The Proper Timing of 457(b) Deferral Elections
BBK’s Jeff Chang Compares 457(b) and 401(k) Plans in NTSA Advisor Article
In an article that first appeared on the Focus On Public Benefits blog and later in the National Tax-Deferred Savings Association’s (NTSA) NTSA Advisor, BBK Partner Jeff Chang discusses the similarities and differences between 457(b) plans and private sector 401(k) plans.
Jeff writes that, because of their “differing origins,” the rules and requirements are different, and “it’s important not to assume that what works for a 401(k) plan will also work for a governmental 457(b) plan.”
According to Jeff, the timing of 401(k) elections is more flexible, while timing of 457(b) elections is less flexible and requires more planning.
He also notes similarities between these plans: “One basic rule common to both 401(k)s and 457(b)s is that you can’t defer amounts of income earned or received before the plan has been adopted or implemented. While it is not uncommon to see 401(k) plans with certain ‘effective dates’ going back to the beginning of a plan year, if the plan is being adopted/signed mid-year, that plan cannot accept deferrals that pre-date the date of adoption/execution of the plan. Similarly, a 457(b) plan cannot accept pre-tax deferrals of amounts of compensation earned prior to the date of adoption of the plan.”
In conclusion, Jeff notes that employees and HR staff are now “moving regularly between the private sector and the public sector.” And as a result, “both new participants and HR staff may be assuming that the looser deferral rules for 401(k)s automatically apply to their 457(b). Unfortunately, if the more strict 457(b) rules are not followed, there could be unwelcome tax consequences.”
Jeff’s NTSA Advisor article can be read in its entirety here.
The NTSA is the nation’s only independent, nonprofit association dedicated to the 403(b) and 457(b) marketplace. The NTSA was formed in 1989 and has grown to include practitioners, agencies, corporate and employer members.