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| What is a 457 plan? The 457 is a tax deferred retirement plan available to employees of certain governmental employers and employees of certain tax exempt employers. These type of employers can include: local and state government workers, firefighters, police personnel, and teachers, among others. Two types of 457 plans exist: "eligible" and "non-eligible" |
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The most common 457 plans are "eligible" plans." These plans fall under the rules of section 457(a)
through section 457(e) of the Internal Revenue Code (IRC). "Eligible" plans are typically known as 457(b) governmental
plans. This FAQ section will focus on the 457(b) plan. |
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The second kind of 457 plans are knows as "ineligible" plans." These plans fall under the rules of section
457(f) of the Internal Revenue Code (IRC). "Ineligible" plans are typically known as 457(f) non-governmental plans.
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Why is there suddenly so much interest in the 457 plan? The 457 plan has traditionally covered state and local government employees, which included some teachers. In the past, teachers who wished to contribute to both plans were limited to the total aggregate amount of the 457 (only $8,500). The Economic Growth and Tax-Relief Reconciliation Act of 2001 (EGTRRA) repealed coordination of contributions between 403(b) and 457(b) plans. This means that employees with enough includable compensation can contribute the maximum elective deferral limit to both a 403(b) and a 457(b). For 2003, this is $12,000 for a whopping total of $24,000. Participants eligible for catch-up provisions can include even more. Not all employers offer both a 403(b) and a 457(b) plan, nor are they required to do so. See: Contribute to both a 403(b) and 457 Why Contribute to a 457 plan? |
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reduce taxable income | |
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save for retirement | |
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contributions and earnings grow tax-deferred | |
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ability to contribute to a 403(b) as well (if offered by employer) | |
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portability — If you change jobs you can move your plan into your new employer's 457,
403(b) or 401(k). You can also roll your 457 plan into an IRA. Note: not all employers or
vendors accept transfers. |
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Who can contribute to a 457 plan? Unlike the 403(b) plan, there is no unviversal accessibility under section 457. This means that employers are not required to make the plan available to all employees. However, any individual who performs service for the employer, including independent contractors, are eligible to participate in the plan. Your human resources department should be able to answer eligibility questions. What are "Top Hat" plans? These are 457 plans that are available only to a select group of highly compensated or executive level employees (i.e. a "Top Hat" group). All assets under the plan remain part of the employer's general assets, and are subject to claims of its creditors. How does a 457 plan work? Employees set aside money for retirement on a pretax basis through a salary deferral agreement with their employer. Under this arrangement, the employee agrees to take a reduction in salary. The money reduced is directed into an investment company offered by the employer. The 457 contributions grow tax free until withdrawal at retirement. How much can be contributed to a 457 plan? For 2003, workers are able to contribute: |
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| 1. | the new employee elective deferral limit of $12,000 (going up to $13,000 in 2004), or | |
| 2. | up to 100% of includable compensation (must be less than the elective deferral limit). | |
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For more information see: 457(b) Plan
Contribution Limits Worksheet for 2002 from Fidelity. |
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What are the catch-up provisions in a 457 plan? If you are age 50 or older in year 2003, you may contribute an additional $2,000 above the 2003 elective deferral limit of $12,000 (this catch-up is scheduled to increase at a rate of $1,000 per year through 2006). Employers are not required to offer this provision. This catch-up option is only available in governmental 457 plans. The 457 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 elective deferral limit, or $24,000 in 2003 This "catch-up" provision kicks in during the three years prior to "normal" retirement age (as defined in the plan). Example: If a worker is to reach "normal" retirement age in 2009, he or she can take advantage of the "final three year" provision in years 2006, 2007, and 2008. Employers are not required to offer this provision. Note: to determine the underutilized amounts in prior years all of the prior coordination rules apply. How long after my 457 contribution is deducted from my paycheck should it take before this amount is credited to my 457 account? Contributions to retirement funds are governed by federal law. Relevant provisions require that employers transmit employee contributions to pension plans as soon as they can reasonably be segregated from the employer's general assets, but not later than the 15th business day of the month immediately after the month in which the contributions were withheld or received by the employer. Are loans available in 457 plans? Proposed regulations would permit plan sponsors to offer loans, but those regulations have not officially gone into effect. However, the IRS says you can rely on these proposed regulations until the final ones are issued. Loans from a governmental entity are allowed within the parameters set forth in the proposed regulations. Generally, as long as the provisions of IRC 72(p) regarding loans are met, loans are allowed. The loan must provide for reasonable interest, secured by the account. Finally, the loan document must contain a loan provision. Note: the conditions that the new regulations would impose on plan sponsors would be more onerous than those that apply to 403(b) plans. For this reason, it is uncertain how many plan sponsors would offer a loan provision. What if my employer doesn't offer a 457 plan? If you work for a 457-eligible employer, lobby the powers that be. Point out the ability to contribute to both a 403(b) and a 457 plan. 457 plan advantage: no early withdrawal penalty A big advantage to the 457 plan is that it is not subject to the age 59 1/2 withdrawal rule. This means there is no 10% penalty for early withdrawal. Keep in mind that if you roll 457 money into a 403(b), 401(k), IRA or any other plan (other than a 457 plan), you will lose this benefit. Conversely, if you roll 403(b) money into a 457 plan you do not avoid the 10% early withdrawal penalty. The plan provider or sponsor has to account for this money separately. As in all cases, you cannot roll over money unless the plan sponsor and product provider allow for it. Other 457 points of note Unlike the 403(b) plan, the employer must create a plan document detailing the specific rules of the plan. A 457 plan must be held in a trust for the exclusive benefit of the plan's participants and beneficiaries. Section 457(g)(3) of the IRC allows governmental plans to use qualifying annuity contracts and/or custodial accounts in lieu of, or in addition to, a trust to satisfy this requirement. Where can I get additional 457 plan questions answered? Post a question on our 403(b)/457 message board. To post, click "New Topic" and post away. It's that easy! |
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 Home | Disclaimer | © 2002 bWise Guys, LLC. All rights reserved. |
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More Information 10/02/02 — IRS Receives Written Comments and Testimony on 457 Proposed Regulations See "Contributing to both a 403(b) and 457 plan" from Publication 571, the IRS document which covers the 403(b) plan. School Districts Should Consider Adding an IRC 457 Plan, by Barbara Healy for 403(b)wise IRC 403(b)/457 Educational Outreach Program |
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