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.