Contributing to 457b allowed without earned income?

[next_milenium]

I retired at the end of December 2022. My employer allows lumpsum contribution of unused Paid Time Off into 457b plan. I elected that option and my unused PTO was converted to a dollar amount and contributed to my 457b account for year 2023.

Since I retired at the end of 2022, I won't have any earned income in 2023. I will only have pension and Social Security as my income. 

I keep reading everywhere that you cannot contribute to 401K without earned income. I thought that rule applies to 457b as well? If that's the case, why did my employer allow me to contribute to 2023?

Am I going to have issues when I file my taxes next year?!

[Vanessa A · Accepted solution]

You are correct.  You cannot contribute more than 100% of your compensation to a 457b plan.  However, since this was your unused PTO, which is considered compensation, that full amount can be contributed to your 457b plan per IRS Guidance. 

So no, you will not have issues next year at tax time.  Your employer handled the contribution of your PTO to your 457B properly. 

[Opus 17]

You should probably expect to get a W-2 next year, that you will need to include on your tax return (it will show the 457b contributions).  So make sure the employer has your address if you plan to move, or if they offer online access to your W-2, make sure you keep your login credentials current until you can download next year's W-2. 

[next_milenium]

That W2 I will receive next year showing 457b contribution won't have any earned income.

I'm guessing that's OK because I got separated from my employer (retired)?

[Opus 17]

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@next_milenium wrote:

That W2 I will receive next year showing 457b contribution won't have any earned income.

I'm guessing that's OK because I got separated from my employer (retired)?

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Because the cashed in PTO is considered "earned income" it is subject to social security and medicare withholding, so the amount should be reported as box 3 and box 5 social security and medicare wages, with social security and medicare withholding in boxes 4 and 6, even though box 1 wages would be zero.  Then the contribution is reported in box 12 with code G.