Employers
457(b) FREQUENTLY ASKED QUESTIONS
What is a 457(b) plan?
A 457(b) plan is a non-qualified tax-deferred compensation plan that works very much like other retirement plans such as the 403(b) and 401(k). Two main types of 457 plans exist: governmental and tax-exempt 457(b) plans. This FAQ section will focus on governmental 457(b) plans.
Who is eligible to contribute to a 457(b) plan?
- Public plans – State and local government plans.
- Private plans – Non-governmental tax-exempt entity plans. Non-governmental (hospitals, charitable organizations, unions, among others) must generally limit participation to a selection group of management or highly compensated (also known as “top hat”) employees. The rules require that private 457(b) plans be unfunded in order to obtain tax benefits.
- Note: Public governmental 457 plans, on the other hand, are required to be funded.
How does a governmental 457(b) plan work?
Employees set aside money for retirement on a pre-tax basis through a salary deferral agreement with their employer. The 457(b) contributions grow tax free until withdrawal at retirement or
termination of employment.
termination of employment.
Why contribute to a 457(b) plan?
- reduce taxable income
- save for retirement
- contributions and earnings grow tax-deferred
- ability to contribute to a 403(b) or a 401(k) as well (if offered by employer)
- portability – public (governmental) plan money can be moved into a new employer’s 457(b), 403(b) or 401(k) if the plan accepts such transfers and offer the same vendors as approved vendors under their plan, or into an IRA.
How much can be contributed to a governmental 457(b) plan?
For 2009, workers are able to contribute the lesser of:
- the employee elective deferral limit of $16,500, or
- up to 100% of includable compensation (must be less than the elective deferral limit).
What are the catch-up provisions in a governmental 457(b) plan?
If you are age 50 or older in 2009, you may contribute an additional $5,000 above the 2009 elective deferral limit of $16,500. Employers are not required to offer this provision. This catch-up option is only available in public (governmental) 457(b) plans.
The 457(b) plan contains a special “catch-up” provision called the “final three year” provision for those approaching retirement (assuming they haven’t contributed the maximum amount in prior years). This provision, which used to limit participants to an additional $15,000 over a 3-year period, now permits up to 200% of the current year elective deferral limit, or $33,000. This “catch-up” provision kicks in during the three years prior to “normal” retirement age (as defined in the plan). Employers are not required to offer this provision. Participants who take advantage of the “final three year” provision cannot also take advantage of the “Age 50 catch-up provision.
The 457(b) plan contains a special “catch-up” provision called the “final three year” provision for those approaching retirement (assuming they haven’t contributed the maximum amount in prior years). This provision, which used to limit participants to an additional $15,000 over a 3-year period, now permits up to 200% of the current year elective deferral limit, or $33,000. This “catch-up” provision kicks in during the three years prior to “normal” retirement age (as defined in the plan). Employers are not required to offer this provision. Participants who take advantage of the “final three year” provision cannot also take advantage of the “Age 50 catch-up provision.
Are all employees eligible to contribute to a governmental 457(b) plan?
Unlike the 403(b) plan, there is no universal accessibility under the 457(b). This means that employers are not required to make the plan available to all employees. Your employer’s plan document should spell out the specific rules for contribution.
Can an employee contribute to a 457(b) and a 403(b)?
Yes. The 457(b) plan has traditionally covered state and local government employees, which included some teachers. This means that employees with enough includable compensation can contribute the maximum elective deferral limit to both a 403(b) or 401(k) and a 457(b). If both plans are offered employees could tax defer a total of $33,000 in 2009. This limit is prior to any catch-up provision they may also have available.
Are loans available in governmental 457(b) plans?
Yes. Under new regulations, plans can be amended to add this provision. The approved vendor must also allow this provision is the plan is amended to offer this. There are very few, if any, 457(b) plans that offer loans.
What are an employee’s options when switching jobs?
Public plans – State and local government plans.
457(b) money can be moved into your new employers’ 457(b), 403(b) or 401(k) if the new plan accepts such transfers and the new employer’s plan offers these vendors as “approved,” or into a Rollover IRA.
457(b) money is not subject to the age 59 ½ withdrawal rule, so money can be withdrawn (subject to income tax on the full amount) without incurring a 10% early withdrawal penalty. Another option when switching jobs is to leave the money where it is, if the plan allows.
457(b) money is not subject to the age 59 ½ withdrawal rule, so money can be withdrawn (subject to income tax on the full amount) without incurring a 10% early withdrawal penalty. Another option when switching jobs is to leave the money where it is, if the plan allows.
Can governmental 457(b) money be withdrawn in the case of “extreme financial
hardship” or “unforeseeable emergency”?
hardship” or “unforeseeable emergency”?
Generally, funds may be withdrawn in the case of “extreme financial hardship” or in the event of an “unforeseeable emergency.” This right is subject to the employer’s plan rules specified in the plan document.
An unforeseeable emergency must be defined in the plan as (1) a severe financial hardship of the participant that results from illnesses or accidents of the participant, their spouse or a dependent, (2) the loss of the participant’s property due to casualty, or (3) other similar extraordinary and unforeseeable circumstances that arise as a result of events beyond the participant’s control. Examples of extraordinary and unforeseeable circumstances include the imminent foreclosure of, or eviction from, a primary residence or the need to pay for medical or funeral expenses. However, educational expenses are not unforeseen, so are not included.
An unforeseeable emergency must be defined in the plan as (1) a severe financial hardship of the participant that results from illnesses or accidents of the participant, their spouse or a dependent, (2) the loss of the participant’s property due to casualty, or (3) other similar extraordinary and unforeseeable circumstances that arise as a result of events beyond the participant’s control. Examples of extraordinary and unforeseeable circumstances include the imminent foreclosure of, or eviction from, a primary residence or the need to pay for medical or funeral expenses. However, educational expenses are not unforeseen, so are not included.
When must governmental 457(b) money be withdrawn?
Generally, withdrawals must begin at age 70 1/2. Withdrawal options will vary by employer. Consult your employer’s plan document for details.
Will participation in a governmental 457(b) affect Social Security Benefits?
No. Salary reduction contributions to a 457(b) reduce taxable compensation for federal (and in most instances, state) income tax purposes.
What happens to 457(b) money at death?
Designated beneficiary(ies) will be paid survivor benefits due at death.
Governmental 457(b) plan advantage: no early withdrawal penalty at retirement or
upon termination of employment.
upon termination of employment.
A big advantage to the 457(b) plan is that it is not subject to the age 59 ½ withdrawal rule. This means there is no 10% penalty for early withdrawal at retirement or upon termination of employment – regardless of age.
Also, note that if you roll governmental 457(b) money into a 403(b), 401(k), IRA or any other plan (other than a 457(b) plan), you will lose this “no early withdrawal benefit."