Question: What is a 457 plan and who is eligible to participate in a 457 plan?
Answer: A 457 plan is a deferred compensation plan that is governed by Section 457 of the Internal Revenue Code which applies to employees and independent contractors of state and local governments and tax-exempt organizations. A 457 plan is really a hybrid of employer-sponsored plans and non-qualified deferred compensation plans. As a result, 457 plans are generally not subject to the strict rules of ERISA but are governed by their own Internal Revenue Code section, which is tied into some qualified plan provisions.
The main reason 457 plans are used is that eligible employees can elect to defer income which reduces current taxes. The employer, generally being a tax-exempt entity, does not need the income tax deduction – so no tax benefit to the employer.
The assets of a 457 plan are held in trust by the employer and are subject to claims of the employer’s creditors. (But there are particular trusts set up and used as part of a 457 plan to protect assets of the trust from being used to satisfy another corporate purpose).
In general, a 457 plan must prohibit employees from taking distributions from the trust before separation from service or attaining the age of 70 ½.
At the time of distribution, the income payable to the employee is considered ordinary income when received.
Comment: Some 457 plans use life insurance policies as funding vehicles. The policies must be owned and the premiums paid by the employer. The employer must also be the beneficiary of the policy.
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org or .
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