CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Retirement Planning & Employee Benefits
Session 10
403(b) and 457 Catch-Ups
©2014, College for Financial Planning, all rights reserved.
Session Details
Module
6
Chapter(s) 1, 5
LOs
6-1
6-7
Explain the basic provisions of a 403(b) taxsheltered annuity (TSA) plan.
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 forprofit 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
10-3
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 test
o 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: $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
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” organization
o 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 $17,500 in 2014 or 100% of
compensation ($5,500 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 plan
10-12
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
10-13
Multiple Choice Question 1
Which 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 $17,500 limit in 2014.
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
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?
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
Multiple Choice Question 3
Which one of the following is not a provision of
Section 457 plans?
a. Elective deferrals are subject to a $17,500 limit
in 2014.
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
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?
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
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)?
a. $17,500
b. $20,500
c. $23,000
d. $26,000
e. $35,000
10-18
Multiple Choice Question 6
Which one of the following statements is
correct regarding 403(b) plans and Section 457
plans?
a. Investment options in a 403(b) plan include
annuities and stocks.
b. Section 457 plans can be rolled over into an
IRA account.
c. Section 457 plans do not have required
minimum distributions (RMDs).
d. 403(b) plans may be subject to ACP, but not
ADP testing.
10-19
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Retirement Planning & Employee Benefits
Session 10
End of Slides
©2014, College for Financial Planning, all rights reserved.