Repeal of Sec. 457 coordination requirements.

• Author: Koppel, Michael D.
• Position: Employee Benefits Pensions

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) contains numerous pension reform provisions. Perhaps the most highly touted provisions are the increased contribution limits for various retirement plans. For example, under the EGTRRA, the maximum annual amount an employer may contribute to a defined contribution plan increases from the lesser of $35,000 or 25% of compensation in 2001, to the lesser of $40,000 or 100% of compensation in 2002. The limits on contributions to IRAs (deductible and Roth) increase from $2,000 in 2001 to $5,000 in 2008. Secs. 401(k) and 403(b) contribution limits increase from $10,500 in 2001 to $15,000 in 2006, and Sec. 457 plan contribution limits increase from the lesser of $8,500 or one-third of compensation in 2001 to the lesser of $15,000 or 100% of compensation in 2006.

Financial advisers and tax practitioners should not overlook one subtle section of the EGTRRA, which relates to contribution limits of Sec. 457 and 403(b) plans. Section 615 of the EGTRRA provides:

Subsection (c) of section 457 ... is amended to read as follows: "LIMITATION.--The maximum amount of the compensation of any one individual which may be deferred under subsection (a) during any taxable year shall not exceed the amount in effect under subsection (b) (2) (A) (as modified by any adjustment provided under subsection (b)(3))."

Section 615 is effective for tax years beginning in 2002.

Although it is not obvious at first glance, Section 615 is very good news for employees eligible to participate in both Sec. 403(b) and 457 plans. Section 615 allows employees eligible to participate in both plans to contribute (and defer from gross income) a maximum of $11,000 to each plan in 2002. Thus, an employee eligible to participate in both a Sec. 403(b) and a Sec. 457 plan could contribute (and defer from gross income) a total of $22,000 in 2002. In 2006, the maximum contribution to each plan will increase to $15,000, for a combined maximum annual deferral of $30,000.

The EGTRRA

Prior to the EGTRRA, old Sec. 457(c)(2) required that any contribution to a Sec. 403(b) plan also counted toward the Sec. 457 contribution limit. Because all contributions to a Sec. 403(b) plan were counted as Sec. 457 plan contributions, old Sec. 457(c)(2) limited total contributions to both plans to the $8,500 Sec. 457 limit rather than the $10,500 Sec. 403(b) limit. As a result, an employee participating in both a Sec. 403(b) plan and a Sec. 457...