New 403(b) and 457 Plan Provisions
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which was signed into law on June 6, 2001, will make significant enhancements to your employer-sponsored savings plan. What is the reason for this new legislation? Many American workers are not saving enough or not saving at all for retirement. The goal of EGTRRA is to help American workers realize that personal savings is necessary for a financially secure retirement. These new provisions became effective on January 1, 2002.
These new provisions will end on December 31, 2010, at which time they will revert to the 2001 pension law standards unless they are extended at that time. Take advantage of this open window of opportunity to save for your future retirement.
|Increased Deferral Limits||Increased Combined Plan Limits||Defined Contribution Plan Limit for 415(c)|
|Catch Up Provisions||Maximum Exclusion Allowance (MEA)||Tax Credit for Low Income Earners|
|Increased Portability||415(c) Defined Benefit Dollar Limit|
Increased elective deferral dollar limits for 403(b) and 401(k) plans; dollar limit for 457 Plans:
(indexed in $500 increments)
If you are participating in both the 403(b) plan and 401(k) plan, then the combined amount you can contribute to both retirement savings plans can't exceed the maximum deferral amount listed on the chart above. For example, in 2005, you cannot contribute more than $14,000 total to both your 403(b) and 401(k) plans combined.
Increased combined plan limits for employees contributing the maximum amount to both 403(b) and 457 plans. In 2005, this would be $14,000 to each plan if desired, a total of $28,000.
Dollar limit under 415(c) (Limit of Employee Elective, non-elective and employer contributions to a plan):
|2001 (current)||25 %||$35,000|
|2002||100%||$40,000 (indexed in $1,000 increments)|
Under current law, the overall amount that can be added each year to defined-contribution plans (including employer and employee contributions) is limited to the lesser of 25 percent of compensation or $35,000. The new law will increase the percentage of compensation limit to 100 percent and the dollar limit to $40,000 beginning in 2002. The increase in the dollar limit will allow larger contributions on behalf of highly compensated employees. The increase in the percentage limit will allow larger contributions on behalf of (rank and file) employees.
Catch up contributions for 403(b) and 457 plan participants over age 50 (in addition to the catch-up contributions that continue to be available to 403(b) participants with 15 years of service. These catch up provisions are available for any participant age 50 regardless of whether they contributed the maximum amount in past years. The catch up contributions can be deducted from each paycheck starting on January 1 of the year in which an employee turns 50.
2001 (current) $0 2002 $1,000 2003 $2,000 2004 $3,000 2005 $4,000 2006 $5,000
The Maximum Exclusion Allowance for 403(b) plans will be repealed in 2002.There will be no more calculations or alternative limits.
There is one exception that will require a calculation from your vendor. Under the 402(g)(7) participants are allowed an additional increase of $3,000 per year as an elective deferral for eligible employees with 15 or more years of service with the current "eligible" employer, and if the employee has not contributed, on the average, at least $5,000 each year to a 403(b) account with that employer. An averaging calculation must be done to ensure the option is available. It is the employees responsibility to convey accurate information to the vendor doing the calculation, i.e., if splitting a deferral between two vendors.
Participants with income under specified thresholds will receive a tax credit for contributing to a retirement plan. The credit is available to individuals who are over the age of 18, other than individuals who are full-time students or are claimed as a dependent on another taxpayer's return. Tax credits are realized only when filing your tax return.
|Joint Filers||Heads of Households||All Other Filers||Credit Rate|
|Over $50,000||Over $37,500||Over $25,000||0%|
- Plan participants will be able to take distribution-eligible amounts in their plan accounts to new employer's plan, whatever the type (excluding nonqualified deferred compensation plans), or to an IRA
- Governmental 457 plans will now be able to permit rollovers to IRAs or to other plans, including qualified plans, 401(k) plans and 403(b) plans.
- After tax amounts will also be eligible to be rolled to an IRA or directly to other plans, provided that the receiving plan agrees to maintain separate records of those amounts.
- Beginning in 2002, state and local government employees will be permitted to purchase service credits in their state defined benefit plan by transferring amounts from their 403(b) or 457 plans.
The dollar limit on the maximum annual benefit payable from a defined benefit plan will increase to $160,000. This limit will not be linked to participants Social Security retirement age. Instead, the dollar limit will be actuarially reduced when benefits begin before age 62 and will be increased if benefits begin after age 65
|2005||$170,000 (indexed in $5,000 increments)|
For more information or questions regarding new changes in retirement plans, please contact Eileen Sorenson, Benefits Administrator. More information about the 457 plan can be found at the VRS website.