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:

1. a 457 Plan of a governmental entity, made available to all employees, and usually as a supplement to a Pension Plan.
2. 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.

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