Does the eligibility requirement for a tax-exempt 457(b) plan have to coincide with an existing 401(k) or 403(b) plan?

No, eligibility can be different from the existing plan.

Who can participate in a tax-exempt 457(b) plan?

Participation in a tax-exempt 457(b) plan is limited to a select group of management or highly compensated employees, including independent contractors.

Is the Form 5500 required to be filed for a tax-exempt 457(b)?

No, as long as the initial DOL filing was made.

Are there any DOL or IRS filings required for a tax-exempt 457(b) plan?

Tax-exempt 457(b) (Top Hat) plans must file a notification of the plan’s existence with the Department of Labor.  As long as this notification is timely filed there is no Form 5500 requirement for the plan.  Nova 401(k) Associates can assist with this filing.

When can a 457(b) plan be established?

A tax-exempt 457(b) plan can be established at any time during the calendar year.

Does a non-governmental 457(b) plan require a plan document?

Yes.  A non-governmental 457(b) does require a written plan document.  Unfortunately, there are no IRS pre-approved plan documents for non-governmental 457(b) plans.  Nova 401(k) Associates provides plan documents.

Reasons to offer a 457(b) plan

The biggest reason that a tax-exempt employer would offer a 457(b) plan is higher deferral limits. Without regard to catch-up limits, the most an individual can defer to a 401(k) plan in 2014 is $17,500.  A 457(b) plan may allow the employee to defer an additional $17,500!  This can be a real perk to higher paid employees of the tax-exempt organization.

A 457(b) plan is also a possible solution if the tax exempt’s 401(k) plan is failing the ADP or ACP test.  For example, if the highly compensated employee (‘HCE’)s are limited to deferring just $5,000 to the 401(k) plan because of low participation by the non-highly compensated employees, a 457(b) plan would allow the HCEs additional tax deferral opportunities.

Other benefits include the following:  Independent contractors can participate and no 10% penalty for withdrawals before age 59-1/2.

Other than governmental employers, who can establish a 457(b) plan?

The organization must be a tax-exempt organization under IRC 501(c), excluding churches as defined under IRC 3121(w).  The most common example of a non-governmental organization sponsoring a 457(b) plan would be a charity which is tax-exempt under IRC 501(c)(3).  Other examples include certain credit unions, country clubs, civic leagues and other groups organized under IRC 501(c).

What is 457(b) plan?

A 457(b) plan is a type of non-qualified tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers. The employer provides the plan and the employee defers compensation into it on a pre-tax basis.   Sometimes the employer also makes contributions.

436/PPA Amendment for DB/Cash Balance Plans

In 2006, Congress signed the Pension Protection Act which made some changes to the rules governing the operation of pension plans and significant changes to the funding rules for defined benefits plans. For most defined benefit plans and cash balance plans, this has resulted in two amendments to their plan:

  • A PPA amendment (adopted usually in 2009).
  • A PPA/436 amendment to be signed this year.

A small number of our clients will have no or one amendment instead for one of the following reasons:

  • When they adopted their plan, the required language was already included.
  • The required language was incorporated into a restatement of the plan document.

If Nova 401(k) Associates maintains your documents, we will prepare the amendment. If you have an outside attorney who maintains your document, please discuss with your attorney whether or not an amendment is required. When speaking with your attorney, we suggest you refer to the amendment as the “436” amendment. We are available to speak with your attorney or review amendments prepared by your attorney.

The PPA/436 amendment updates the Plan document

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to reflect the following provisions of PPA:

  • Limited availability of lump sum form of payment (and other accelerated payments) when the Plan’s funded status is below 80%
  • Automatic freezing of plan accruals when the Plan’s funded status is below 60%

A plan is required to adopt these amendments even if the Plan’s funded status is well above 100% and the plan’s operation is unaffected by the amendment.

Please feel free to call us if you have questions!