CONTRIBUTIONS

What will the new 457 contribution limits be?

The current $8,500 457 government plan limit will increase as follows:

The limit will be indexed in $500 increments thereafter.
The 25% compensation limit increase to 100% of compensation.

What are new elective deferrals under EGTRAA?

Starting in 2002, the maximum annual contributions to 401(k) plans, 403(b) plans for nonprofit workers and Section 457 plans for government workers, all of which had ranged from $8,500 to $10,500, will be identical and will grow gradually until 2006, when the maximum will reach $15,000.

How will the Normal Retirement Age Catch-up for government plans be impacted by EGTRRA?

The Normal Retirement Age catch-up limit will be raised to twice the limit in effect for normal 457 contributions:

This means that participants who are eligible to use the current Normal Retirement Age catch-up provision in 2002 may be able to contribute as much as $22,000 in that year.

What is the "New" 457 Age 50 Catch-Up Provision?

EGTRRA has created an extra catch-up opportunity for workers age 50 and older. Participants who are not using the Normal Retirement Age catch-up, and are age 50 or older, may make an additional catch-up contribution to their 457 plan. Participants may not take advantage of the Age 50 catch-up in any year they are using the Normal Retirement Age catch-up.

This new Age 50 catch-up contribution limit will be the lesser of:

1. compensation reduced by elective deferrals you may make to other plans,
2. a specified dollar limit.

The dollar limits are as follows:

Age 50 catch-up contributions will not be counted as contributions when calculating unused deferrals for Normal Retirement Age catch-up.

Do I have to make an election to allow for the Age 50 catch-up in my plan?

Yes, you do have to make this election and your plan will need to be updated to reflect this new provision. An important note is that current Treasury and Internal Revenue Service information indicates that if the Age 50 catch-up is elected for one plan, it must be provided for in all elective deferral plans offered by the employer.

What are the 457 Coordination Requirements?

Prior to EGTRRA, participant 457 contribution limits were reduced by other deferrals participants made to other eligible sponsored retirement plans. EGTRAA has repealed the coordination of deferral limits. This means that participants who have the ability to contribute, for example, to both a 457 plan and 401(k) plan, may contribute the maximum amount to each plan (subject to the contribution limits for each plan).

PORTABILITY

What plan types can be rolled into other plans?

EGTRRA allows roll-overs to be accepted between 401, 403, 457 and IRA's. the Plan sponsor is responsible for determining what plan type roll-overs will be allowed into their plan. However, EGTRRA mandates roll-overs out of all sponsored defined contribution plans.

What is the difference between a transfer and a roll-over?

A transfer generally refers to a like-to-like, plan-to-plan transfer when a participant does not receive tax reporting. This would occur if you were setting up a new 457 plan, and wanted to transfer participant account balances from your old 457 plan to your new 457 plan.

A roll-over is generally the result of a plan distribution being made to the participant, the participant would receive tax reporting (1099), and the participant would direct where the distributed assets were to be sent. The participant could direct this distribution to go to another 457 plan, but this would be considered a roll-over of those 457 assets.

Which rules will apply if I move my 401 plan account assets into another type of plan such as a 457 plan, 401(k) plan, 403(b) plan, or IRA?

Generally, retirement plan assets that are rolled into another retirement plan or an IRA will "take on" the characteristics of the plan to which they are rolled.

However, there is a very important exception:

Currently, under a 401 plan, a 10% early withdrawal penalty generally applies if withdrawals are taken from these plans prior to age 59 1/2. Under EGTRRA, 401 plan assets that are rolled into a 457 plan will remain subject to the 10% early withdrawal penalty even after they have been moved into a 457 plan.

Conversely, if 457 assets are rolled into a 401 plan, those assets will assume the 10% early withdrawal penalty. This is a very important disclosure for participants who are intending to roll their 457 plan assets into other plans.

How will 457 account assets rolled into a 401 plan be treated upon distribution?

If the 457 assets are withdrawn before the participant reaches age 59 1/2, the 10% early withdrawal penalty will apply.

How will 401 account assets rolled into a 457 plan be treated upon distribution?

If the 401 assets are withdrawn before the participant reaches age 59 1/2, the 10% early withdrawal penalty will apply. In general, assets rolled from one plan to another eligible plan assume the characteristics of the new plan, in the case of taxation, the rolled-over assets maintain or assume the most restrictive taxation scenario.

Will a participant that participates in both a Section 401 plan and a Section 457 plan at the same employer be able to consolidate balances in one of the plans when he or she separates from service?

Yes, as long as the plan accepts roll-overs into the plan from the other plan type.

DISTRIBUTIONS

Can participants elect to change their distribution elections after January 2002?

EGTRRA allows participants who have deferred their distribution election, or who have commenced a systematic distribution payout (as long as the participant is not receiving an annuity payout) to change their election. Prior to EGTRRA, this distribution election was considered irrevocable.

As a Plan Sponsor you must decide whether or not you will allow your participants who have already made a distribution election to make a change to their elections. If you decide to allow participants to make these changes, participants would be allowed to change their elections that begin on or after January 1, 2002.

What is the "same desk rule" under EGTRRA?

EGTRRA provides a consistent definition of what qualifies as a "distributable event" in those situations when participants fall under a "same desk" situation. Specifically, in the event where a participant's employer relationship is changed (e.g. changing from a county to state jurisdiction) but the actual participant's job does not change, current rules would not consider this situation as a distributable event. EGTRRA now defines this as a distributable event, and therefore allows the participant to receive a distribution from the plan.

What effect will EGTRRA have on participant tax reporting?

Prior to EGTRAA distribution payments to 457 government participants were taxed as wages (W-2). Effective for the tax year 2002, distribution payments made to participants from 457 plans will be reported as 1099R's beginning in 2002.

Are loans allowed for section 457 plans?

Yes, loans are available to section 457 plans. EGTRRA did not impact the fact that loans are available to section 457 plans ‚ this was accomplished via the Small Business Job Protection Act of the 1990's. However, the use of loans in section 457 plans has not been prevalent due to administrative complexity and lack of understanding and clarification regarding IRS guidelines in administering section 457 loans.

Copyright © 2001 Retirement Plan Solutions, LLC. Call or Email us today for further information.