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Session 10 403(b) and 457 Catch-Ups

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits. Session 10 403(b) and 457 Catch-Ups. Session Details. 403(b) Fundamentals. Qualified employers Public educational systems 501(c)(3) organizations

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Session 10 403(b) and 457 Catch-Ups

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  1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 10403(b) and 457 Catch-Ups

  2. Session Details

  3. 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 ERISA Two basic types of 403(b) arrangements • Employee deferral only • Employer contribution and employee deferral

  4. 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

  5. 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

  6. Employer 403(b) Contributions Nonelective Employer Contributions • Require the plan to meet coverage and participation tests: • Ratio percentage test • Average benefits test Matching Contributions • Require the plan to satisfy only the ACP test

  7. Maximum 403(b) Salary Deferrals The lesser of the following two limits: • The annual deferral limit: $17,500 in 2014 plus the long service catch-up ($3,000 limit) • Section 415(c) limit: lesser of 100% of compensation or $52,000 (2014) plus age 50 catch-up if eligible

  8. 403(b) Catch-Up Contributions • Age 50 catch-up provision • Long-service rule exception • must have worked for the same employer for 15 years or more • must be a “HER” organization • 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

  9. 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. 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) • participation limited to a select group of highly paid or management employees (“top hat” plan) • 457(b) – “eligible” • governmental • nongovernmental

  11. Eligible Employers for 457(b) Plans & Deferral Amounts

  12. Funded & Unfunded 457(b) Plans

  13. Catch-up Provisions of 457(b) Plans Age 50 catch-up • Additional $5,500 for those age 50 and older not in the final three years prior to retirement Final 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

  14. Multiple Choice Question 1 Which one of the following is not a provision of TSAs? • The contract between the employer and the employee must be legally binding. • The employee can execute more than one contract per employer per year. • Salary reduction contributions generally are subject to a $17,500 limit in 2014. • The annual TSA contract is irrevocable; the employee may not terminate the agreement during the year. • Loans are permitted in accordance with qualified plan rules.

  15. Multiple Choice Question 2 Which one of the following is not a provision of the special limits that are available to certain employees in a TSA plan? • It is available to employees of health, education, and religious organizations (HER organizations). • It may use both catch-up provisions if qualified. • It may typically defer at least $200 to their TSA during the first year of service. • 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). • 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.

  16. Multiple Choice Question 3 Which one of the following is not a provision of Section 457 plans? • Elective deferrals are subject to a $17,500 limit in 2014. • Employees of tax-exempt organizations and state/local governments may establish Section 457 plans. • An employee retiring at age 65 is not permitted to receive payments until age 70½. • 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.

  17. Multiple Choice Question 4 John 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? • He will pay no tax and no penalty on the distribution. • He will pay tax and a 10% penalty on the distribution. • His distribution is subject to the mandatory 20% withholding. • He will pay tax with no penalty on the distribution.

  18. Multiple Choice Question 5 Rita, 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 (2014)? • $17,500 • $20,500 • $23,000 • $26,000 • $35,000

  19. Multiple Choice Question 6 Which one of the following statements is correct regarding 403(b) plans and Section 457 plans? • Investment options in a 403(b) plan include annuities and stocks. • Section 457 plans can be rolled over into an IRA account. • Section 457 plans do not have required minimum distributions (RMDs). • 403(b) plans may be subject to ACP, but not ADP testing.

  20. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 10End of Slides

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