Governmental 457b excess deferrals/plan compliance

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PFOS
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Governmental 457b excess deferrals/plan compliance

Post by PFOS »

Hi all,

I've run into this odd predicament for last year (TY 2021) and I'm looking for advice on how to proceed. My spouse is a teacher and has access to the state 457(b) deferred compensation plan with a 6% match. We decided we would max it out and we set deductions based on $19500. What I learned, on my own, towards the end of last year was that (based on what I can find from the IRS) the limit is $19,500 for employee and employer contribution combined and not employee only as I'm used to with my 401k. My spouse's schools director is always slow about changing deduction percentages so

what I assumed would happen was:
1) We would contribute to the plan until we hit the max of $19500
2) the plan would automatically stop us from contributing any more to it
3) We miss out on a month or two of matching :oops: Oh well, you live you learn

What happened instead was:
1) The contribution were allowed to continue and we ended up contributing ~$22500 to the plan
2) We contacted the director who said she was going through the same issue
3) The director contacted the plan administrator (plan administrator for the state) who said that we are fine and allowed to contribute up to $20500 for TY 2022

Please note that this is with the same plan and employer for the entire year. Based on everything I've found, we have excess deferrals to the plan but the people in charge seem to think it's fine. I'd like to know the correct answer is so I can plan for TY 2022 as well as deal with tax consequences before they get needlessly complicated. Can anybody confirm that what I'm reading from the IRS about the 457b contribution limit being both employee and employer contributions is correct? If I'm wrong, great! But If I'm right, has anybody ran into this issue previously? Is this another one of those, the IRS will deal with it when they get to it things?

Thanks!
krow36
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Re: Governmental 457b excess deferrals/plan compliance

Post by krow36 »

The 19,500 employee contribution limit for 2021 does not include any employer contributions. There is a separate limit that does include both employee and employer contributions (which public school teachers never have to worry about!).
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retiredjg
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Re: Governmental 457b excess deferrals/plan compliance

Post by retiredjg »

PFOS wrote: Wed Mar 23, 2022 12:32 pm What I learned, on my own, towards the end of last year was that (based on what I can find from the IRS) the limit is $19,500 for employee and employer contribution combined and not employee only as I'm used to with my 401k.
Where did you "learn" this? I don't think it is correct.

Edited. Maybe it is correct but we have just not seen this in the past since it is so unusual for a 457b to have a match.

https://www.irs.gov/retirement-plans/pl ... ion-limits
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retiredjg
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Re: Governmental 457b excess deferrals/plan compliance

Post by retiredjg »

https://www.irs.gov/retirement-plans/ir ... tion-plans

"Employers or employees through salary reductions contribute up to the IRC 402(g) limit- $20,500 in 2022 ($19,500 in 2021 and in 2020; $19,000 in 2019) on behalf of participants under the plan. See 457(b) plan contribution limits."

Learn something new here every day. :shock:

However, I would sure hate to disagree with the plan administrator...
zie
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Re: Governmental 457b excess deferrals/plan compliance

Post by zie »

It's amazing that you get an employer match on a 457B.

Chances are probably fairly high the IRS won't notice, but if they do, they will likely get quite upset, and start charging you 6%/yr(?) for every penny over the contribution limit, likely going back as far as they can reach. Though 6% even over a dozen years on $2k isn't really that bad.

How will the IRS know? Your employer is required to send documents to the IRS with what they put into retirement plans, so assuming it wasn't one of the 30 million tax documents the IRS just threw away, they could very easily figure it out eventually, as it will be pretty plain. This particular paperwork is able to be filed electronically, so assuming your state filed it electronically the IRS would not have thrown it out as part of the 30M documents.

Personally I'd try and sort the mess now, by withdrawing the excess contributions (~ 2k) pay the $120 and ensure you don't do this again this year. If you don't want to do that, I'd try to get it in writing from the state that everything is totally fine, so if the IRS notices, you hopefully can convince them to get mad at the state and not you.

Good Luck, and congratulations on getting a match on a 457B, bonus if you also get a pension too!
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
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retiredjg
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Re: Governmental 457b excess deferrals/plan compliance

Post by retiredjg »

I'm sure there is a procedure for fixing this. However, it won't get fixed until the plan administrator agrees that there is a problem. That is probably what needs to be addressed first.
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retiredjg
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Re: Governmental 457b excess deferrals/plan compliance

Post by retiredjg »

Assuming this is in some ways similar to 401k/403b....

