Distribution Reporting for 457(b) Plans

“Are distributions to retired employees from a 457(b) plan of a private tax-exempt employer reported on a 1099-R or W-2? Does it matter whether the distribution is an annuity or not?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

In order to answer this question, it is helpful to look at the IRS Form W-2 Instructions, which state the following on page 16 (boldface text reflects the Experts emphasis):

Box 1—Wages, tips, other compensation. “Show the total taxable wages, tips, and other compensation that you paid to your employee during the year. However, do not include elective deferrals (such as employee contributions to a section 401(k) or 403(b) plan) except section 501(c)(18) contributions. Include the following:

. . .

14. Distributions to an employee or former employee from an NQDC plan (including a rabbi trust) or a nongovernmental section 457(b) plan.”

Thus, distributions to an employee from a 457(b) plan sponsored by a nongovernmental tax-exempt organization are reported in Box 1 of the W-2. Note that this reporting is in contrast to the distribution reporting for a 457(b) governmental plan, where distributions are reported on a 1099-R, not a W-2.  Further, death benefits from a 457(b) plan sponsored by a tax-exempt organization paid to the estate or beneficiary of a deceased employee are reportable on Form 1099-MISC.

Note that the W-2 instructions do not make a distinction between types of distributions, so annuity distributions from a private tax-exempt 457(b) plan would be reported on a W-2 as well, even if the employee has long since retired from the plan sponsor. However, plan sponsors should keep in mind that annuity distributions from 457(b) plans of tax-exempt organizations must be carefully structured to maintain the unfunded status of such deferred compensation and avoid immediate taxation under constructive receipt rules.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.