Over the past few months, McKay Hochman has noticed an increase in 457 plan sponsorship. Through our discussions with clients, we can attribute the increase to two major reasons. The first is that proposed regulations require 403(b) plan sponsors to adopt 401(k)-like rules. This is causing many potential 403(b) sponsors to rethink the adoption of the plan. The proposed 403(b) regulations require a written plan document which includes such options as eligibility, level of deferrals, beneficiary designations, selection of investment option and managers, and rollover provisions. Plan sponsors are moving to offer 457(b) plans which don't have this additional complexity. As a general rule, 457 plans use a single provider which makes explaining plan provisions to employees easier, which in turn increases participation. The 457 plan regulations are seen by many plan sponsors as easier and cleaner to comply with than the 403(b) regulations.

The second reason is that those plan sponsors who currently maintain a 403(b) plan are adding a 457 plan so that participants who are nearing retirement may save more money by maxing out employee deferrals to both plans. Prior to 2002, the annual pretax deferral limit for 401(k), 403(b) and 457 plans was coordinated. A participant who participated in either a 401(k) or 403(b) or a combination thereof could defer $10,500. A participant in a 457 could only defer $8,500. A Participant who participated in all three types of plans in 2001 could only defer a total of $8,500 to the three plans, the 457 plan limit. Beginning in 2002, the annual deferral limit for 457 plans is separate from the limit for 401(k) and 403(b) plans. For example, in 2007, an employee of a governmental entity or a tax-exempt organization may defer $15,500 to a 403(b) plan and an additional $15,500 to a 457 plan. However, if the 457(b) plan is sponsored by a tax-exempt organization, participation is limited to a select group of management or highly compensated employees. Eligible employees also may have additional opportunities to make catch-up contributions to each type of plan.

Should you have a plan sponsor who is interested in establishing a 457(b) plan, McKay Hochman offers a single-use 457(b) plan which can be designed to meet any plan sponsor's needs, whether it is the only plan or an additional plan to act in tandem with their existing 403(b) plan. To have a plan designed, contact Martha Kirwin at 973-492-1880.