What are the Rules for Employer and Employee 403(b) and 457(b) Contributions?

May 4, 2017
Employer 403(b)
  • For 2017, the $60,000 combined limit on employee and employer contributions to the 403(b) plan allows employers to contribute up to $54,000 on behalf of an employee.
  • Employer Contributions to the 403(b) plan can be continued for up to five years after the participant severs employment.
  • In-service distributions are allowed in 403(b) plans after attainment of age 59 ½, whereas severance from employment is required for 457(b) plan distributions.
  • The 10% early distribution penalty is waived if age 55 is attained during the calendar year employment is severed.
  • There are additional contributions if you have 15 years of service with the same employer.
403(b) Limits on Employer Contributions

For 2017, the employee basic elective deferral limit is $18,000, whereas the limit on aggregate employee and employer contributions is $54,000. If no elective deferrals are involved, then the employer is allowed to contribute up to the $54,000 limit. An employee who has reached age 50 can defer an additional $6,000. It is possible for an aggregate amount of up to $60,000 to be contributed to a 403(b) plan on behalf of an employee during 2017. If the 403(b) plan allows, the employee can contribute after tax dollars up to the $60,000 limit, less what has already been deferred. Why is this? Here’s how:

Funding Your Roth IRA
If your Section 403(b) plan allows for after tax contributions, you could contribute up to $60,000 in 2017 less the amount you have already deferred.

Example:
Bob is over 50 and he elects to defer up to $24,000 in his 403(b) plan for 2017. If his plan allows for after tax contributions, Bob could contribute an additional $36,000 of after tax dollars to the 403(b) plan. But why would you need that?

With new IRS guidance, when it’s time to rollover your 403(b) to an IRA, you can rollover your after-tax money to a Roth IRA. Now your money grows tax free in the Roth IRA.

Consult your tax advisor if you wish to do this.

457 (b) Contributions

Unlike 403(b) plans, Employer Contributions to 457(b) plans are considered deferred compensation by the IRS, so they ARE subject to Social Security and Medicare (FICA) taxes.

The fact that Employer 403(b) contributions are NOT subject to FICA taxation is one of several reasons they are an attractive alternative to Employer 457(b) Contributions.

457(b) Limits on Employer Contributions

For 2017, the basic limit on aggregate employee elective deferrals and employer contributions is $18,000. Contributions for an employee who has attained age 50 can be increased up to an additional $6,000, making it possible for up to $24,000 to be contributed to a 457(b) plan on behalf of an employee during 2017. If 2017 is one of the three years immediately preceding normal retirement age and eligibility has been determined by plan for the 3 year Catch-up in the 457(b) plan, the employer is allowed to contribute up to the elective deferral limit plus underutilized contributions in prior years, up to $36,000 in 2017.

Note the limit on employer contributions is far less in the 457(b) plan than the amounts that the employer could contribute to a 403(b) plan AND FICA taxes must be paid on employer 457(b) contributions, whereas employer 403(b) contributions are exempt from FICA taxation.

Employer Contributions to the 403(b) Plan can be continued for up to five years after the participant severs employment, which is not possible in a 457(b) Plan.

In-service distributions are allowed in 403(b) plans after attainment of age 59 ½ , whereas severance from employment is required for 457(b) plan distributions.

Of course, there are advantages to 457(b) plan participation too, including, but not limited to, the following:

  • No 10% early distribution penalty for post-severance distributions before attaining age 59 ½.
  • Often fees are lower in 457(b) plans than in 403(b) plans.
  • Employees can contribute to both plans, thus basically doubling their tax-deferred supplemental retirement savings options.

The beauty of tax exempt employers who have both plans is if you are eligible you can do both.

If you are over age 50 and make enough money you could put away $24,000 in each plan.

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Doug Mueller, CPA
President
(314) 862-2070
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