“We are a public higher education institution that sponsors a 403(b) and a 457(b) plan. Last year, we hired an employee who is now 63 years of age. He was eligible to make deferrals to both of our plans last year, but only deferred to the 403(b) plan. This year, he wants to max out in both of our plans. We know he can contribute $27,000 to the 403(b), but what about the 457(b) plan? We do have the special three-year catch-up provision in our plan, and our normal retirement age is 65. Would he qualify for that?”

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

Indeed, he would qualify for the special three-year catch-up for 457(b) plans, since service is not a factor in that election, and he is in one of the three taxable years ending prior to the year in which he reaches normal retirement age (65 in your plan). Participants may only use the special three-year catch-up rule if they did not defer the maximum deferral limitation permitted in previous years, which is also applicable here. Under the rule, the maximum deferral limitation for the participant is the lesser of 1) an amount equal to twice the dollar limit on annual deferrals under Internal Revenue Code section 457(b)(2)(A) (adjusted annually for inflation); or 2) the underused limitation, i.e., the sum of the ceiling limit in effect for the year at issue, minus the amount of deferrals under any 457(b) plan for the prior taxable year.

Thus, the deferral limit is either the lesser of double the 2022 elective deferral limit (2 x $20,500, or $41,000), or this year’s limit of $20,500 plus the amount of unused 457(b) deferrals in prior years. To calculate this unused amount for this employee, we only have one prior year, which is 2021. He didn’t defer at all in 2021; if he had enough compensation in 2021 to defer the full amount to the 457(b), that would have been $19,500 in unused deferrals, since the 457(b) deferral limit in 2021 was only $19,500 (note that the age-50 catch-up does not count for this purpose). Thus, $20,500 plus $19,500 is $40,000, which is less than $41,000 and is thus the participant’s 457(b) deferral limit for 2022. Note that the participant cannot add the age-50 catch-up to this amount, since he cannot use the three-year catch-up and the age-50 catch-up in the same year. However, he can still defer a total of $67,000 total to the retirement plans you offer ($27,000 to the 403(b) and $40,000 to your 457(b) assuming that he has at least that much eligible compensation to defer), which is not too shabby!

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. 

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