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| Why Public School Districts
Should Consider Adding an IRC 457 Plan
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| The Economic Growth and Tax Relief Reconciliation Act of 2001
will have a positive and lasting impact on public school district employees and employers.
The Act includes increased deferral opportunities with new and additional compliance
regulations. It provides for greater opportunities for employees to take responsibility for
their economic security. However, School District employers have an even bigger opportunity. Congress has given school districts new tools that can assist you in recruiting and retaining quality new employees at a time when huge teacher shortages are prevalent. One of these tools is the availability of offering an Internal Revenue Code ("IRC") 457(b) Eligible Deferred Compensation Plan. IRC 457 applies to any nonqualified plan sponsored by a state or local government entity, their political subdivisions and their instrumentalities. Most school districts have always been able to offer such a plan (subject to state statutes), but many did not because the advantages of a 403(b) program outweighed those of a 457 plan. Some school districts have offered both, but participation in the 457 plan has generally been limited to classified staff. EGTRRA Has Brought Big Changes Beginning January 1, 2002, a 457 plan will become a valuable opportunity for employees of educational institutions. Previously, 457(b) eligible deferred compensation plans had lower contribution limits than 403(b) programs. In addition, prior to EGTRRA 457 contributions had to be coordinated with 403(b) contributions. EGTRRA has made the following changes to the use of 457 plans in public school districts: 457 contributions have no impact on 403(b) contributions. |
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Employees can contribute the maximum elective deferral limit (IRC 402(g) and
415(e)(15)) to one or both plans. Public school districts are one of the few employer groups
that qualify to offer both plan types to all employees. |
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The addition of a 457 would be an attractive recruiting tool for highly compensated
employees, such as Administrators and Coaches, with a need for flexible distribution options. |
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| 457 plans have broader catch-up provisions for
those nearing retirement. |
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Employees can use the 457 plan catch-up provision during any of the three years
prior to their normal retirement age. Employees can contribute up to two times the normal
deferral limit. (In 2002, the deferral limit is $11,000 and will increase to $15,000 by 2006).
This means an employee using the catch-up provision could contribute $22,000 in 2002 and as
much as $30,000 in 2006. |
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The 457 catch-up provision is in addition to the 403(b) catch-up provisions. |
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| 457 plans have greater flexibility for non-career
faculty and staff than 403(b) programs. |
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457 plan withdrawals are available at any time after severance from employment.
Unlike 403(b) programs, 457 plans are exempt from the 10% premature distribution penalty under
IRC 72(t). |
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Upon severance from employment, accumulations can be taken as a lump sum,
periodic payment options can be put into place, rolled over to an IRA, another 457, a 403(b)
program or a 401(a)/(k) plan of a new employer. |
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457 plans are the only plans that do not have a 10% penalty for withdrawals prior
to age 59 _ and that are available for distribution upon severance from employment (subject to
ordinary income tax). Also, 457 plans provide a deferred savings program that is not contingent
upon retirement. |
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457 plans are a financial savings tool for those planning on teaching for only for
a few years and then raising a family for a period of time. Or those wishing to pursue a graduate
degree on a full time basis. It is interesting to note that on average of 65% of teachers leave the school district during their first five years of teaching, and the average tenure of superintendents is 4 years. |
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| 457 plans offer broader eligible participation
definition than 403(b) programs and may provide more to offer non-traditional employees or
independent contractors. |
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Unlike 403(b) programs, there is no requirement for universal accessibility.
Therefore, employers are not required to make the plan equally available to all employees as a
condition of the plan offering, but they may choose to do so. |
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Participants in an eligible 457 plan may include all persons who "perform a service
for the employer." This differs from 403(b) programs that can only offer the plan to W-2 issued
employees, where the school district has control over the performance of the job function. 403(b)
programs also feature universal accessibility, which requires that the school district make the
program available to all employees. |
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This 457 "performance of service" requirement can include all types of personnel,
including: Part-time employees and Independent contractors. |
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| Old School Thinking For many years, school districts have been offering 403(b) programs and treating them as a requirement, a "necessary evil" of doing business or as a union negotiation. Most employers that offer 403(b) programs follow the traditional model, which simply provides payroll accommodations for salary reduction contributions by the employees. The employer makes no contributions and, in general, tries to avoid direct support or affirmation of any vendor or product provider. This approach is directly opposite to the public and private sector approach where these plans are competitively priced through a formal RFP process. Here they are treated as a true benefit, and used as a recruiting tool supported by the employer. In the public and private sectors, these types of plans are often a "must have" benefit, which is subject to a competitive process. This process assures the employer and employee the best investment selection, with lowest possible fee structure controls, plan design and expenses. If public school district employees compare their 403(b) program offerings to that an employee working in the private sector, or for a state and local government, they may find that their 403(b) programs are significantly inferior in investment selection and expense ratios. They may feel that the school district abandoned them, in a sense, when it comes to setting up a program that only gives them a list of multiple providers with no distinguishing features, higher costs, and low value choices. New School Thinking Generally, 457 plans are sponsored by the employer and, therefore, are not considered to be individual arrangements. Public school districts have an opportunity to follow the model used by public and private sectors and to realize that they have strong negotiating power over plan design and expenses. Competitive bids give the school district ability to: |
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Offer lower-cost, quality investment options in all appropriate asset classes
Provide unbiased education and communication vs. a sales pitch |
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Use Plan Administration technology to streamline the processes without use of
paper and man hours by the school district |
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Use technology to ensure the school district plans are compliant from the beginning |
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Encourage employees to participate and promote these NEW options as a BENEFIT
rather than a burden! |
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| Now, from an employer standpoint, public school districts have a big
opportunity to utilize these new tools provided by Congress as a true "benefit offering" of the
district and as a recruiting and retention tool. School districts can rethink how they want to
make these 457 plans available and enter into formal Request for Proposal processes aimed at a
single provider without all the political "red tape" surrounding traditional 403(b) programs. |
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 Home | Disclaimer | © 2002 403(b)wise, LLC. All rights reserved. |
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