Employee Deferral Trivia
A question in our recent SECURE Act webinar concerning a relatively obscure rule in 457(b) plans inspired a look into the absolute maximum that an individual could voluntarily defer into any combination of qualified retirement plans (403(b)/401(k)/457(b)) in 2020. The result was surprising:
- The 457(b) Plan “Freebie”— To begin the calculation, it is important to understand that 457(b) plans DO NOT COUNT against the 2020 402(g) elective deferral limit of $19,500. Thus, participants fortunate enough to work for an employer who sponsors both a 401(k) and a 403(b) plan, or a 403(b) and 457(b) plan, can essentially double their elective deferral limit to $39,000 in 2020 by deferring $19,500 to a 403(b) or 401(k) plan, and an additional $19,500 to a 457(b) plan.
- Age-50 Catch-Up — But wait, there’s more! The age 50 catch-up election permits an additional $6,500 to both plans. However, the 457(b) catch-up is only permitted in governmental plans. So, participants age 50 or older as of 12/31/2020, eligible to participate in both a governmental 457(b) plan and a 403(b) (or 401(k)), can defer a total of $52,000 in 2020 ($26,000 to each plan), if both plans allow for age 50 catch-up elections (which most do). Pretty amazing, right?
- Obscure Catch-Up Elections — While few qualify, there are two additional catch-up elections that make it possible to defer even more than $52,000. Both elections require that participants have not maxed out their retirement plan deferrals in prior years of their working career.
- The 15-year catch-up election for 403(b) plans allows individuals who have worked for more than 15 years and deferred an average of less than $5,000 per year the right to defer up to an additional $3,000 to a 403(b) plan, if certain other requirements are met. A word of caution, however: the calculation is hopelessly complicated, and thus many 403(b) plans do not permit this election.
- The 457(b) three-year catch-up rule allows participants to DOUBLE their 457(b) elective deferral limit to $39,000 in the three years prior to the plan’s normal retirement age (generally between age 65 and 70½) if they have deferred under the limits for the prior years by at least $19,500 in the aggregate. Again, the plan must permit this election (most do). Important to note: this election CANNOT be used in addition to the age 50 catch-up election.
Thus, an extremely fortunate participant who qualifies for ALL of these elections, and is eligible to defer to both a 403(b) and 457(b) plan that permits all of these election, can defer a whopping $68,000 (assuming he/she earns more than $68,000) in 2020. The figure is $29,000 for a 403(b) ($19,500+ $6,500 age 50 + $3,000 15-year) and $39,000 under the special three year catch-up election to a 457(b) plan. Note that the 403(b) plan also has a combined limit on employer and employee contributions, known as the 415(c) limit, that could potentially limit 403(b) elective deferrals to an amount lower than $29,000, if the employer contribution to the 403(b) is large enough.
The question from our SECURE Act webinar which asked about this inquired as to whether the SECURE Act eliminated the normal retirement age maximum of 70½ for 457(b) three-year catch-up election purposes, since 70½ no longer applies for some other purposes under the Act (including the minimum in-service distribution age for 457(b) plans). Unfortunately, the answer to this question is no; the maximum normal retirement age for this purpose remains age 70½.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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