What is a section 457 deferred-compensation plan?
What types of organizations may establish a section 457 plan?
What is a political subdivision, agency or instrumentality of a state?
Who is allowed to participate in the plan?
How do I establish a section 457 account?
What are the tax benefits to me?
How much can I contribute to my 457 account?
If I work for more than one eligible employer, can I contribute to both plans?
Can I stop or change the amount of my deferrals?
Can I ever contribute over the elective deferral limit?
Can my employer contribute to the plan also?
I heard my employer owns the plan assets. Is this true?
What responsibilities does my employer have toward the plan?
Can I contribute to both a section 457 plan and a 403(b) plan?
What happens if I contribute too much?
Can I participate in the plan again if I stop my deferrals?
What kinds of investments are allowed in a section 457 plan? Can I choose them?
Can I access my account in the event of an emergency?
May I take a loan against my account?
Do I have to pay taxes on distributions as I take money out of the plan?
When I leave my job, can I begin taking my money out?
Can I transfer my account to another service provider or roll it over to an IRA?
Is there an age when I must begin taking distributions?
If I leave my current employer and go to work for another who also sponsors a section 457 plan, may I transfer my account to my new employer's plan?
What is a section 457 deferred-compensation plan?
A 457 plan is a retirement plan offered by certain employer groups which allows employees to make contributions on a pretax basis through salary reductions. Since the money is invested pre-tax, your current income tax is reduced. Your money is invested in the investments of your choice and grows on a tax-deferred basis until you begin receiving withdrawals, usually at retirement.
What types of organizations may establish a section 457 plan?
- Any state government
- A political subdivision of a state
- Any agency or instrumentality of either of these
- A tax-exempt rural electric cooperative or an affiliate of one
- Any nonprofit organization under IRC 501(c)
What is a political subdivision, agency or instrumentality of a state?
Examples of a political subdivision of a state are a city or township. Examples of an agency or instrumentality are a school district, road commission, water district or sewage authority. These are only a few examples.
Who is allowed to participate in the plan?
In a government plan, any employee may participate. Government entities are exempt from ERISA, a Department of Labor law that governs employer-sponsored plans. However, for a 501(c)(3) nonprofit organization's 457 plan to be exempt from ERISA, it must establish the plan only for a select group of management or highly compensated staff. Nonprofit organization 457 plans must be designed to be exempt from ERISA if they are to qualify as 457 plans.
How do I establish a section 457 account?
Your employer must first agree to sponsor a 457 plan and adopt a written plan document that outlines the plan provisions. You would then enter into an agreement with your employer authorizing a portion of your salary to be contributed to the plan. Your employer may not reduce your salary and contribute to the plan before you complete this agreement. Your employer will tell you which products are approved for the plan, and you may select from these. With the assistance of your representative, you will then complete an application or enrollment form for the service providers.
What are the tax benefits to me?
With many methods of saving, both contributions and interest income are taxable. A 403(b) offers you the power of tax-deferred saving:
- You do not pay current Federal income tax on amounts that you defer (certain states may allow deferral of state taxes as well)
- You do not pay current Federal income tax on the interest your dollars earn
How much can I contribute to my 457 account?
You are allowed to contribute 100% of your includable compensation up to the elective deferral limit, as indexed. Includable compensation is your gross compensation reduced by any pretax deductions. The chart contains the dollar limits set by the IRS until 2006, along with the amount allowed for governmental catch-up contributions. You may make catch-up contributions without regard to contributions you made in prior years starting in the taxable year you will attain age 50 and for years thereafter, but not in your final three taxable years before you reach the plan's normal retirement age. The actual amount may vary based on your employers specific plan design.
| Year |
Maximum tax-deferred
contribution limit |
Catch-up contribution
limit for governmental plans |
| 2004 |
$13,000 |
$3,000 |
| 2005 |
$14,000 |
$4,000 |
| 2006 |
$15,000 |
$5,000 |
If I work for more than one eligible employer, can I contribute to both plans?
Yes, if you work for more than one eligible employer, you can contribute up to 100% of includable compensation to each plan, but the aggregate of your contributions between the two cannot exceed the elective deferral limit.
Can I stop or change the amount of my deferrals?
Yes, you can generally stop your contribution or change your deferral amount at any time. However, your employer may limit the number of changes you can make in a year.
Can I ever contribute over the elective deferral limit?
Yes, in the last three taxable years prior to your plan's normal retirement age, you may increase your contribution by amounts you were eligible to contribute in prior years but did not, up to an overall annual limit of two times the applicable elective deferral limit.
Can my employer contribute to the plan also?
Yes, the 457 plan may have employer contributions.
I heard my employer owns the plan assets. Is this true?
