457(b) Plan Primer

During the 2013 National Tax Sheltered Accounts Association (NTSAA) 403(b) Summit, Susan D. Diehl, QPA, from PenServ Plan Services Inc. in Horsham, Pennsylvania, discussed rules for 457(b) plans. A 457(b) plan is a non-qualified deferred compensation plan or eligible deferred compensation plan that can be sponsored by governments—states and political subdivisions of states. Tax-exempts can sponsor 457(b)s in which only certain highly-compensation employees (the top paid group) can participate.

For governmental 457(b)s, Internal Revenue Service (IRS) Revenue Procedure 2004-67 provided model language, Diehl said.

Governments and tax-exempts may also sponsor a 457(f) top hat plan. These plans are established by a specific agreement, have specific payout options and no contribution limits.

According to Diehl, 457(b) deferrals are limited, but they are not considered toward the Employee Retirement Income Security Act (ERISA) 402(g) limit, so participants may contribute the 402(g) limit to their 401(k) or 403(b) and also contribute the limit to their 457(b). Deferrals can be pre-tax and/or Roth, and the plan can have employer matching and/or nonelective contributions, but Diehl said employers typically do not contribute.

Deferrals to 457(b) plans are subject to FICA (Federal Insurance Contributions Act) and unemployment tax at the time of deferral, and subject to income tax when distributed.

Catch-up contributions in 457(b) apply to the three years immediately preceding the plan's normal retirement age. Participants may contribute up to two times the deferral limit for up to three years.

Participants of governmental 457(b)s may roll over their accounts to other plans, and rollovers into individual retirement accounts (IRAs) have been allowed since 2001, but participants in 457(b)s sponsored by tax-exempt organizations may not, Diehl explained. For tax-exempts, accounts may be distributed when there is no longer a substantial risk of forfeiture. The distribution is reported on a participant's W-2, not a 1099-R. Distributions are allowed at age 70½, at separation from service and for an "unforeseeable emergency," she said.

No hardship withdrawals are allowed in 457(b) plans, and the distributions allowed for an "unforeseeable emergency" are hard to get, Diehl noted. There is no premature distribution penalty for these distributions.

Participants in a governmental 457(b) plan may take a loan from their accounts. These must be coordinated with other plans of the employer; the same rules as for other plans apply. Diehl added that qualified domestic relations orders (QDROs) also apply to 457(b)s, effective since 2002.

Other distribution rules include:

• An independent contractor may get a "retirement" distribution when the contract ends; usually this means there has been a 12-month period without a contract with the employer; and
• There is an in-service distribution rule for participants with less than $5,000 in their accounts; if no deferrals have been made for two years and the participant has never used the rule before, he or she can take a voluntary distribution, or the employer may make it mandatory for the participant to take a distribution, Diehl said.