Maximizing retirement savings with employer contributions to a governmental 457(b) plan or a governmental 401(a) plan
Many states, cities, towns and governmental instrumentalities sponsor both an eligible 457(b) deferred compensation plan and a qualified 401(a) defined contribution plan. While maintaining two different plans under the Internal Revenue Code creates additional compliance, administration and communication requirements, it can be a practical strategy to maximize meaningful employer-provided retirement benefits to employees.
Since Congress eliminated the ability for governmental employers to establish 401(k) plans after May 6, 1986, governmental employers are not able to add a pre-tax cash or deferral feature to their existing 401(a) defined contribution plans. With the understanding that it is essential for employees to maximize their savings for a secure retirement, many government employers seek alternative solutions in addition to the 401(a) defined contribution plans they offer. As a result, 457(b) deferred compensation plans have become popular as a retirement savings vehicle for voluntary employee pre-tax deferrals (including after-tax designated ROTH contributions).
Employer contributions
To attract and retain employees, it is common for employers to make employer contributions on behalf of participants. Such contributions come in two forms, either an employer non-elective contribution or an employer match contribution designed to encourage employee participation.
Considerations at a glance
The following chart notes the considerations for adding an employer contribution (non-elective and/or match) to either an eligible 457(b) deferred compensation plan or alternatively, a qualified 401(a) defined contribution plan.
| 457(b) | 401(a) | |
|---|---|---|
| 2026 IRS Annual Contribution Limit | 100% of compensation up to $24,500 | 100% of compensation up to $72,000 |
| Allocations subject to the IRS Annual Contribution Limit |
NOTE: An employee seeking to maximize deferrals to the plan is more likely to have an excess deferral if the 457(b) also provides for employer contributions. |
|
| Impact of Vesting, on IRS Annual Contribution Limit | Employer contributions count toward the IRS annual contribution limit in the later of:
| Employer contributions count toward the annual limit in the taxable year contributed, regardless of vesting |
| Catch-up Contribution | If permitted under the 457(b) plan, an eligible participant may contribute up to the greater of the following once the annual IRS contribution limit is met:
Beginning in 2026, a participant whose prior year Internal Revenue Code Section 3121(a) wages for the employer that exceed $150,000 can generally only contribute under the Age50+ catch-up as Roth contributions. | Not available |
FICA taxes on employer contributions, as applicable* *Note: Wages of governmental employees are subject to FICA taxes if:
| As applicable, employer contributions are required to be taken into account for FICA purposes in the taxable year deferred if the employer contribution is 100% vested, or alternatively in the taxable year vested (along with earnings) if the employer contribution is subject to a vesting schedule. | Not applicable, employer contributions not subject to FICA |
Additional resources
This information is provided by Voya for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/insurance decision.
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