The assets in a section 457 plan are owned and controlled by your employer; however, employers that are part of state and local governments are required to establish a trust or hold the plan assets in an annuity contract or custodial arrangement for the exclusive benefit of the employees. The plan assets for these employers may no longer be attached by the employer's creditors in the event of financial disaster.
What responsibilities does my employer have toward the plan?
The employer must establish the plan and name a plan administrator. The plan administrator is then responsible for administering the plan in accordance with IRS regulations and the established plan document. This means they should only authorize allowable withdrawals, are responsible for ensuring that the employee makes a benefit election in the appropriate time frame and does not change it, and that required minimum distributions are taken in a timely manner.
Can I contribute to both a section 457 plan and a 403(b) plan?
Yes, you may contribute to both a 403(b) and a 457 plan. The maximum you may contribute is a total of 100% of includable compensation to each plans elective deferral limit. If you are eligible for the age 50 and over catch-up limit, your total catch-up contributions to both plans must not exceed the age 50 and over catch-up limit.
What happens if I contribute too much?
The excess contribution is taxable income in the year it was contributed and must be withdrawn from the plan.
Can I participate in the plan again if I stop my deferrals?
Yes, by completing a new salary reduction agreement with your employer unless your employer's plan document disallows you from restarting within the same plan year.
What kinds of investments are allowed in a section 457 plan? Can I choose them?
It depends on the provisions of your employer's plan. Most allow the employees to make investment choices; however, some do not. Your employer may offer fixed annuities, variable annuities, mutual funds, savings accounts, CDs, money market accounts and life insurance. Only a limited portion of your deferral may go toward the purchase of life insurance, however.
Can I access my account in the event of an emergency?
You may take a withdrawal from your account only in the event of separation from service, termination from employment, disability, or an unforeseeable emergency. Your beneficiaries may take withdrawals upon your death. Your employer's plan provisions may place additional restrictions on withdrawals. However, your account is intended for retirement purposes, so the IRS imposes regulations to ensure that a true emergency exists before you can withdraw money from your account. This means that your unforeseeable emergency must be a severe financial hardship resulting from a sudden illness or accident to you, your spouse or dependent, loss of your property due to casualty, or other similar extraordinary and unforeseeable circumstances. In other words, you may not withdraw funds to buy a car or pay college tuition. The amount withdrawn may not exceed your need.
May I take a loan against my account?
Section 457 plans generally do not allow for loans. The plan document and investment account must both contain loan provisions for them to be available to you.
Do I have to pay taxes on distributions as I take money out of the plan?
Amounts received are taxed as ordinary income to you in the year in which you receive them.
When I leave my job, can I begin taking my money out?
Non-profit organization plans -
You are required to elect a payout option no later than 60 days following the plan year-end in which you leave your employer. The payout election may be for the amount and frequency of payments you wish, or you might choose to defer payments until a later age. You may choose once to further delay the payout date or age. Your election is an irrevocable, one-time choice and should be considered carefully. Payments that continue for more than one year must be in non-increasing amounts, with the exception of reasonable cost-of-living increases. Withdrawn amounts will be reported on your W-2.
Governmental plans -
Governmental plan participants may elect any form of distribution they choose and the election is
not required to be irrevocable. Additionally, under these plans participants are allowed to rollover their account balance into any other qualified plan you already have or are eligible to establish. When you begin to withdraw your money, it will be reported on an IRS Form 1099.
Your employer's plan may always be more restrictive or may not have been amended to include certain provisions. It is always wise to check with your Plan Administrator.
Unlike other qualified plans, Section 457 plans do
not have a 10% excise tax for premature distribution prior to age 59 ½ (except qualified plan rollovers into the 457 plan). The payout choices your service provider might offer include lump sum withdrawal, annuitizing your account, or periodic payments over life expectancy.
Can I transfer my account to another service provider or roll it over to an IRA?
Assuming you are transferring your account to an approved service provider under your employer's plan and your employer authorized the transfer, you may transfer to another service provider. If you participate in a governmental plan described on the cover, you may be eligible to roll over your account to an IRA, a 403(b) or another qualified plan. Participants in nonprofit organization plans are prohibited by law from transferring account balances to any plan other than another nonprofit organization 457 plan.
Is there an age when I must begin taking distributions?
Yes, you must begin taking distributions by April 1st following the later of the year you reach age 70 ½ or the year in which you retire.
If I leave my current employer and go to work for another who also sponsors a section 457 plan, may I transfer my account to my new employer's plan?
Yes, if the new employer is willing to accept the transfer into their plan.
Variable annuities and mutual funds are subject to market risks, including the potential loss of principal invested.
Guarantees and benefits are subject to the claims-paying ability of the underlying insurance company.
