Does the RMD Age Change Affect Rules for Special Catch-Up in 457 Plans?

“We are a public university that sponsors both a 403(b) and 457(b) plan. For the special three-year catch-up election permitted in our 457(b) plan, I realize that the election is limited to the three calendar years prior to attainment of the plan’s normal retirement age—age 70.5 in our plan, which we understood was the maximum retirement age that we could implement. But, given the recent changes under the SECURE Act, could we increase our plan’s normal retirement age to 72?”

Stacey Bradford, Charles Filips, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Excellent question, but before the Experts respond, an explanation to our readers of this election might be helpful to provide context. In 457(b) plans, there is a special election that permits contributions in excess of the general limit ($19,500 in 2020). If the plan permits, a participant in each of the three calendar years prior to the normal retirement age (as specified in the plan) can contribute the lesser of:

1. Twice the annual limit ($39,000 in 2020); or
2. The basic annual limit ($19,500 in 2020) plus the amount of the basic limit not used in prior years.

Thus, if the participant has no unused limitation in prior years (i.e., he/she has always “maxed out” deferrals), the election will be no use, since limit #2 ($19.500 + $0 in unused limit) would always apply. That is why this is a “catch-up” election, as it allows you to catch-up on contributions that you did not make in prior years. The limit may only be used for one three-year period, and cannot be used in addition to the age-50 catch-up that applies to governmental plans.

As for your question, the IRS has not yet issued guidance on the impact of the required minimum distribution (RMD) age change in the Setting Every Community Up for Retirement Enhancement (SECURE Act) on the 457(b) last-three-years catch-up. And the regulation about the catch-up expressly refers to age 70.5 as the maximum normal retirement age:

“[A] plan may define normal retirement age as any age that is on or after the earlier of age 65 or the age at which participants have the right to retire and receive, under the basic defined benefit pension plan of the State or tax-exempt entity (or a money purchase pension plan in which the participant also participates if the participant is not eligible to participate in a defined benefit plan), immediate retirement benefits without actuarial or similar reduction because of retirement before some later specified age, and that is not later than age 70½.” See Treas. Reg. § 1.457-4(c)(3)(v)(A).

The 70.5 age is also still described as the maximum normal retirement age on the IRS website addressing the catch-up, last updated in June. (See https://www.irs.gov/retirement-plans/issue-snapshot-section-457b-plan-of-governmental-and-tax-exempt-employers-catch-up-contributions.) Thus, while it is possible that the IRS may eventually change this rule to reflect the SECURE Act’s change, and might even do so retroactively, for the time being, the regulation states that age 70.5 remains the upper limit.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.