November 28, 2017
| Please note: The information in this alert is relevant for employers that sponsor a 403(b) and/or a 457(b) plan and their consultants. The information is not applicable to employers that are not able to sponsor these types of plans (i.e., for-profit private sector employers). |
The Senate Finance Committee released additional information about the tax reform legislation it has approved, which likely will be considered by the full Senate in the near future. We wanted to provide a heads up about some provisions in the Senate’s version of the bill that may/will have a significant impact on public sector employers that sponsor 403(b) plans and/or 457(b) plans. The following excerpt is taken from the Finance Committee’s summary of the legislation (which is referred to as the “Mark” below). We have highlighted some of the key information.
Conformity of contribution limits for employer-sponsored retirement plans
Current Law: In the case of a section 401(k) plan or a section 403(b) plan, specific annual limits apply to elective deferrals by an employee and additional annual limits apply to aggregate contributions for the employee. For 2017, elective deferrals are generally limited to the lesser of (1) $18,000 plus an additional $6,000 catch-up contribution limit for employees at least age 50 and (2) the employee’s compensation. If an employee participates in both a section 401(k) plan and a section 403(b) plan of the same employer, a single limit applies to elective deferrals under both plans. However, under a special rule, in the case of employees who have completed 15 years of service, additional elective deferrals are permitted under a section 403(b) plan maintained by an educational organization, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches. In this case, the annual limit is increased by the least of (1) $3,000, (2) $15,000 reduced by the employee’s additional elective deferrals for previous years, and (3) $5,000 multiplied by the employee’s years of service and reduced by the employee’s elective deferrals for previous years.
For 2017, the limit on aggregate contributions to a qualified defined contribution plan (including a section 401(k) plan) or a section 403(b) plan is the lesser of (1) $54,000 and (2) the employee’s compensation. Because employees generally do not receive compensation for years after they have terminated employment, contributions generally cannot be made for former employees. However, under a special rule, employer contributions to a section 403(b) plan can be made for up to five years after termination of employment.
In the case of a governmental section 457(b) plan, all contributions are subject to a single limit, generally for 2017, the lesser of (1) $18,000 plus an additional $6,000 catch-up contribution limit for employees at least age 50 and (2) the employee’s compensation. This limit is separate from the limit on elective deferrals to section 401(k) and section 403(b) plans. Thus, for example, if an employee participates in both a section 403(b) plan and a governmental section 457(b) plan of the same employer, the employee may contribute up to $18,000 (plus $6,000 catch-up contributions if at least age 50) to the section 403(b) plan and up to $18,000 (plus $6,000 catch-up contributions if at least age 50) to the section 457(b) plan. In addition, under a special rule, catch-up contributions may be made by an employee to a governmental section 457(b) for the last three years before attainment of normal retirement age. Additional contributions may be made up to the lesser of (1) two times the otherwise applicable dollar limit for the year (two times $18,000 for 2017, or $36,000) and (2) the employee’s otherwise applicable limit for the year plus the amount by which the limit applicable to the employee for previous years exceeded the employee’s deferrals for the previous years. If a higher limit applies to an employee for a year under this special rule than under the general catch-up rule ($6,000 for 2017), the general catch-up rule does not apply for the year.
In the Mark: The provision applies a single aggregate limit to contributions for an employee in a governmental section 457(b) plan and elective deferrals for the same employee under a section 401(k) plan or a 403(b) plan of the same employer. Thus, the limit for governmental section 457(b) plans is coordinated with the limit for section 401(k) and 403(b) plans in the same manner as the limits are coordinated under present law for elective deferrals to section 401(k) and section 403(b) plans.
The provision repeals the special rules allowing additional elective deferrals and catch-up contributions under section 403(b) plans and governmental section 457(b) plans. Thus, the same limits apply to elective deferrals and catch-up contributions under section 401(k) plans, section 403(b) plans and governmental section 457(b) plans.
The provision repeals the special rule allowing employer contributions to section 403(b) plans for up to five years after termination of employment.
The provision also revises application of the limit on aggregate contributions to a qualified defined contribution plan or a section 403(b) plan (that is, the lesser of (1) $54,000 (for 2017) and (2) the employee’s compensation). As revised, a single aggregate limit applies to contributions for an employee to any defined contribution plans, any section 403(b) plans, and any governmental section 457(b) plans maintained by the same employer, including any members of a controlled group or affiliated service group.
JCT Estimate: This provision would increase revenues by $1.7 billion over 10 years.
Please contact us for any questions regarding the legislation.