3594 / What limitations on the amount of deferrals apply to Section 457(b) "eligible" nonqualified deferred compensation plans?
A Section 457(b) plan must provide that the annual deferral amount may not exceed the lesser of (1) 100 percent of includable compensation or (2) the applicable dollar limit. The dollar limit is $24,500 in 2026, $23,500 in 2025, $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020 and 2021, and $19,000 in 2019.1 In tax years beginning after 2006, annual cost-of-living adjustments are made in $500 increments.2 "Annual deferral" includes not only elective salary deferral contributions, but also nonelective employer contributions.3 The annual deferral amount does not include any rollover amounts received by the plan on behalf of the participant.4
Any amount deferred in excess of the Section 457(b) plan's deferral limits is considered an "excess deferral." Likewise, where an individual participates in more than one Section 457 plan, amounts deferred not in excess of the applicable plan's deferral limits, but that exceeds the individual participant's deferral limit, are also considered excess deferrals.5 Amounts that exceed a governmental Section 457 plan's deferral limits must be distributed to the participant, along with allocable net income, as soon as administratively practicable after the plan determines that the amount constitutes an excess deferral.6 If a nongovernmental tax-exempt Section 457(b) plan's deferral limits are exceeded, the plan will be treated as a Section 457(f) "ineligible" plan.7
For these purposes, all plans in which the individual participates as a result of his or her relationship with a single employer are treated as a single plan.8 Where excess deferrals have arisen out of a failure to satisfy the individual deferral limitation, a Section 457(b) plan may provide that the excess deferral will be distributed as soon as administratively practicable after the plan determines that the amount constitutes an excess deferral. If the Section 457(b) plan does not distribute the excess deferral, it will not lose its status as an eligible plan, but the participant must include the excess amount in income for the later of (1) the taxable year in which it was deferred or (2) the first taxable year in which there is no longer a 457(f) substantial risk of forfeiture.9
The contribution limits under IRC Section 457(b) are not coordinated with the IRC Section 402(g) limits on elective deferrals under IRC Section 401(k) plans and IRC Section 403(b) plans.10 These limitations do not apply to qualified governmental excess benefit arrangements under IRC Section 415(m) (3).11
Pre-409A, some employers avoided the deferral limitations by deliberately failing to satisfy the trust requirements under IRC Section 457(g) – so that the IRS would rule the plan to be an ineligible plan ( Q 3602) – while maintaining a Section 457 (f) "substantial risk of forfeiture" ( Q 3538) in order to avoid current taxation.12 Under Section 409A and its guidance and the 2016 Proposed Regulations integrating 457 with 409A, the plan would also need to satisfy the requirements of both the unique 457(f) "substantial risk of forfeiture" definition and as well as the 409A "substantial risk of forfeiture" definition.. In most cases the unique and very stringent 457(f) definition requirements to achieve deferral, especially as to voluntary deferral 457(f) plans, will present the most difficult and perhaps impossible hurdle for potential plan sponsors. SERPs will find compliance with both definitions much less of a challenge.
Compensation. "Includable compensation" has the meaning given to "participant's compensation" by IRC Section 415(c) (3) ( Q 3867). Includable compensation is determined without regard to community property laws. Compensation is taken into account at its present value in the plan year in which it is deferred (or, if the compensation deferred, is subject to a Section 457(f) substantial risk of forfeiture, at its present value in the plan year in which such risk is first eliminated).13
1. Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.
2. IRC § 457 (b) (2).
3. Treas. Reg. § 1.457-2(b).
4. Treas. Reg. § 1.457-4(c)(1)(iii).
5. Treas. Reg. §§ 1.457-4(e)(1), 1.457-5.
6. Treas. Reg. § 1.457-4(e)(2).
7. Treas. Reg. § 1.457-4(e)(3).
8. Treas. Reg. §§ 1.457-4(e)(2), 1.457-4(e)(3).
9. Treas. Reg. § 1.457-4(e) (4).
10. IRC § 457 (c).
11. IRC § 457 (e) (14).
12. See, e.g., Let. Rul. 9823014.
13. IRC §§ 457(e)(5), 457(e)(6), 457(e)(7).