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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits. Session 10 403(b) and 457 Catch-Ups. Session Details. 403(b) Fundamentals. Qualified employers Public educational systems 501(c)(3) organizations

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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits

Session 10403(b) and 457 Catch-Ups

403 b fundamentals
403(b) Fundamentals

Qualified employers

  • Public educational systems
  • 501(c)(3) organizations
  • Ministers performing religious services for for-profit companies
  • 403(b) plans are not considered to be qualified, were around before ERISA

Two basic types of 403(b) arrangements

  • Employee deferral only
  • Employer contribution and employee deferral
403b age and service requirements
403b: Age and Service Requirements

Typical

  • Minimum age 21
  • One year of service
  • If a plan has a two-year service requirement, 100% immediate vesting
  • If a plan has a minimum age 26 requirement, 100% immediate vesting and the two-year service requirement cannot be used
salary reduction agreement
Salary Reduction Agreement
  • Multiple agreements with same employer in a taxable year are allowed
  • Agreement is legally binding and irrevocable as to amounts already earned
  • Employee may terminate agreement at any time for amounts not yet earned
  • Employer may require $200 minimum annual deferral to meet nondiscrimination safe harbor
employer 403 b contributions
Employer 403(b) Contributions

Nonelective Employer Contributions

  • Require the plan to meet coverage and participation tests:
    • Ratio percentage test
    • Average benefits test

Matching Contributions

  • Require the plan to satisfy only the ACP test
maximum 403 b salary deferrals
Maximum 403(b) Salary Deferrals

The lesser of the following two limits:

  • The annual deferral limit: $17,500 in 2014 plus the long service catch-up ($3,000 limit)
  • Section 415(c) limit: lesser of 100% of compensation or $52,000 (2014) plus age 50 catch-up if eligible
403 b catch up contributions
403(b) Catch-Up Contributions
  • Age 50 catch-up provision
  • Long-service rule exception
    • must have worked for the same employer for 15 years or more
    • must be a “HER” organization
    • additional annual catch-up allowed up to the lesser of:
      • $3,000
      • $15,000, reduced by increases to the general limit that were allowed in previous years due to 15-year rule
      • $5,000 times the number of years of service, subtracted by the total elective deferrals made by employee for earlier years
403 b withdrawals loans
403(b) Withdrawals & Loans

In-service withdrawals

generally not permitted,

except for

  • attainment of age 59½
  • separation from service
  • death
  • disability (Soc. Sec. definition)
  • hardship (employee deferrals only)
  • loans (same terms as 401(k) loans)
section 457 deferred compensation plan
Section 457 Deferred Compensation Plan

A 457 plan is a deferred compensation plan, not a

qualified plan, and therefore not subject to many of

the qualified plan rules.

Two main categories of 457 plans:

  • 457(f) (nongovernmental)
    • participation limited to a select group of highly paid or management employees (“top hat” plan)
  • 457(b) – “eligible”
    • governmental
    • nongovernmental
catch up provisions of 457 b plans
Catch-up Provisions of 457(b) Plans

Age 50 catch-up

  • Additional $5,500 for those age 50 and older not in the final three years prior to retirement

Final three years catch-up

  • Available for each year of the three years preceding normal retirement age
  • Catch-up contribution up to the allowable deferral for the current year, resulting in total deferrals up to two times the allowable deferral for the current year
  • From unused deferrals only
  • Cannot use with age 50 catch-up
multiple choice question 1
Multiple Choice Question 1

Which one of the following is not a provision of TSAs?

  • The contract between the employer and the employee must be legally binding.
  • The employee can execute more than one contract per employer per year.
  • Salary reduction contributions generally are subject to a $17,500 limit in 2014.
  • The annual TSA contract is irrevocable; the employee may not terminate the agreement during the year.
  • Loans are permitted in accordance with qualified plan rules.
multiple choice question 2
Multiple Choice Question 2

Which one of the following is not a provision of the special limits that are available to certain employees in a TSA plan?

  • It is available to employees of health, education, and religious organizations (HER organizations).
  • It may use both catch-up provisions if qualified.
  • It may typically defer at least $200 to their TSA during the first year of service.
  • With 15 or more years of service, a participant may increase each year’s deferral limit by $3,000 (up to $15,000 of cumulative increases).
  • If prior salary reductions exceed $5,000 times years of service, no increase to the deferral amount is available to employees with more than 10 years of service.
multiple choice question 3
Multiple Choice Question 3

Which one of the following is not a provision of Section 457 plans?

  • Elective deferrals are subject to a $17,500 limit in 2014.
  • Employees of tax-exempt organizations and state/local governments may establish Section 457 plans.
  • An employee retiring at age 65 is not permitted to receive payments until age 70½.
  • An additional deferral catch-up of up to twice the regular deferral, less any deferral for the current year, is allowed in the three years prior to retirement.
multiple choice question 4
Multiple Choice Question 4

John Billups, age 53, participated in his former employer’s 457 plan. He terminated several weeks ago and just received his distribution check.

Which of the following statements is true?

  • He will pay no tax and no penalty on the distribution.
  • He will pay tax and a 10% penalty on the distribution.
  • His distribution is subject to the mandatory 20% withholding.
  • He will pay tax with no penalty on the distribution.
multiple choice question 5
Multiple Choice Question 5

Rita, age 63, has worked for the local animal rescue shelter for the past 17 years. The shelter offers a 403(b) plan for all of its full-time employees. Rita is currently the senior accountant, and plans to retire within the next three years. Her current annual compensation is $75,000.

What is the maximum amount that Rita could defer this year (2014)?

  • $17,500
  • $20,500
  • $23,000
  • $26,000
  • $35,000
multiple choice question 6
Multiple Choice Question 6

Which one of the following statements is correct regarding 403(b) plans and Section 457 plans?

  • Investment options in a 403(b) plan include annuities and stocks.
  • Section 457 plans can be rolled over into an IRA account.
  • Section 457 plans do not have required minimum distributions (RMDs).
  • 403(b) plans may be subject to ACP, but not ADP testing.
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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits

Session 10End of Slides