The 457 plan is a type of tax advantaged defined contribution retirement plan that is available for governmental and certain non governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre_tax basis. For the most part the plan operates similarly to a 401(k) or 403(b) plan most people are familiar with in the US.
Changes with EGTRRA 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made a number of changes in how 457 plans are treated. The most notable of which is the coordination of benefits limitation was removed. This allows a person whose employer has a 401(k) or 403(b) and a 457 to defer the maximum contribution amounts to both plans instead of coordinating the total and only being able to meet a single limit amount. Thus a participant could contribute the maximum $13,000 for 2004 into their 401(k) and also the maximum $13,000 into their 457 plan. If that person is over age 50 they can contribute the additional catch up amount into each plan also, meaning an additional $3,000 into the 401(k) and another $3,000 into their 457. The total would then be $32,000 deferred instead of the $16,000 that would have been allowed if the coordination of benefits provision had not been repealed in regards to the 457 plan.
Other notable changes made in the EGTRRA legislation were increasing the maximum deferral amount from the approximately $8,500 that was previously allowed to the same maximum elective deferral amount that 401(k) plans and now 403(b) plans allow, and easing restrictions on some plan rollovers. Governmental 457 plans my be rolled into other types of retirement plans with few restrictions beyond the normal ones for any other type of employer provided plan, which includes separation of service or disability. This includes other 401(k) and 403(b) plans and also IRA's. IRA's have much greater flexibility in withdrawal and conversion privileges. In contrast, non governmental 457 plans can only be rolled into another non governmental 457 plan.
Catch up provisions
The 457 plan allows for two types of catch up provisions. The first is similar to other defined contribution plans and amounts to an additional $3,000 that can be contributed as noted above. The second (only available to governmental 457 plans?) is much more complicated and can be elected instead by an employee that is within 3 years of normal retirement age (and perhaps eligible retirement at any age). This second catch up option is equal to the full employee deferral limit or another $13,000 for 2004. Thus a person over 50 within 3 years of retirement and both a 457 and a 401(k) could defer a total of $42,000 into their retirement plans by utilizing all of their catch up provisions. The second type of catch up provision is limited to unused deferral limits from previous years. An employee that had deferred the maximum amount of money into the 457 plan every year they were employed previously would not be able to utilize this extra catch up.
Governmental and non_governmental plans
There are two primary types of the plans, governmental and non governmental. The governmental plans fall under Section 457g of the IRS code, and can no longer be established. Non governmental plans fall under sections 457b and 457f, and are only available to non profit employers.
Non governmental plans
Non governmental plans can now be set up by non profit organizations in addition to their 403(b) plans. They may either be "eligible" plans set up under section 457(b) or "ineligible" plans set up under section 457(f). ERISA legislation has said that non governmental plans must be limited to some group of higher compensation employees. The level of compensation required is not specified by Erisa, but it must be according to some ascertainable standard that the employer sets. The same highly compensated limit ($90,000 a year for 2004) in place for 401(k) discrimination testing would likely be acceptable, as would restricting the plan to some class of employees such as directors or officers. Because of this limitation to higher compensation employees, 457b plans are often referred to as "top hat" plans.
Non governmental 457 plans have a number of restrictions that governmental ones do not. Money deferred into non governmental 457 plans may not be rolled into any other type of tax deferred retirement plan. It may only be rolled into another non governmental 457 plan. Also, money deferred into non governmental plans is not set aside in a trust for the exclusive benefit of the employee making the deferral. The IRS code requires that money in a non governmental 457 plan remains the property of the employer and is thus available to general creditors of the employer in legal or bankruptcy proceedings.
457(f) (ineligible) plans
IRS code section 457(f) allows for non governmental, non profit organizations to set up a plan that can be tax deferred and exceed the normal defined contribution employee deferral limit. Ineligible 457 plans are made available because non profit organizations are not allowed to have another kind of non qualified deferred compensation plan.
In order for the plan to receive tax deferred status the money contributed to the plan by the employee must face a "substantial risk of forfeiture" which has been clarified by the IRS to mean that in addition to the money remaining available to general creditors of the organization, it must be conditioned upon future performance of substantial services. If these conditions are met there is no limit on the amount of money that may be deferred by the employee.
External links and references
- IRS website page regarding 457 plans (http://www.irs.gov/retirement/article/0,,id=111442,00.html)
- IRC 403(b)/457 Online Resource Guide (http://www.irs.gov/retirement/article/0,,id=96315,00.html)
- IRS Section 457 plan outline (28pp pdf file) (http://www.irs.gov/pub/irs-tege/457_outline.pdf)
- Section 457 of the IRS code (http://assembler.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000457----000-.html) - From Cornell Law School