457 & Social Security - I'm confused!

[karotte]

I recently started contributing the max to the 457(b) offered by my employer. In my most recent pay stubs, I noticed that neither I nor my employer has been contributing to social security...i think it's because I'm contributing more than 7.5% of my income to the 457b. My question is, what does this mean for me in practical terms? Would contributing $17,500/year to the 457b over the next few years instead of paying SS tax make me ineligible for SS? I imagine it would at least reduce the amount of SS I would receive in the future, right?

For the record, I'm 32, so not receiving SS any time soon (if ever).

I guess I'm just wondering if my new dedication to maximizing my pre-tax retirement savings is going to bite me in the end.

Can someone explain?

Thanks
Vicki

[Sean1215]

Do you work for a State or local government? Some of them are not covered by Social Security. If so, you are probably covered by a pension system.

http://www.ssa.gov/pubs/10051.html

--Sean

[lawman3966]

You speak in all-or-nothing terms.
It's worth distinguishing between two things: (1) not accumulating social security benefit credits while at your current employer; and (2) being disqualified from receiving SSA benefits because of your current employment.

(1) is quite possible; whereas (2) is not. I was a state employee at a University in Illinois for about two years. For part of that period, I was on a plan that is alternative to, not additional to, SSA, and did not accumulate Social Security benefits while working there. However, upon moving to private sector employer later on, I resumed the accumulation of SSA credits, and am eligible to receive benefits at the age of my choice between 62 and 70, based on all of my work other than the work done at that State University.

[rr2]

I recently started contributing the max to the 457(b) offered by my employer. In my most recent pay stubs, I noticed that neither I nor my employer has been contributing to social security...i think it's because I'm contributing more than 7.5% of my income to the 457b. My question is, what does this mean for me in practical terms? Would contributing $17,500/year to the 457b over the next few years instead of paying SS tax make me ineligible for SS? I imagine it would at least reduce the amount of SS I would receive in the future, right?

For the record, I'm 32, so not receiving SS any time soon (if ever).

I guess I'm just wondering if my new dedication to maximizing my pre-tax retirement savings is going to bite me in the end.

Can someone explain?

Thanks
Vicki

It looks like you have a 457b plan instead of paying into SS. The 7.5% contribution made by you is instead of the 6.2% SS withholding others do. Thus based on this current retirement plan, you are in eligible for SS. It is possible that your employer might be making additional contributions as well. Read your plan documentation in detail. Making additional contributions does not affect your eligibility any further.

Unfortunately, the rules for 457b vary considerably depending on the plan. That is why any advice you get here is likely to be inapplicable to you. Once agin, read the document.

PS: my wife participates in a similar 457b plan in place of SS with mandatory 7.5% employee contributions. There is no employer match and no further employee contributions are permitted.

[karotte]

Thanks for the responses. My employer (city govt) does pay into social security - they have been for the previous years i have worked for them. It's only since i started contributing to the 457 that they no longer contribute to SS. I guess I will move forward with the 457, given that I will likely work for other employers in the future.

[Peter Foley]

Does your employer contribute to your 457 plan? I personally would want contributions to SS each year. What would happen if you contributed 5% each year to your 457 plan?

[mark18068]

Thanks for the responses. My employer (city govt) does pay into social security - they have been for the previous years i have worked for them. It's only since i started contributing to the 457 that they no longer contribute to SS. I guess I will move forward with the 457, given that I will likely work for other employers in the future.

Generally, once a local government starts paying into social security, they can't arbitrarily change that. Normally, they can only be exempt from it if a defined benefit pension plan exists that meets certain criteria. A 457 plan is defined contribution so that in and of itself shouldn't affect social security.

I would check with your HR department. They should be able to shed some light on it.

[rr2]

Thanks for the responses. My employer (city govt) does pay into social security - they have been for the previous years i have worked for them. It's only since i started contributing to the 457 that they no longer contribute to SS. I guess I will move forward with the 457, given that I will likely work for other employers in the future.

One other possible issue to consider is whether your 457b contributions can be rolled over to an IRA. The plan that my wife has only permits rollovers to other 457b plans ONLY. You cannot rollover to an IRA, 401k, or 403b. On termination, you have to withdraw the amount either in 1 lump sum or over 5 years. Taxes are due on withdrawal but no penalties. Get your plan documents and read them. That is the only way to know for sure.

