Virginia Defined Contribution Plans

What is the Deferred Compensation Plan?
The Commonwealth of Virginia 457 Deferred Compensation Plan (457 Plan) is a tax-deferred retirement savings plan established under Internal Revenue Code Section 457(b) and Chapter Six of Title 51.1 of the Code of Virginia. The Plan enables employees of the Commonwealth and other public employers in Virginia who adopt the Plan to contribute up to the annual limit, or 100% of includible compensation, whichever is less. Includible compensation is all compensation except that used to purchase VRS defined benefit plan service on a tax deferred basis. The annual limit for 2009 is $16,500. If you are age 50 or older, you may contribute an additional $5,500 for a total of $22,000. If you are nearing retirement, you also may be eligible for the Standard Catch-Up, which might allow you to contribute up to $33,000 in 2009. The amount contributed accumulates tax-deferred until the Plan amounts are distributed, generally after retirement. Participants in the 457 Plan also may be eligible for the Virginia Cash Match Plan.

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Who’s eligible to enroll?

All employees of the Commonwealth and participating employers, including wage employees and elected or appointed officials, are eligible to enroll. There is no upper or lower age limit for participation. Salaried state employees hired or rehired on or after January 1, 2008 are enrolled in the 457 Plan through Automatic Enrollment, unless they already have a 457 Plan account, self enroll, opt out or actively contribute to a 403(b) account.

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What does tax-deferred mean?
Contributions are taken out of pay before taxes are calculated, reducing current taxable income. Participants have more take-home pay than by saving the same amount with after-tax dollars. Also, earnings on the account accumulate tax deferred.

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How does the amount contributed affect income tax?

The income on which federal and Virginia income tax is calculated is reduced by the amount of money contributed to the Plan. For example, if an employee’s salary is $28,000 and the employee contributes $1,800 ($75 per pay period x 24 pay periods per year), income for federal and Virginia income tax purposes will be $26,200.

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Does this mean I will never have to pay taxes on my contributions?

No. Under federal and Virginia law, your 457 Plan contributions and any earnings are tax-deferred, allowing more of your money to potentially grow compared to after-tax alternatives. Upon withdrawal, each payment you receive from your account is subject to federal and state income taxes as you receive it. Amounts remaining in your account are tax-deferred until they are withdrawn.

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How do I qualify for the employer Cash Match?

If you’re a full-time or part-time salaried state employee making continuous contributions of at least $10 per pay period to the Plan, you’re eligible for the Virginia Cash Match Plan. Your employer will match 50% of your contribution to the 457 Plan or $20 per pay period, whichever is less.

If you are employed by a political subdivision or a school division that adopted the Virginia Cash Match Plan your employer sets the amount of the match.

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How is the 457 Plan different from a traditional IRA?

The 457 Plan offers you the convenience of setting some money aside on a regular basis, with each paycheck. This may help you keep the discipline you need to save for your retirement.
In addition, unlike a traditional IRA, you will not incur a 10% tax penalty for distributions from the 457 Plan taken prior to age 59½. However, other deferred compensation distribution restrictions apply. As explained above, the 457 Plan allows you to defer large amounts of money (100% of your includible compensation or $16,500 for 2009, whichever is less) and your right to use the Plan is not limited by any income threshold test, such as the one imposed for traditional IRA deductions.

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Will participating in the 457 Plan affect my VRS pension benefits or Social Security?

No. The 457 Plan offers you the opportunity to save, in addition to your VRS benefit. Your VRS benefit is calculated on your credible compensation before the contribution to the 457 Plan is taken out.
Also, FICA tax is paid on the amount you contribute to the Plan, so participation does not reduce your Social Security benefit.

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Can Employees of political subdivision and school divisions participate in the Commonwealth 457 Plan?

Yes. All public entities in Virginia may adopt the 457 Plan by resolution of its governing body. Those that adopt the Plan also may adopt the Virginia Cash Match Plan. Contact your VRS Employer Representative for more information.

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