457 Governmental Plans
Employees of cities, counties, water districts, or other similar municipal entities often have access to a special type of retirement plan through their employers. Called governmental 457 deferred compensation plans (often shortened to 457 plans), these programs allow employees to make contributions from their paychecks which are then invested in programs chosen by the employees. These plans are only available to state and local government employees, not federal employees.
Another type of 457 plan, called non-governmental 457 or “top hat” plans, can only be established by certain tax-exempt entities for the benefit of groups of highly-compensated employees (HCEs) or groups of executives, officers, directors, or officers. The top hat plans can’t be offered to regular employees.
Generally speaking, 457 plans are very similar to better-known retirement plans, like 401(k) plans or 403(b) plans. There are, however, some important distinctions. One is that 457 plans don’t have to be offered to all employees, as noted above. They are considered “non-qualified” plans, and are governed by different rules than 401(k) or 403(b) plans are.
What are the advantages of a 457 plan?
These plans offer many of the same benefits that qualified plans provide, including:
- Tax-deferred contributions, so any of your contributions and earnings are free of income tax until withdrawal.
- Earnings on the funds are also tax-deferred.
- You can select from a range of investment options chosen by the plan sponsor.
- Your employer may choose to provide matching contributions, which will help you build your retirement savings.
- Participants age 50 and older can make “catch-up” contributions (up to $6,000 in 2016).
However, 457 plans are not exactly like other retirement plans. There are some other elements of these plans that separate them from other qualified retirement plans, such as:
- Money can be withdrawn before age 59 ½ without a 10 percent penalty, as long as the participant is retiring or ending his or her employment. The participant will still owe regular income taxes on the withdrawal.
- Employees who have both 457(b) plans and 401(k) or 403(b) plans can contribute the maximum allowable to both plans. For 2016, that amount is $18,000, which means participants in two plans can contribute a total of $36,000.
- Some plans allow special catch-up contributions. For three years prior to the normal retirement age specified in the plan, these participants can contribute up to twice the annual limit.
Talk to the Experts
457 plans must follow very specific rules and regulations. For example, government 457 plans must hold all plan assets and income in trust, or in custodial or annuity accounts for the exclusive benefit of participants and their beneficiaries. Non-governmental “top hat” 457 plans must hold all plan assets as property of the employer, which means they can be seized by creditors if the company goes into default. At FiduciaryFirst, we’re experienced with all types of retirement plans, including 457 plans. Contact us at 1-866-625-4611 for more information.
Tracking Number: 1-492524
This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, the plan sponsor will be in compliance with ERISA regulations.