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What is a 457 Retirement Plan?
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A 457 plan is a retirement or pension plan that provides benefits to government employees as well as employees of tax-exempt organizations. Employees participating in 457 plans are allowed to defer their compensation on a before-tax basis via regular payroll deductions. Money placed in these accounts grows on a federally tax-free basis until withdrawn.
Today, we’re going to explain the basics of 457 retirement plans, touching on topics such as employee eligibility, contribution limits, as well as the differences between these plans and 401(k) or 403(b) plans.
Employer 457 Retirement Plans
The growing interest in 457 plans stems from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which made a number of changes as to how these 457 plans are treated. Employers eligible to participate in these plans include state and local government agencies that are exempt from federal income taxes , as well as other non-church organizations exempt from federal income taxes such as:
• Educational Organizations
• Charitable Organizations
• Hospitals
• Chartable Foundations
• Labor Unions
• Trade Associations
• Tax-exempt Non-Rural Electric Cooperatives
Governmental and Non-Governmental Plans
As just discussed, there are two types of 457 plans - those for governmental agencies and those for non-governmental / tax-exempt organizations. Some government plans were established under the provisions of Section 457(g) - but these types of plans can no longer be created. Most of the plans in existence today are Section 457(b) plans and that’s what we’re going to discuss first in this publication. We’ll cover the topic briefly here, but we’ve got an entire publication dedicated to 457(f) plans.
Non-Governmental 457b Plans
Non-profit organizations are now able to provide their employees with 457 plans in addition to their traditional 403b plans . Such companies can establish an eligible plan under Section 457(b) or what are called “ineligible” plans under Section 457(f).
Non-governmental 457(b) plans are limited to a predefined standard group of higher compensation employees - typically directors or officers of the company. Oftentimes this compensation limit is the same as that used for 401k participation testing purposes. And because these plans are usually limited to highly-compensated employees or a select group of executives, they are sometimes referred to as “top hat” plans.
The big advantage of these plans is that they allow employees that are in their peak earning years to defer the payment of federal and state income taxes on their contributions to the plan.
457b Plan Restrictions
Plans for these non-governmental entities are much more restrictive than governmental plans. For example, money deferred into these plans cannot be rolled over into any other type of tax-deferred retirement plan - only another non-governmental 457 plan. In addition, the money placed into these accounts is not held in a trust for the sole benefit of the employee that makes the deferral. Instead the money remains the property of the employer and therefore is available to creditors .
Deferral Limits 2008 / 2009
In 2007, the contribution limit on a 457b plan was $15,500 and that limit remained the same in 2008. Contributions moved up to $16,500 in 2009. In the years 2010 and beyond, the deferral limit on these plans will move up in $500 increments and will be indexed for inflation . This deferral limit applies to both governmental and non-governmental 457b plans.
Catch-Up Contributions
If you’re over 50 by the end of the calendar year, then you also qualify for an additional catch-up contribution of $5,000 in the years 2007 and 2008. In 2009, catch-up contributions moved up to $5,500. Catch-up contributions only apply to governmental plans. Non-governmental 457b plans are not eligible to make catch-up contributions.
457b Special Catch-Up Contributions
Finally, you may also qualify for a special catch-up contribution of $15,500 in 2007 and 2008, up from $15,000 in 2006. In 2009, this special catch-up contribution moved up to $16,500. This special catch-up contribution cannot be combined with the $5,000 / $5,500 catch-up contribution for those aged 50 and over. In order to qualify for this special catch-up deferral, you must have under-contributed in prior years. Speak with your plan’s administrator to verify your eligibility under this special provision.
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