TECHNICAL
CORRECTION TO SECTION 457
DEFINITION OF
COMPENSION
Prepared By: Patricia K.
Keesler
Benefits Law Group
Atlanta, Georgia
As part of the technical corrections to EGTRRA which are incorporated in the Job Creation and Workers Assistance Act of 2002, Congress made a small change to section 457 that may have a big impact on many employees.
Traditionally, section 457 plans used a definition of compensation that excluded deferrals to a 457, 401(k) or 403(b) plan. While section 401(k) and 403(b) plans look at compensation for deferral purposes before those contributions are made, section 457 plans looked at compensation after subtracting those amounts out.
Under EGTRRA, Congress attempted to provide more parity between section 457 and 401(k) plans and therefore revised the limit on deferrals to section 457 plans to be $11,000, or 100% of compensation, just like section 401(k) and 403(b) plans. However, the legislation did not change how compensation is defined under section 457 plans. So again, a person could defer 100% of compensation under a section 457 plan, but compensation was calculated after subtracting any contribution to the plans and other plans. New technical corrections eliminate that distinction so that the 100% of compensation limit for section 457 plans is 100% of compensation before any deductions for other pre-tax contributions.
This change will benefit lower income employees who either work part time or have a two-income household. It also may help elected officials who work in both the private sector and for the government and who earn only a small amount from the government position. However, some section 457 plans may need to be amended to take advantage of this change.