457 Plan Trends and Tips
Check your plan operations for these common errors.
Failure to follow unforeseeable emergency 457(b) plan distribution rules
Improper administration of unforeseeable emergency distributions is a frequent source of errors for 457(b) plan sponsors. Hardship distributions from a 457(b) plan are only permitted when a participant is faced with an unforeseeable emergency and where the amount of these distributions doesn't exceed the amount reasonably necessary to satisfy the emergency need. Although determining whether a participant or beneficiary is faced with an unforeseeable emergency is based on the facts and circumstances of each situation, rules and examples defining “unforeseeable emergency” must be applied. Errors made in administering these distributions include mistaken determinations, inadequate documentation and distributions that exceed the amount needed for the unforeseeable emergency.
Failure to comply with IRC Section 457(b) catch-up limitations
Generally, 457(b) plans can allow for two types of catch-up provisions. The first is the age 50 catch-up contributions for governmental employers only. This is the same age 50 catch-up as used in 403(b) and other defined contribution plans and amounts to an additional $6,000 in 2015, 2016 and 2017 that can be contributed by participants who are at least age 50 by the end of the calendar year.
The second (available to all eligible employers) is available to 457(b) plan participants who are within 3 years of normal retirement age. This catch-up feature can be equal to the annual employee deferral limit for the year ($18,000 in 2015, 2016 and 2017) so it can effectively double this limit in a given year. However, the IRC Section 457(b)(3) catch-up increase is limited to unused deferral limits from previous years. Participants who previously deferred the maximum amount of money into a 457(b) plan every year they were eligible for that plan would not be able to use this extra 457(b)(3) catch-up. Participants in eligible 457(b) plans may only use it in the last 3 tax years prior to the tax year in which the participant reaches normal retirement age under the terms of the 457(b) plan. For a governmental 457(b) plan the IRC Section 457(b)(3) catch-up contributions can't be combined with age 50 catch-up contributions in any year, so eligible participants are limited to contributing the higher of their age 50 catch-up increase or their IRC Section 457(b)(3) catch up increase.
Failure to comply with IRC Section 457(b) permissive service credit transfer rules
An eligible governmental 457(b) plan may permit participants and beneficiaries to transfer deferred amounts to defined benefit governmental plans for the purpose of purchasing permissive past service credit under the receiving defined benefit governmental plan. Permissive past service credit is credit for a period of past service recognized by a governmental defined benefit plan. Both the transferee and receiving plans must permit the transfers and the receiving plan must also prevent the amount transferred from exceeding the amount necessary to fund the benefit resulting from the past service credit on an actuarial basis. The participant and beneficiary must voluntarily contribute the transferred amount to the defined benefit governmental plan in addition to any regular employee contribution required under the plan. These transfers are not treated as distributions for purposes of the IRC Section 457(b) distribution restrictions, so the transfers may be made before the severance from employment of the participant or beneficiary.
Model amendments for this catch-up provision can be found in Section 6.04 of Revenue Procedure 2004-56 and Final Regulations Regarding Purchase of Permissive Service Credit by Plan– to–Plan Transfer.