3595 / Can participants in a Section 457(b) “eligible” nonqualified deferred compensation plan make catch-up contributions?

IRC Section 457(b) Catch-up Rules. An eligible Section 457(b) plan can provide for catch-up contributions in one or more of a participant’s last three taxable years ending before the participant attains normal retirement age under the plan. For those years, in addition to the normal limits, a participant may defer a catch-up amount equal to the portions of normal deferral limits unused in prior taxable years for which the participant was eligible to participate in the plan.¹ During those years, the limit on deferrals is increased to the lesser of (1) twice the amount of the regularly applicable dollar limit (2 × $23,000 in 2024; or (2) the underutilized limitation.² Note that the IRC Section 457(b) catch-up rules cannot be used for the year in which the participant attains normal retirement age.³ The underutilized limitation is the sum of (1) the otherwise applicable limit for the year; plus (2) the amount by which the applicable limit in preceding years exceeded the participant’s actual deferral for those years.⁴

For purposes of determining the underutilized limitation for pre-2002 years, participants remain subject to the rules in effect for those prior years (e.g., includable compensation is reduced by all pre-tax contributions and the previous coordination rules apply.).⁵ A participant cannot elect to have the IRC Section 457(b) catch-up rules apply more than once, even if the participant failed to use it in all three years before reaching retirement age, and even if he or she rejoined the plan or participated in another plan after retirement.

For purposes of the IRC Section 457(b) catch-up rules, the Section 457(b) plan must generally specify the plan’s normal retirement age. Under the regulations, a Section 457(b) plan may define normal retirement age as any age on or after the earlier of (1) age 65 or (2) the age when participants may retire and receive immediate retirement benefits (without actuarial or other reduction) under the basic defined benefit plan of the government or tax-exempt entity, but in any event, no later than age 70½ (even post-SECURE Act for these types of plans). A special rule provides that Section 457(b) plans may permit participants to designate a normal retirement age within these ages instead of designating a normal retirement age. A participant may not have more than one normal retirement age under different plans sponsored by the employer sponsoring the Section 457(b) plan for purposes of the IRC Section 457(b) catch-up rules. Plans that include among their participants qualified police or firefighters may designate an earlier normal retirement age for such qualified police and firefighters.⁶

Age 50 Catch-up Rules. An additional catch-up rule applies for eligible Section 457(b) plans of governmental employers.⁷ Additional contributions are allowed for participants who have attained age 50 by the end of the taxable year.⁸ (See also Q 3761). All eligible IRC Section 457(b) governmental plans of an employer are treated as a single plan.⁹ The additional amount is the lesser of (1) the applicable dollar amount; or (2) the participant’s compensation, reduced by the amount of any other elective deferrals that the participant made for that year.¹⁰