How Should a 457(b) Plan Determine Normal Retirement Age?

Q: I read an Ask the Experts column that implied that the plan sets the normal retirement age in a 457(b) plan on which the special three-year catch-up election is based. However, our 457(b) plan document seems to indicate that each of our plan participants actually designate their normal retirement ages. Is that possible?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Yes, it is possible for a 457(b) plan to allow participants to designate their normal retirement age for purposes of the special three-year catch-up election. In this instance, it is helpful to look to the relevant regulation, Treasury Regulation § 1.457-4(c)(3)(v)(A) as follows (boldface text reflects the Experts’ emphasis):

(v) Normal retirement age—(A) General rule. For purposes of the special section 457 catch-up in this paragraph (c)(3), a plan must specify the normal retirement age under the plan. 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 70 1/2. Alternatively, a plan may provide that a participant is allowed to designate a normal retirement age within these ages. For purposes of the special section 457 catch-up in this paragraph (c)(3), an entity sponsoring more than one eligible plan may not permit a participant to have more than one normal retirement age under the eligible plans it sponsors.

(B) Special rule for eligible plans of qualified police or firefighters. An eligible plan with participants that include qualified police or firefighters as defined under section 415(b)(2)(H)(ii)(I) may designate a normal retirement age for such qualified police or firefighters that is earlier than the earliest normal retirement age designated under the general rule of paragraph (c)(3)(i)(A) of this section, but in no event may the normal retirement age be earlier than age 40. Alternatively, a plan may allow a qualified police or firefighter participant to designate a normal retirement age that is between age 40 and age 70.5.

Your 457(b) plan could permit any participant to designate a normal retirement age between age 65 and 70.5 (or an age earlier than 65, if the participant has the right to retire and an unreduced immediate retirement benefit at such earlier age under the defined benefit pension plan of the state or tax-exempt entity, or money purchase pension plan, if the participant is not eligible to participate in a defined benefit plan). In addition, if there are any qualified police or firefighter participants in your 457(b) plan, those participants can designate any normal retirement age that is between age 40 and age 70.5, if your plan allows it.

It is important to note that your plan is not required to allow for such flexibility; it could simply designate a single normal retirement age for all participants, and many plans do indeed designate such a normal retirement age for purposes of administrative simplicity.

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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