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Texas Payroll/Personnel Resource

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Voluntary Deductions
Deferred Compensation Plans

Introduction

Deferred compensation plans are optional programs that allow employees (individuals who are officers or employees of a state agency) to defer income until retirement. A deferred compensation plan is offered in addition to a retirement, pension or benefit system established by law. The deferral of compensation does not reduce retirement, pension or other benefits provided by law unless the reduction is required by federal law.

The Employees Retirement System of Texas (ERS) has established 401(k) and 457 plans collectively known as the Texa$aver program. Effective Jan. 1, 2008, new state employees are automatically enrolled in a deferred compensation plan unless they notify their agencies that they wish to opt out of the plan.

Effective Jan. 1, 2012, state employees are allowed to have their 401k or 457 accounts in Texa$aver funded with post-tax deductions, also known as Roth 401k and Roth 457 plans. The employee must:

  • Establish a Texa$aver account with the account administrator.
  • Determine if the account will be funded through pre-tax deductions, post-tax deductions or both.
  • Determine the percentage or amount to be withheld as payroll deduction.

State agencies (defined as boards, commissions, offices, departments or other agencies in the executive, judicial or legislative branch of state government, including institutions of higher education) receive enrollment information from ERS and must establish a payroll deduction for the deferred amount. The employee may stop the deduction at any time by notifying his or her agency and ERS in writing.

Some employees may be eligible for participation in 403(b) plans, which are administered by the employing agencies.

401(k) and 457 Texa$aver Program

State agency employees who are not employed by an institution of higher education (which has the meaning assigned by Texas Education Code, Section 61.003, except the term does not include a public junior college) can enroll in both the Texa$aver 401(k) and 457 plans.

The current administrator of the Texa$aver program will advise employees on the availability and the tax consequences of choosing pre- or post-tax deductions. As established in Internal Revenue Service Code, the limits on the amounts that can be deferred to the accounts are:

  • $23,000 per year in 2024 if the employee is age 49 or younger.
  • $30,500 per year in 2024 if the employee is age 50 or older.

An employee can choose to have up to the relevant maximum deducted in a tax year to a 401k account, and the same amount to a 457 account if the employer offers both. The amounts deducted can be pre-tax deductions, post-tax deductions or a combination of both.

Employees of higher education institutions and community colleges may enroll in a 457 plan if their institutions choose to offer such a plan.

When employees retire or leave state employment, they do not have to withdraw or roll over their Texa$aver account money.

401(k) Loan Repayment

State agency employees who receive a loan from the state’s 401(k) plan must repay the loan through payroll deduction.

Agencies are notified to start or stop an employee’s loan repayment deduction via electronic data transfer from ERS.

Loan repayment usually begins with the pay period after the loan was made. An agency must notify an employee if his or her salary does not support the loan repayment deduction.

State agencies should direct any employee inquiries concerning loan repayment to the 401(k) plan administrator.

457 Loan Repayment

State agency employees who receive a loan from the state’s 457 plan must repay the loan through payroll deduction.

Agencies are notified to start or stop an employee’s loan repayment deduction via electronic data transfer from ERS.

Loan repayment usually begins with the pay period after the loan was made. An agency must notify an employee if his or her salary does not support the loan repayment deduction.

State agencies should direct any employee inquiries concerning loan repayment to the 457 plan administrator.

403(b) Deferred Compensation Plans

A 403(b) plan also allows for contributions to be taken before taxes are calculated as prescribed in Section 403(b) of the Internal Revenue Code of 1954 as it existed on Jan. 1, 1981.

This type of deferred compensation is available only to employees of certain education institutions, including:

  • The Texas Higher Education Coordinating Board.
  • The Texas Education Agency.
  • The Texas School for the Deaf.
  • The Texas School for the Blind and Visually Impaired.
  • The Texas Juvenile Justice Department and the facilities and institutions under its jurisdiction.
  • Each state-supported institution of higher education.

Sources

Internal Revenue Code, Sections 401(a)(13)(A), (k); 72(p), 402(g)(1), (5); 457(a)-(e), (g); Texas Government Code, Sections 609.001(1)-(2), (5), (8), (10), (11), 609.007(b)-(c), 609.502(a)-(c); Texas Revised Civil Statutes, Article 6228a-5, Sections 1, 2(b); 34 Texas Administrative Code Section 87.5(a).