Section 457 Retirement Plans

A 457 plan is a retirement plan offered by certain employer groups which allows employees to make contributions on a pre-tax basis through salary reductions.

• Any state government
• A political subdivision of a state
• Any agency or instrumentality of either of these
• A tax-exempt rural electric cooperative or an affiliate of one
• Any nonprofit organization under IRC 501(c) (non-governmental)

Examples of a political subdivision of a state would be a city or township. Examples of an agency or instrumentality would be school districts, road commissions, water districts or sewage authorities. These represent only a few possible examples.

In a government plan, any employee may participate. Government entities are exempt from ERISA, a Department of Labor law that governs employer-sponsored plans. However, for a 501(c)(3) nonprofit organization’s 457 plan to be exempt from ERISA, it must establish the plan only for a select group of management or highly compensated staff. Nonprofit organization 457 plans must be designed to be exempt from ERISA if they are to qualify as 457 plans.

Your employer must agree to sponsor a 457 plan and adopt a written plan document that outlines the plan provisions. Once your employer has established the Plan and chosen the investment products, you will need to enter into an agreement with your employer authorizing a portion of your salary to be contributed to the Plan.

• Lower Taxes: Your contributions are pre-tax which lowers your taxable income. Lower taxes means you keep more of your money.
• Tax-Deferred: Your contributions grow on a tax-deferred basis allowing your plan to compound at a greater rate than a taxable account.
• Supplement to Pension: While many employees of 501(c) organizations have access to a pension program, most pensions do not supply income equal to pre-retirement salary. A 403(b) plan can supplement current pension plans.

You are allowed to contribute 100% of your includable compensation up to the elective deferral limit, as indexed. Includable compensation is your gross compensation less any pre-tax deductions. The chart contains the dollar limits set by the IRS along with the amount allowed for governmental catch-up contributions. Catch-up contributions are allowed for those who are 50 or older in the given calendar year, but not in your final three taxable years before you reach the plan’s normal retirement age. The actual amounts may vary based on your employer’s specific plan design.

You can contribute up to 100% of includable compensation to each plan, but the aggregate of your contributions between the two cannot exceed the annual 457 deferral limit.

Yes, generally you can stop or change your deferral amount at any time. Your employer may limit the number of changes you can make in a year.

In the last three taxable years prior to your plan’s normal retirement age, you may increase your contribution by amounts you were eligible to contribute in prior years but did not, up to an overall annual limit of two times the applicable deferral limit.

The excess contribution is taxable income in the year it was contributed and must be withdrawn from the plan.

457 plans may have employer contributions.

If eligible, you may contribute to both plans. The maximum you may contribute is a total of 100% of includable compensation up to the effective deferral limit of each plan. This feature may allow you to maximize your contributions, as the deferrals are not aggregated. If you are eligible for the “age 50” catch-up, the catch-up contributions must be aggregated and are subject to the “age 50” catch-up limit.

The assets in a section 457 plan are owned and controlled by your employer. Employers that are part of state and local governments are required to establish a trust or hold the plan assets in an annuity contract or custodial arrangement for the exclusive benefit of the employees and/or their beneficiaries.

The employer must establish the plan and name a plan administrator. The plan administrator is then responsible for administering the plan in accordance with IRS regulations and the established plan document. This means they should only authorize allowable withdrawals, are responsible for ensuring that the employee makes a benefit election in the appropriate time frame and does not change it, and that required minimum distributions are taken in a timely manner.

If approved by your employer, you may take a withdrawal from your account only in the event of separation from service, termination from employment, disability, or an unforeseeable emergency. Your beneficiaries may take withdrawals upon your death. Your employer’s plan provisions may place additional restrictions on withdrawals. Your account is intended for retirement purposes, so the IRS imposes regulations to ensure that a true emergency exists before you can withdraw money from your account. This means that your unforeseeable emergency must be a financial hardship resulting from sudden illness or accident to you, your spouse or dependent, loss of your property due to casualty, or other similar extraordinary and unforeseeable circumstances. The amount withdrawn may not exceed your need.

The IRS generally allows loans on Section 457 plans, but your employer has the final decision. The plan document and investment account must both contain loan provisions for a loan to be available to you.

Amounts received are taxed as ordinary income to you in the year in which you receive them.

Governmental plans - Governmental plan participants may elect any form of distribution you choose and election is not required to be irrevocable. Under these plans, you are allowed to rollover your account balance into any other qualified plan you already have or are eligible to establish. When you begin to withdraw money, it will be reported on an IRS Form 1099.

Your employer’s plan may always be more restrictive or may not have been amended to include certain provisions. Check with your Plan Administrator for your plan provisions.

Unlike other qualified plans, Section 457 plans do not have a 10% excise tax for premature distributions prior to age 59 ½ (except qualified plan rollovers into the 457 plan). The payout choices your service provider might offer include lump sum withdrawal, annuitizing your account, or periodic payments over life expectancy.

Non-governmental plans - You are required to elect a payout option no later than 60 days following the plan year-end in which you leave your employer. The payout election may be for the amount and frequency of payments you wish, or you might choose to defer payments until a later age. You may choose once to further delay the payout date or age. Your election is an irrevocable, one-time choice and should be considered carefully. Payments that continue for more than one year must be in non-increasing amounts, with the exception of reasonable cost-of-living increases. Withdrawn amounts must be reported on your W-2.

You may transfer to another provider assuming they are an approved provider under your employer’s plan and your employer authorized the transfer. If you participate in a governmental plan you may be eligible to roll over your account to an IRA, a 403(b) or another qualified plan. You will be subject to the new plan rules which may subject you to the 10% excise tax. Participants in non-governmental plans are prohibited by law from transferring account balances to any plan other than another non-governmental 457 plan.

You must begin taking distributions by April 1st following the year you attain age 70 ½ or the year in which you retire.

Your new employer must be willing to accept the transfer into their plan.