1. If this were a 401k and the excess is not fixed by the employer by April 15th, the excess just stays there. Contrary to what might be expected, this is not illegal and apparently it is not uncommon.

2..When filing taxes, tax software just won't let the excess be deducted. It adds the excess back to taxable income and the tax payer is taxed properly. When taking distributions from the 401k, the tax payer just pays tax on that amount a second time. This not not terribly burdensome because this same person also gets the benefit of having a little extra growing tax deferred for awhile.

3. I suppose if someone is doing taxes by hand, they could deduct the excess, but it seems this might be flagged upon reaching the IRS.

PFOS, it would be interesting to know what your tax return actually says...was the excess deducted from taxable income? Or did the excess get added back in to the taxable income?

I suggest that you not do anything for 2021. It's too late to be fixed and it is not actually a problem anyway.

(I would keep documentation of efforts to get this resolved with the plan administrator in case the subject ever comes up.)
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retiredjg
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Re: Governmental 457b excess deferrals/plan compliance

Post by retiredjg »

PFOS wrote: Wed Mar 23, 2022 12:32 pm Can anybody confirm that what I'm reading from the IRS about the 457b contribution limit being both employee and employer contributions is correct?
Apparently, Bankrate agrees.

https://www.bankrate.com/retirement/per ... ment-plan/
  • "State and local government employers rarely provide matches to employees. With 401(k) and 403(b) plans, the annual contribution limit applies only to employee deferrals, not any money “matched” by the employer. However, if a government employer does make a contribution to a 457(b) plan, it counts toward the total allowable limit for the year."
krow36
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Re: Governmental 457b excess deferrals/plan compliance

Post by krow36 »

I certainly stand corrected. Nice job, retiredjg, as usual!
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retiredjg
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Re: Governmental 457b excess deferrals/plan compliance

Post by retiredjg »

krow36 wrote: Fri May 27, 2022 11:50 pm I certainly stand corrected. Nice job, retiredjg, as usual!
Yeah, I stand corrected too. This is not at all how I thought it worked. :oops:
Topic Author
PFOS
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Re: Governmental 457b excess deferrals/plan compliance

Post by PFOS »

retiredjg wrote: Fri May 27, 2022 7:22 am Assuming this is in some ways similar to 401k/403b....

1. If this were a 401k and the excess is not fixed by the employer by April 15th, the excess just stays there. Contrary to what might be expected, this is not illegal and apparently it is not uncommon.

2..When filing taxes, tax software just won't let the excess be deducted. It adds the excess back to taxable income and the tax payer is taxed properly. When taking distributions from the 401k, the tax payer just pays tax on that amount a second time. This not not terribly burdensome because this same person also gets the benefit of having a little extra growing tax deferred for awhile.

3. I suppose if someone is doing taxes by hand, they could deduct the excess, but it seems this might be flagged upon reaching the IRS.

PFOS, it would be interesting to know what your tax return actually says...was the excess deducted from taxable income? Or did the excess get added back in to the taxable income?

I suggest that you not do anything for 2021. It's too late to be fixed and it is not actually a problem anyway.

(I would keep documentation of efforts to get this resolved with the plan administrator in case the subject ever comes up.)
Sorry retiredjg, my notifcations for this just kicked in. Section 12 on the W2 is a G code only accounts for the our contributions, not the match. W2 does not have the retirement box checked off on section 13. Quickly comparing paystubs to W2 seems to show the match is not accounted for anywhere. So strange
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retiredjg
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Re: Governmental 457b excess deferrals/plan compliance

Post by retiredjg »

Did the extra money actually show up in your account?
Topic Author
PFOS
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Re: Governmental 457b excess deferrals/plan compliance

Post by PFOS »

retiredjg wrote: Wed Jun 08, 2022 11:55 am Did the extra money actually show up in your account?
Yes as in it's all within the 457b account. I have statements showing both employee and employer contributions and they add up to ~$22,000. What I find strange is that the 457b administrator runs the plan for the entire state. There's no way I'm the first person to run into this
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retiredjg
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Re: Governmental 457b excess deferrals/plan compliance

Post by retiredjg »

You may not be the first, but you are one of the few who knows that particular rule (that both your contribution and the employer contribution are included in the elective deferral limit). It does not appear to have been known here (or at least nobody's talking :wink: ).