[jeffyscott]

A 457 plan is defined contribution so that in and of itself shouldn't affect social security.

http://www.irs.gov/pub/irs-tege/public_ ... _guide.pdf

As stated above, employees are excluded from mandatory social security coverage if they are
covered by a public retirement system. “A “public retirement system” is not required to be a
qualified plan within the meaning of the Employees’ Retirement Income Security Act of 1974
(ERISA). The employee may be a member of any type of retirement system, including a
nonqualified system (for example, a section 457(b) plan, discussed below), as long as the plan
provides a minimum level of benefits, as specified by law, under that system.
A public retirement system may take one of two forms: the defined benefit retirement
system, which is based on a guaranteed minimum benefit, and the defined contribution
retirement system, which is based on a required contribution from the employee.

[karotte]

Good point, Peter. I think as long as contributions are less than 7.5% of income, my employer will continue contributing to SS. I'll have to think about whether that is preferable.

My employer doesn't contribute anything, but on the up side, i will be able to roll over into 401k, 403b, 457 or ira...I confirmed that before enrolling.

[retiredjg]

One other possible issue to consider is whether your 457b contributions can be rolled over to an IRA. The plan that my wife has only permits rollovers to other 457b plans ONLY. You cannot rollover to an IRA, 401k, or 403b.

What you are describing applies to a non-governmental 457b plan. This poster has a governmental 457b which can be rolled into an IRA, but then would be subject to the 59.5 year rules, so it may or may not be a great idea to do a rollover if you need the money earlier.

The other difference is that a non-governmental 457b does not actually belong to the employee. That money remains the property of the employer and is available to creditors if the employer in legal or bankruptcy proceedings. Many people have decided that non-governmental 457 plans might be better avoided (if possible).

[rr2]

One other possible issue to consider is whether your 457b contributions can be rolled over to an IRA. The plan that my wife has only permits rollovers to other 457b plans ONLY. You cannot rollover to an IRA, 401k, or 403b.

What you are describing applies to a non-governmental 457b plan. This poster has a governmental 457b which can be rolled into an IRA, but then would be subject to the 59.5 year rules, so it may or may not be a great idea to do a rollover if you need the money earlier.

The other difference is that a non-governmental 457b does not actually belong to the employee. That money remains the property of the employer and is available to creditors if the employer in legal or bankruptcy proceedings. Many people have decided that non-governmental 457 plans might be better avoided (if possible).

This is a 457b plan for temporary and part time employees of the local state university. The plan docs have the state seal on them. The docs explicitly state that it is a "governmental" plan.

My wife does not have a choice -- enrollment is mandatory which includes employee contribution of 7.5%. This contribution goes into a stable value plan paying 3% currently.

EDIT: I was wrong. Apparently, we can rollover to an IRA. The plan docs have not been updated in years.

[retiredjg]

That's interesting. I don't know how a plan can limit where you can roll the money if the law allows it. And the law does allow a governmental 457b to be rolled into an IRA, a 401k/403b, etc. The law does not allow a non-governmental 457b plan to roll into anything other than another non-governmental 457b plan.

A little confusing.

[retiredjg]

Oh. I see your edit. Not so confusing anymore.

[Mudpuppy]

Good point, Peter. I think as long as contributions are less than 7.5% of income, my employer will continue contributing to SS. I'll have to think about whether that is preferable.

It would be best to confirm this is what is happening by talking to the HR or payroll department (whichever is responsible for employee benefits). There are a myriad of other possibilities that may have occurred, so instead of making an assumption, get confirmation from the people who should (hopefully) know.

[retiredjg]

I agree. I don't see how voluntary contributions to a 457b can affect paying into SS. Not saying it's not possible, but it just doesn't make sense. I''m wondering if someone goofed.

[pshonore]

My wife at one time was a substitute teacher who was paid on a W2. The local Board of Ed wanted to avoid their share of SS for her so they deducted 7.5% of Gross wages from her salary (pre-tax) and put it into a "retirement plan", which was available to her once she stopped substituting. Is this a form of a 457 plan? As I recall they did deduct Medicare.