457(b) Top Hat Question

[ENT Doc]

Doing some research on 457(b) "Top Hat" plans because I am trying to help a colleague out with his prospective employer's retirement plans.  This is a non-profit, non-governmental entity.  He will have available BOTH a 401(k) and a 457(b) Deferred Compensation Plan ("Top Hat" Plan).  The latter plan is only available to highly compensated employees.  The match on the 401(k) is 5.5% of compensation (to a max of $4,700), but you only get to this level after 20 years of service.  He was sent a notice from the administrator of these plans that he could defer up to 80% of his salary under this combo salary deferral arrangement.  My impression of the 401(k) and 457(b) contribution limits was that they are the lesser of 100% salary or $18,000, which can increase by $6,000 for the former for catch-up (>50 years old) and by an additional $18,000 if you're <3 years from retirement for the latter.  I have read in two places that the employer contribution to the 457(b) can be up to $18,000 as well.  So at best, this is $18k+$4.7K+$6K+$36k+$18k = $82,700.  Under the IRS limits for "Highly Compensated Employee" one's salary must by >$120,000.  Even at the lower limits of this limit the max savings isn't near 80%.  Am I missing something here?

Also, I'm curious if anyone else participates in a 457(b) Top Hat plan and how they have set up their deferrals.  This seems to be the biggest issue with a plan like this since you have to appoint your deferrals on contribution, which may not jive with your future goals.  Seems like they involve a heck of lot more financial planning than a 401(k) where you can withdraw funds at will at 55, given certain requirements are met, and can't roll these funds into another retirement account.

[Miss Bonnie MD]

Do a search on 457bs but whether you use it or not will depend on:

1) system's credit rating (the money you contribute technically does not belong to you - this is only an issue if the hospital goes bankrupt).

2) distribution option of the 457b if your friend leaves the job - some jobs make you take ONE lump sump  - def not desirable. You want flexible withdrawal options.

I use my hospital's 457b (private, not govt) and contribute the max 18k to it. I can change the amount of my contribution at anytime - is your friend's 457b not set up like this? I get no employer contribution. This is all PLAN specific. I would look at the actual SPD documents. Also I assume your friend's 401k is really a 403b, pretty much same thing but slightly different.

 

457bs are great if you're planning on early retirement tho since you can withdraw them before a 401k/403b.

[Bott1637]

All 457s are "top hat" in that they are all only available to the high income people within an organization. So there is nothing special about this plan if they are calling it top hat. I'm not sure what you mean by set up their deferrals. Do you mean their distributions? These plans are all deferred income so maybe that's the reason you used that terminology? Non governmental plans all have their own distribution rules and are the main element to consider when deciding to use or not IMO.

[ENT Doc]

I don't think ALL 457s are "top hat" - only the non-government elligible plans are.  Those 457(b)s are specifically intended for high income earners in an organization.  The government 457 doesn't have to pass that test.  They are also treated differently in regards to roll-overs, catch-up contributions, etc.  Yes, when I said "set up deferrals" I meant "distributions", or setting up when the deferrals will be deferred to.

As to the original question, while plans are different from organization to organization, each plan has (or had) the potential at least to contribute to the legal maximum.  Curious what that legal maximum (potential) is...

[jfoxcpacfp]

Correct, only the NPO 457s are "top-hat". I meant to do some research on the calculations yesterday and round back to you but had too many appts. Will try when I go to the office after church.

[PhysicianOnFIRE]

Wow, that's a rotten vesting schedule on the 401(k) match. 20 years? Our employer has us 100% vested in the match from day 1. We're fully vested in the 401(k) profit sharing (6% of salary up to IRS' $270k limit = up to $16,200 a year) after 5 years.

For the 457(b), I simply frontload mine to $18,000 early in the calendar year and let it ride. Distribution options in mine are quite flexible, but need to be set up shortly after leaving the job or you will get a lump sum the following year. The money could also be rolled over into another non-governmental 457(b).

After some discussion in this thread, I'm planning to take my distributions over a period of 5 years or so in early retirement.

[ENT Doc]

The vesting goes to 100% over 5 years - it's just that the employer match increases over time, starting at 0 in the first year going to 5.5% at 20 years as a maximum %.  That's nice to have such flexible distribution options.  Not sure if he is able to elect to receive distributions (and how) at the point of separation/retirement or if he needs to elect this up front.  He was indicating to me that this would need to be done up front, which creates much more constraint than your situation.  Thanks for the link to the other post.  Good discussion there.  I think I'd base the distribution period on several things - yearly expenses, 401k/403b balances, 457 balance, my age at the time, solvency of the institution at that time, and dividend income from my taxable at that point.  Suppose I'd factor in the investment options and expense ratios too if they were bad.  If you're not dealing with a lot of money ($150k meets this definition in my mind) then I think it's best to get it out early.  The tax deferred growth is nice, but it's not really your money until you take it out.  Plus, I'm not sure how 457 top hat money gets treated when you die.

