Tip of the Day
By Stephanie Reagan
Are your executives reaching their deferral of compensation dollar limits in the organization's 403(b) or 401(k) plan?
Why not adopt a simplified 457(b) Plan for the executives so they can elect to defer up to $17,500 ($18,000 for 2015) of their salary annually (increased for cost-of-living adjustments) in addition to the 403(b) or 401(k) plan dollar limits?
I say adopt a "simple" plan because you want to make this plan easy to administer and free of compliance errors.
So just limit the annual plan deferrals of salary to the $17,500 annually (increased for cost-of-living adjustments). For executives who want to elect deferrals of salary in the 457(b) plan, it's best to avoid certain 457(b) plan provisions. For example:
Do not allow for employer matching because it is easy to exceed the statutory limits.
Do not offer the 457(b) catch-up contributions, because it doesn't amount to that much and it's hard to administer.
- Do not have employee contributions in a 457(b) deferral plan if the company plans to make employer contributions for that executive. $17,500 ($18,000 for 2015) is the total dollar limit (increased for cost-of-living adjustments) for employer and employee contributions combined.
To reduce complexity and limit the chance of exceeding the dollar limit, if the organization wants to offer employer contributions to a 457(b) plan for some executives, it may wish to adopt two separate 457(b) plans - one for participants with deferrals and one for employer contributions.
If a participant is eligible for the 457(b) Employer Contribution Plan, then he or she should be excluded from participating for that year in the 457(b) Employee Deferral Plan. Note that exceeding the dollar limit has dire tax consequences for the executive.
To keep it simple and cost effective, use the same investment alternatives that have been chosen for the organization's 403(b) or 401(k) plan. Make your vendor of the 403(b) or 401(k) plan also be the trustee of the "Rabi Trust". Your vendor will be happy to provide you with plan documents and other information upon your request and usually for free.
All participants are 100% vested in their deferral account balance. It's a good idea to also make the employer contributions 100% vested. That way there's nothing to keep track of or worry about!
Here's some other information about 457(b) plans to consider:
Rollovers are not allowed in or out of the plan.
The Federal early withdrawal penalty of 10% before age 59 ½, does not apply.
The organization owns the 457(b) plan assets until they are distributed to participants.
Plan assets are subject to the organization's general creditors.
Loans are not available.
No Form 5500 annual filings are required, just a one-time notice to the DOL.
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