457 Plan - Changes With EGTRRA 2001

Changes With EGTRRA 2001

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made a number of changes in how governmental 457 plans are treated, the most notable of which is that the coordination of benefits limitation was removed. This allows a person whose employer has a 401(k) or 403(b) and a 457 to defer the maximum contribution amounts to both plans instead of coordinating the total and only being able to meet a single limit amount. Thus a participant can contribute the maximum $16,500 for 2009 into their 401(k) and also the maximum $16,500 into their 457 plan. If that person's age is at least 50 at the end of the current tax year, they can contribute the additional catch up amount into each plan also, meaning an additional $5,500 into the 401(k) and another $5,500 into their governmental 457 (catch-up contributions are not provided for non-governmental 457 plans). The total would then be $44,000 deferred instead of the $22,000 that would have been allowed if the coordination of benefits provision had not been repealed in regard to the governmental 457 plan. As a result, many governmental employers have now set up 457 and 401(k) plans for their employees, and non-profit employers have set up 403(b) and 457 plans each allowing their employees to invest in both. Some state universities and school districts have access to all three tax-deferred plans. However, the total combined annual contribution to 401(k) and 403(b) plans is subject to the $16,500 limit and $5,500 catchup limit.

Other notable changes made in the EGTRRA legislation were increasing the maximum deferral amount from the approximately $8,500 that was previously allowed to the same maximum elective deferral amount that 401(k) plans and now 403(b) plans allow, and easing restrictions on some plan rollovers. Governmental 457 plans may be rolled into other types of retirement plans with few restrictions beyond the normal ones for any other type of employer provided plan, which includes separation of service or disability. This includes other 401(k) and 403(b) plans and also IRA's. IRA's have much greater flexibility in withdrawal and conversion privileges. In contrast, non-governmental 457 plans can only be rolled into another non-governmental 457 plan.

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