Maximum Deferral When a 401(a), 403(b) and 457(b) Are Offered

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

Our public university sponsors a 401(a) defined contribution plan, as well as 403(b) and 457(b) plans. The majority of our employees are eligible for all three. What is the maximum elective deferral that an employee eligible for all three plans can make for 2022?”

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

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We partially addressed this question in our Ask the Experts column on the combined 403(b)/457(b) limit for public 403(b)-eligible employers, but that column needs to be updated for 2022. The general elective deferral limit for a 403(b)/457(b) plan combo would be $41,000 in 2022 ($20,500 to the 403(b) plan and $20,500 to the 457(b) plan). If an employee received EMPLOYER (i.e., nonelective) contributions to the 457(b) plan, that $20,500 limit for that plan would be reduced by those contributions. Further, if any employee received EMPLOYER contributions in EXCESS of $40,500 to the 403(b) plan (an unusual event in the Experts’ experience), the amount in excess of $40,500 would also effectively “crowd out” or reduce the $20,500 limit to the 403(b) plan (the limit on combined employer and employee deferrals to 403(b) accounts for 2022 is the lesser of $61,000 or 100% of includible compensation for the employee’s most recent service year).

If an employee is age 50 or older by the end of 2022, and both the 403(b) and 457(b) permit the use of the age-50 catch-up election, the combined elective deferral limit would increase from $41,000 to $54,000 ($20,500 + $6,500 catch-up to each plan). If your 457(b) plan offers the three-year catch-up election, the small number of employees who would qualify for that could defer up to $68,000 for each of the three calendar years prior to normal retirement age instead of $54,000 (for more on the three-year annual catch up election, see “Does the RMD Age Change Affect Rules for Special Catch-Up in 457 Plans?” In the rare event that your 403(b) plan offers the 15-year catch-up election, which would allow qualifying employees to defer up to an additional $3,000 to the 403(b) plan, the deferral limit would increase from $68,000 to $71,000 for those employees. For details on all these limit calculations, see the Ask the Experts column linked above.

Of course, all of these scenarios assume that employees have that much in compensation to defer in the first place, as employees may only defer up to 100% of compensation less any mandatory deductions, such as those for FICA federal payroll tax, to a retirement plan.

A 401(a) plan does not allow for pre-tax elective deferrals, nor does it allow for Roth contributions, unless it contains a 401(k) feature, which governmental entities are generally not permitted to have, except for some grandfathered plans. However, if the plan has an after-tax contribution provision, an employee could generally make after-tax contributions up to the lesser of the plan limit or $61,000, less any employer contributions to the 401(a) plan in 2022.

If short, your eligible employees can defer quite of bit of money to your combination of plans!

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.

Picking the Minds of Stock Plan Participants

Most feel confident in their ability to access their stock plan account, but many would like more education about maximizing their benefit.

Morgan Stanley at Work has published the results of a new survey of some 40,000 U.S. stock plan participants.

According to the analysis, nearly 40 million Americans quit their jobs in 2021, in what economists have called the Great Resignation. With the demand for talent increasingly outstripping supply, and a third of U.S. workers considering a job change in the next year, employees are paying more attention than ever to their financial security and their emotional and physical well-being in the workplace. They are also reassessing the types of benefits they want and expect, and many are focusing on equity compensation.

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The new Morgan Stanley at Work analysis suggests stock plan benefits may enable companies to both attract and retain talent, yet stock plan participants broadly lack a high degree of confidence and knowledge about their benefits.

According to the survey, most stock plan respondents (75%) feel confident in their ability to access their stock plan account, but only about half understand how to sell their stock plan shares. Still fewer, about a third, report understanding how to estimate the potential tax impact of their stock plan benefits.

Equally few respondents feel confident in maximizing the financial potential of their stock plan benefits, and, as such, some four in five stock plan participants believe their companies should play a role in educating and advising them about the benefit.  

Respondents are eager to learn about their stock plan and are actively looking for information—online via their stock plan platform or company intranet, as well as through periodic emails and one-on-one consultations with financial advisers. The survey concludes that companies can financially empower their employees to meet long-term goals while driving their loyalty.

A collective 78% of respondents are either satisfied or very satisfied with their stock plan benefit. A scant 2% were very dissatisfied, and 5% were somewhat dissatisfied. The remaining 15% are neither satisfied nor dissatisfied.

Only 16% of those surveyed had called their stock plan service center during the prior year, but the vast majority of these, more than 80%, agreed that their call center professional was knowledgeable and helped them resolve their inquiries in a timely manner.  

When it comes to those survey participants who had sold stock shares, 28% put the proceeds into a checking or savings account, while 10% transferred the proceeds to another brokerage account, which is the same proportion that spent the cash in the short term. Perhaps most striking, some 4% of respondents admitted to not knowing or not remembering what they did with their stock plan sale proceeds.

A sizable majority of respondents agreed that the stock plan is one of the reasons they have chosen to stay with their current employer. Many also agree with the statement that the plan is a good way for the company to demonstrate its appreciation of employees.

In terms of the type of information stock plan investors would like to get more of, they cited guidance about how their stock sales might impact their taxes. They would also like more information about how to potentially maximize the financial benefit from their stock plan holdings.

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