457 Plan

457 Plan

A 457 plan is a savings and retirement plan very similar to a 401k retirement plan. The major benefit of a 457 plan, like a 401k plan, is that employees who participate in the retirement plan are allowed to defer their compensation on a pre-tax basis, which lowers their taxable income rate while still allowing and encouraging saving.  Similar to other retirement plans, 457 plan rules stipulate that the monies contributed by qualified government and non-government employees into an employee 457 plan are allowed to accrue interest tax free until it is withdrawn at retirement or for other eligible reasons.

The 457 plan definition is a retirement plan specifically designed for employees of the government agencies as well as employees of not for profit corporations and other tax-exempt entities including hospitals.

457 Plan Rules

The plan rules for the 457 retirement plan were changed in 2001. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 specifically addressed and updated the plan rules, creating differentiation between plans for government employees and non-government employees by splitting the 457 plan into sub-plans called 457 (b) plans and 457 (f) plans. Older plans were created as 457 (g) plans but they can no longer be created even though they continue to exist for those who had initially contributed to them. 457 rollover options allow older plans to be combined with newer plans.  457 (b) plans are the plans used by government employees while 457 (f) plans cover employees who work in education, charitable organizations, hospitals, foundations, labor unions, trade associations, and certain non-rural electric company cooperatives.

Non government employees have to meet specific requirements in order to be eligible for 457 (b) plans. This type of plan is limited to the directors and officers of the organizations, but other non-profit employees who do not meet the income test limits do have a tax-deferred retirement plan available called a 403b. The 457 (b) compensation testing limit for highly paid employees is similar to that of the 415 limits for highly compensated officers in for-profit corporations on their 401 (k) plan.  Because the 457 plan is reserved for highly compensated employees, it has sometimes been called a top hat plan. A highly compensated employee, according to the IRS, is one who makes more than $110,000 per year.

457 Limits

457 plan limits are $16,500 for 2009 and 2010, but starting in 2011 the limit will increase by $500 per year. The 457 plan limits apply to both non-governmental and government employee plans. Some employees are exempted from the limits if they are of a certain age and have not been participating for very long. These employees, if they are over the age of 50, may be eligible to make additional payments into the account called “catch-up contributions,” which would allow them to contribute up to twice as much as the typical plan allowance.

In 2009, the 457 contribution limit was $16,500, and that limit remained the same in 2010.  In the years 2011 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.
Tim Ord
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