Maximizing retirement savings with employer contributions to a governmental 457(b) plan or a governmental 401(a) plan
Written by Kim Solecki
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) | |
|---|---|---|
| 2024 IRS Annual Contribution Limit | 100% of compensation up to $23,000 | 100% of compensation up to $69,000 |
| 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:
*SECURE 2.0 provides that, enforceable in 2026, a participant whose prior year Internal Revenue Code Section 3121(a) wages for the employer exceed $145,000 (subject to IRS annual cost of living adjustments) can only contribute under the Age 50+ 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
Kim Solecki is a member of the Technical Services Team for the Tax Exempt Markets, with significant experience in the defined contribution retirement plan industry, including 403(b), 401(k) and 457(b) plans. Kim has a Master of Science in Human Resources Management and holds a Certified Employee Benefits Specialist (CEBS) designation through the IFEBP (International Foundation of Employee Benefit Plans), in partnership with the Wharton School of the University of Pennsylvania.
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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