What is a 457 Deferred Compensation Plan?
A 457 deferred compensation plan is a defined contribution retirement plan for employees of local, state and federal governments and agencies, and certain non-profit organizations, like public schools and county hospitals. 457 deferred compensation plans are named after Internal Revenue Code Section 457.
A 457 deferred compensation plan is similar to other retirement plans, like a 401(k) and 403(b) plans in that plan earnings grow on an tax-deferred basis, and contributions are made through voluntary payroll deduction. There are some significant differences, which we will address on this site.
457 Deferred Compensation Plan Highlights
- Contributions are generally on a before-tax basis, just like a 401(k) or 403(b).
- Employee contributions and plan earnings are 100% vested in 457 deferred compensation plans.
- Participant’s age 50 and older can make a catch-up contribution of $3,000. Plus, significantly larger catch-up contributions can be made in the three years prior to retirement - up to two times the basic contribution limit. This is one of the features that differentiates 457 deferred compensation plans apart from other qualified retirement plans.
- Participants may be able to borrow from their 457 deferred compensation plan under certain loan provisions in the plan document.
- Previous regulations stated that if a person worked for a public company and also worked for the government, their contributions to one retirement plan limited their participation in the other. This is no longer true. A participant can now make a maximum contribution to both plans.
- Distributions from a 457 plan are only allowed if one of the following qualifying events occurs:
- Separation from service
- Unforeseeable emergency
- Death of the participant.
- Distributions are subject to ordinary income taxes. You should consult with a tax professional for your specific situation.
Upon separation from service, a participant can roll their 457(b) plan assets to an IRA or to a new employer’s plan, such as a 401(k), 403(b) or even another 457(b) plan, if that plan accepts transfers.
Types of 457 Deferred Compensation Plans
457(b) Deferred Compensation
- Annual contributions limited to 100% of compensation to a maximum of $16,500 in 2009, and indexed for inflation in $500 increments, up to age 50. Participants age 50 and over may defer up to $22,000.
- Annuity or unisex life insurance may be used for funding a 457(b) either exclusively, or in combination with one another.
- At retirement or separation of service, values may be rolled over into IRA accounts or other types of qualified retirement plans. Current regulations do not allow life insurance funding of IRA or Roth IRA accounts.
457(f) Deferred Compensation
- Contributions are unlimited.
- Annuity or unisex life insurance programs may be used for funding a 457(f) either exclusively or in combination with one another.
- A substantial risk of forfeiture is required.
- All deferred income is taxable in the year it becomes available to the participant. However, it is possible to extend the deferral period in certain circumstances.
Starting Your 457(b) or 457(f) Deferred Compensation Plan
Ten Steps to 457 Deferred Compensation
- Establish the plan with a board resolution from the tax exempt organization.
- Determine who will act as trustee for the plan. This person will oversee funding vehicles.
- File an ERISA memorandum with the US Department of Labor.
- Complete the Master Agreement which defines the plan benefits and limitations.
- Complete the Joinder agreement which defines the specific participant benefits.
- Notify your plan profider and establish a payroll program.
- Determine the funding vehicle to be used.
- Complete product application.
- Complete underwriting if utilizing life insurance funding.
- Begin payroll deduction.
457 Deferred Compensation Funding Vehicles
Your 457 program may be funded with a variety of different contracts including:
- Fixed Annuities
- Variable Annuities*
- Universal Life Insurance
- Index Universal Life Insurance
- Whole Life Insurance
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