[TheGipper]

The distribution rules are the most important factor to consider (assuming no solvency concerns).

The whole point here is tax minimization, right. There is no point in avoiding taxes now if you are forced to take it all out in a too short distribution window, and will end up paying nearly the same tax. Not worth the added risk. How short is too short will depend on how much you have in the 457b, when you plan to retire, and your other taxable income streams in retirement.

Our non-gov 457b distribution rules are a bit complicated but favorable. Upon retiring or leaving, we must make an irrevocable decision on distribution schedule which can be stretched over a period up to 10 years and up to age 70.

A lot of moving parts to consider, some work against each other:
1) Want distributions to begin after both spouses retire to minimize effective tax. (Spouse with 457b will "retire" earlier than other for us)
2) For our tax purposes, would be best to stretch distributions over age 60-70 period, leaving more room for Roth conversions and tax gain harvesting from retirement date (?) through age 70.
3) For safety (unforseen bankruptcy or merger) may be wise to accelerate withdrawals earlier (perhaps in a 5 year window, hopefully still after both spouses retire, see POF linked thread).
4). One will also need to consider if the 457b investment options are suboptimal and if the funds are needed for a pre-55 early retirement.

Some plans (not ours) allow modifications to the distribution schedule.

In the end I'd use the 457b if:
1) No solvency concerns and
2) Exhausted other tax-deferred space and
3) Distribution schedule is flexible enough to significant lower taxes on distribution over current marginal rate.

[Bott1637]

ENT Doc wrote:

I don’t think ALL 457s are “top hat” – only the non-government elligible plans are.  Those 457(b)s are specifically intended for high income earners in an organization.  The government 457 doesn’t have to pass that test.  They are also treated differently in regards to roll-overs, catch-up contributions, etc.  Yes, when I said “set up deferrals” I meant “distributions”, or setting up when the deferrals will be deferred to.

As to the original question, while plans are different from organization to organization, each plan has (or had) the potential at least to contribute to the legal maximum.  Curious what that legal maximum (potential) is…

Click to expand...

Well you were asking about a non-governmental plan thus my use of the word all.   All non-governmental plans are "top-hat."  I haven't heard of a plan requiring one upon signing up to determine their distribution phase.  Often the requirements of the distribution phase are difficult to understand.  I'm not saying your friend's plan doesn't require one to tell them upon signing up how they want distribution but I would make sure your friend is sure on that point.

As to your question on the limit of contribution...the 18k plus/minus catchup contribution is the only portion that is tax deferred.  You may be able to get more money into the plan each year but that portion isn't tax deferred at that point.

https://www.irs.gov/government-entities/federal-state-local-governments/government-retirement-plans-toolkit

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-457b-contribution-limits

So you are only getting 18k into it each year unless old enough to allow the catch up.  The less than three years from retirement allowing an extra 18k is only for whatever the plan defines as retirement not from what you define as retirement.

[ENT Doc]

Thank you.  Yeah, I understand that the deferral amount is only $18k (possibly more nearing those retirement years), but I was just trying to do the math on their 80% claim, seeing how a number could be produced in any way to approach that figure.  I can't see any way he can "defer" 80% of his income under both plans.  But assuming they misspoke and meant "put away" 80% of your income (regardless of source), I still can't see how they can make such a claim.  The numbers just don't add up.  I too find it strange that they would ask him to do a distribution election with the deferral - will definitely get clarity on this.  Anyhow, appreciate the thoughts and advice everyone.

[sportdoc]

Hi all,

I recently finished fellowship and just started a new position that offers a 457b top hat plan.  I will have maxed out my 401k, ROTH IRA and HSA for the year and was considering trying to max out the 457b over the next few months.

After reading through a few different forums, I am now questioning whether or not I should use this as an investment vehicle.  I'm 32 years old and I am starting my position at a small hospital that was recently bought by a larger institution.  Considering my age, I could max this plan out for the next 20-30 years and would obviously have a good deal of money in it.  If some people are considering taking distributions over 5 years rather than 10 years to avoid the increased risk of creditors over a 10 year period, how should I feel about contributing over the next 20-30 years and the possible risks of creditors coming after an institution over that period?  Is it better to wait and use a 457b only for the last several years before retirement?  Is there any scenario where people would recommend avoiding a 457b and investing the money elsewhere?  Thanks in advance and any advice would be much appreciated!