Section 457 Plans - Deferred Compensation Plans, by Paul M. League, QFP, CFP®
A Section 457 Plan is a deferred compensation plan available to employees of
state or local governmental entities, their agencies, and/or several of the
tax-exempt organizations under Code Section 501.
Technically, these are non-qualified plans, however, an eligible Section 457
Plan resembles a tax-qualified plan in that, as long as the plan meets the
requirements of Code Section 457, plan participants are not taxed on their
plan interests until they actually received distributions.
There are two types of 457 Plans:
a 457 Plan of a governmental entity, made available to all employees, and
usually as a supplement to a Pension Plan.
other tax-exempt organizations where they are offered to only a select group
of employees, in the same manner that non-qualified plans are.
The participant must be a "general unsecured creditor" of the plan sponsor,
thereby creating the "substantial risk of forfeiture" that allows the
participant to avoid constructive receipt of any annual income.
Like corporate, non-qualified plans, 457 Plans have specified contribution
limits, and are also subject to the minimum distribution rules.
A 457 Plan may be established and funded with salary deferrals at any time
during the calendar year; however, these cannot be with after tax
deferrals. A "salary deferral agreement" must first be signed before any
compensation, earned after it, can be deferred into the Plan.
For plan years beginning in 2002, the 457 maximum deferral limits, and the
definition of compensation, are the same as for 401(k) plans; therefore,
participants may defer the lesser of $100% of compensation, or $11,000 for
2002. The deferral dollar limit will increase to $12,000 for 2003, $13,000
for 2004, $14,000 for 2005, and $15,000 for 2006 and thereafter. During each
of the three years prior to retirement, there is a special catch-up limit
that is generally twice the deferral limit. Also as of 2002, the maximum
deferral limit is not reduced by deferrals made to another type of
retirement plan such as a 401(k) or 403(b) plan; therefore, a participant
covered by a 457 Plan, and a 401(k) Plan, may defer the maximum $11,000 (for
2002) into each plan for a total of $22,000 in deferrals.
As of 2002, certain distributions from State and local government plans are
eligible for rollover to a traditional IRA, SEP IRA, safe-harbor 401(k),
403(b), governmental 457, or other qualified retirement plan.
Please contact us for more information on such plans at:
800.482.5347.
Disclaimer: The material discussed
herein
is meant for general illustration or informational purposes only and is
not to be construed as investment advice. Although the information has been gathered from sources believed to
be reliable, it is not guaranteed. Please note that individual situations
can vary; therefore, the information contained herein should be relied upon only when
coordinated with individual professional advice. We are not licensed for
and therefore do not provide tax or legal advice.
About
the Author: Paul M.
League, QFP, CFP® is the Founding Principal of both League Financial & Insurance
Services (www.LeagueFinancial.com) & League Financial Services (www.LeagueFS.com),
which are privately held companies
located in Palm Desert, CA.
Paul and his companies specialize in assisting clients to
create, expand & preserve assets. Contact Information: Paul M. League, QFP, CFP®, P.O. Box
11800, Palm Desert, CA 92255-1800 · 800.482.5347 ·
Info@LeagueFinancial.com.
©Paul M. League. All Rights Reserved.
