plans here. The top 12 questions (and answers!) you should ask yourself before contributing to a non-governmental 457 plan are:
1) Can I make my own contributions to the plan?
Yes, contributing your own money to these plans is permitted.
2) Can I make Roth (post-tax) contributions?
Roth contributions are not allowed but do not worry, you will be able to pay taxes on the funds later.
3) How much can I contribute to the plan?
The contribution limit is the 457(e)(15) limit, which in 2019 is $19,000. Accordingly, one benefit is that there is no ADP/ACP testing for these plans, as in the 401(k) arena. With non-governmental 457(b) plans, you know you will be able to contribute the maximum amount to the plan, without worry of refunds. This can be extremely helpful with financial planning.
4) If my employer is making contributions, can I contribute as well?
Yes, but you need to remember that both your deferrals and your employers’ contributions go towards the same $19,000 limit. The 415(c) rules that allow for higher employer contributions in 401(k) plans, do not exist for 457 plans. If your employer contributions $10k to the plan, the most you can do is $9k.
5) Can I use any catch-up provisions?
The popular Age 50 Catch-up is not allowed in this type of plan, however, you may be able to use the Final 3-year Catch-up. This is rare though, as this option allows you to make-up for “missed opportunities” and generally those who can contribute to these plans have not missed enough opportunities to contribute.
6) Can I contribute if I am not an executive?
No. These plans are reserved for the executives and the top 10-15% earners in the company. If you do not currently meet these strict criteria, you will not be allowed in the plan.
7) What if I already contribute the maximum amount to my 401(k) or 403(b) plan?
The 457 limits are separate from other types of plans such as 401(k), 403(b), 401(a) and IRAs.
8) When I take my money out, can I roll it to another plan?
Rolling funds from these types of plans to a qualified plan is not allowed. It is possible that you can roll the funds to another non-governmental 457(b) plan, but this is an extremely rare scenario.
9) Can I take a loan out?
No. The funds become legal property of your employer and if your employer is willing to offer you a loan, it will need to happen outside of the plan.
10) Can I take my money out early?
No. In this regard, these plans function more like a 401(k) plan. Without a qualifying event such as a separation of service or attainment of a certain age, you will not be able to withdraw your funds. Although, unforeseeable emergencies withdrawals are permitted.
11) Why do people contribute to the plans?
It is all about deferring taxes. Technically, we are deferring compensation, but what we really want to do is defer taxes. If you find yourself in that enviable position of being able to live on less than you make, this is a great option to help secure your future.
12) Who do my contributions belong to?
All contributions, whether made by the employer or employee, remain property of the company and are subject to creditors, until paid out. It is important to research the financial health of the company, before making the decision to contribute.
If you have additional questions on non-governmental 457(b) plans, please contact National Benefits Services.