Compensation Limit for 457(b) Plans

“Is there a 457(b) compensation limit that is similar to the Code Section 401(a)(17) compensation limit for 401(k) and 403(b) plans ($305,000 in 2022)?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

The 401(a)(17) compensation limit, which, as you stated, is $305,000 in 2022, does technically apply to the 457(b) plan definition of compensation. Code Section 457(e)(5) defines compensation for 457(b) plans, known as “includible compensation,” as the Code Section 415(c)(3) definition, which is limited by 401(a)(17).

However, as a practical matter, this compensation limit should generally not limit the contributions that can be made to a 457(b) plan on behalf of a participant. The reason is that total contributions to a 457(b) plan are limited to the LESSER of the following under Code Section 457(b)(2):

(A) the applicable dollar amount, or

(B) 100% of the participant’s includible compensation.

The applicable dollar amount is $19,500 in 2021 ($20,500 in 2022) or $26,000 in 2021 and $27,000 in 2022 for governmental plan participants who are age 50 or older. Thus, likely the only way that compensation would come into play is if a participant’s compensation was LOWER than these thresholds (e.g., a participant who is not yet 50 years of age has compensation of $15,000 in 2022, in which case his/her contribution limit would be the lesser of $20,500 or $15,000, or $15,000).

The Experts do note, however, that your plan document could provide that contributions must be made on the “first” $305,000 of compensation received by a participant. Therefore, if a participant has a low deferral election (e.g., 1%), they could hit the compensation limit before hitting the contribution limit.  However, this provision is not all that common, and the contribution limit will generally be the limit at issue before the much higher 401(a)(17) compensation limit would ever come into play.

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.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.