Contact Us 858-444-2300

Blog

Is a 457 Plan Right For You?

Posted by Paul D. Woodard | Jul 19, 2017 | 0 Comments

Retirementplan

There are a number of retirement plans offered by employers, including pension, profit sharing, and 401(k) plans. While many companies offer 401(k) or 403(b) retirement plans, the lesser known 457 plans provide an alternative retirement plan option for many governmental and non-profit employees.

A 457 plan is a nonqualified deferred compensation retirement plan available to certain governmental and non-profit employers. A 457 plan provides similar tax advantages to a 401(k). Furthermore, employers with a 457 plan may not be limited to sponsoring that plan alone. This allows employees with multiple retirement plans to contribute to their 457 plan in addition to their 401(k) or 403(b) plan, essentially doubling their maximum contribution limit, including catch-up amounts for employees who are 50 or older.

A 457(b) plan's annual contributions to a participant's account cannot exceed the lesser of: (1) 100% of the participant's includible compensation, or (2) the elective deferral limit of $18,000 (for 2015 – 2017). However, in addition to the normal contribution limit, 457(b) plans may permit a participant age 50 or older to make catch-up contributions ($6,000 for 2017). In addition, a 457(b) plan may allow for special 457(b) catch-up contributions if the participant is three years away from his or her normal retirement age allowing the participant to contribute double the annual limit, for a total of $36,000.

A 457 plan sponsor must either be a governmental unit or a tax-exempt 501(c) entity. Most 457 plans are set up either as an “eligible” 457(b) or “ineligible” 457(f) retirement plan. Most governmental employees in California have access to a 457 plan, but some tax-exempt employers have 457(b) plans limited to higher compensation employees, known as Top Hat plans.

Non-governmental, non-profit organizations may establish 457(f) plans where other non-qualified deferred compensations plans are not allowed. Ineligible 457(f) plans have no contribution deferral limit. However, in order to be deferred, the contributions must be subject to a substantial risk of forfeiture, leaving the money subject to the reach of creditors. In addition, participants risk losing a portion of their benefits in a 457(f) plan if they don't meet the conditions of the plan, such as staying with the company for a minimum amount of time.

There are some limits to non-governmental 457(b), or Top Hat plans. For example, non-governmental 457(b) plans are generally not available to all employees and are limited to some group of employees set by the employer, including directors, officers, and higher compensation employees. As to transferability, non-governmental 457 plans cannot be rolled into another tax-deferred retirement plan and can only be rolled into another non-governmental 457 plan. As far as risk protection, contributions to a non-governmental 457 plan remain the property of the employer, subject to claims of the employer's creditors in the event of insolvency, until the employee takes a distribution.

While 457 plans and 401(k) plans are both types of deferred compensation retirement plans, there are a number of key differences between the two. Like a 401(k), a 457 plan allows participants to defer compensation by making contributions to their retirement plan; however, a 457 plan may allow for more flexibility. For instance, early withdrawals from a 401(k) are subject to a 10% penalty but with 457 plans, there is no early withdrawal penalty, although withdrawals are subject to ordinary income tax. A 457 plan may also be available to certain independent contractors who work with governmental agencies and eligible non-profits, while 401(k) and 403(b) accounts are not likewise available to independent contractors.

If you have any questions about employee retirement plans, Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.

Comments

There are no comments for this post. Be the first and Add your Comment below.

Leave a Comment

Comments have been disabled.

Sample

Subscribe to our Newsletter

Menu