I don't know if something is wrong or not. It seems you have done your part. You have asked the questions and the state administrator has assured you it is fine.

Maybe there is some work around (like the employer contribution is put in some other way - like a 401a? - but it shows up in your 457b.) Stranger things have happened.
Joe Public
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Re: Governmental 457b excess deferrals/plan compliance

Post by Joe Public »

retiredjg wrote: Wed Jun 08, 2022 5:52 pmMaybe there is some work around (like the employer contribution is put in some other way - like a 401a? - but it shows up in your 457b.) Stranger things have happened.
That’s how it is with mine. The 457 “matching contribution” is actually contributed into a 401(a) account and is not part of the 457 contributions or balance.
runninginvestor
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Re: Governmental 457b excess deferrals/plan compliance

Post by runninginvestor »

PFOS wrote: Wed Jun 08, 2022 5:15 pm
retiredjg wrote: Wed Jun 08, 2022 11:55 am Did the extra money actually show up in your account?
Yes as in it's all within the 457b account. I have statements showing both employee and employer contributions and they add up to ~$22,000. What I find strange is that the 457b administrator runs the plan for the entire state. There's no way I'm the first person to run into this
Maybe you can file a whistleblower complaint and get a windfall if there's intentional wrongdoing :wink:

But if you want further documentation for the administrator:
https://www.irs.gov/retirement-plans/co ... 457b-plans

Interestingly, if the plan doesn't think it's an excess deferral, you may have trouble following from the above:
"Distribute excess (plus allocable income) as soon as administratively practicable after the plan determines that the amount is an excess deferral"

To be cleared your spouse isn't eligible for any catch up contributions?
Topic Author
PFOS
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Re: Governmental 457b excess deferrals/plan compliance

Post by PFOS »

Joe Public wrote: Wed Jun 08, 2022 6:07 pm
retiredjg wrote: Wed Jun 08, 2022 5:52 pmMaybe there is some work around (like the employer contribution is put in some other way - like a 401a? - but it shows up in your 457b.) Stranger things have happened.
That’s how it is with mine. The 457 “matching contribution” is actually contributed into a 401(a) account and is not part of the 457 contributions or balance.
Interesting, the match is definitely included in the balance on the same account. There's no documentation indicating there's a 401(a). I'll go digging through some of the docs and report back if I find anything interesting
runninginvestor wrote: Wed Jun 08, 2022 6:17 pm Interestingly, if the plan doesn't think it's an excess deferral, you may have trouble following from the above:
"Distribute excess (plus allocable income) as soon as administratively practicable after the plan determines that the amount is an excess deferral"

To be cleared your spouse isn't eligible for any catch up contributions?
haha I have the feeling that blowing the whistle on retirement plan compliance for a school would not be particularly lucrative but if we're talking >$100 I might consider it

That's my main concern. I'd rather not have to deal with headache of all that. Definitely not catch up eligible, we're decades from that
Alan S.
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Re: Governmental 457b excess deferrals/plan compliance

Post by Alan S. »

Considering all these facts, and the deadline to distribute any excess deferrals has passed, you will probably end up just ignoring this issue, as the plan appears to be doing. Best that she not stir the pot on this issue, particularly since any action would not be to her benefit.

From a purely technical standpoint, we have not been able to connect the dots. It seems like the logical thing for the plan to do would be to claw back the employer contributions first, and that would not generate a taxable distribution. But to do that, the balance in the plan would of course be reduced. It is not logical to think that a plan this large would be in constant violation of the deferral limit (employee and employer), but again the oversight for govt 457b plans is minimal. Perhaps these employer contributions are recharacterized in some manner to a 401(a) and then transferred back into the 457b, or some other complex treatment that is complex enough that the plan avoids explaining it.

For most plans, EPCRS contains provisions for correcting errors. But EPCRS does not contain guidance for govt 457b plans.
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retiredjg
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Re: Governmental 457b excess deferrals/plan compliance

Post by retiredjg »

Alan S. wrote: Thu Jun 09, 2022 10:18 am ...or some other complex treatment that is complex enough that the plan avoids explaining it.
Made me laugh. :D
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