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What is a Section 457 Plan?

Tax code section 457 provides rules to govern all nonqualified deferred compensation plans of governmental employees and non-church controlled tax-exempt organizations. The pension plan designed to comply with these rules is simply referred to as a Section 457 plan. Employees are allowed to defer compensation on a pre-tax basis through payroll deductions that further allows them to defer federal and sometimes state taxes until the assets are withdrawn.

What are Eligible and Ineligible Plans?

Eligible Section 457 plans include limits on the amounts deferred and are subject to favorable tax treatment. Plans that provide greater deferral are generally designed for executives and are referred to as ineligible. The amount deferred annually by an employee for an eligible plan cannot exceed the lesser of 100% of the employee’s compensation or an applicable dollar amount as follows:

• 2007----- $15,500

The limit on catch-up contributions that participants age 50 and over can make remains at $5000 for 2007.

Only eligible employers can establish a Section 457 plan. An eligible employer is defined as states, subdivisions of states, instrumentalities or political subdivisions of states, or any entity other than a governmental unit that is exempt from federal income taxes. Some governmental units that are exempt from federal income taxes include the following types of organizations:

• charitable organizations
• religious organizations
• educational organizations
• private hospitals
• private foundations
• labor unions
• trade associations
• fraternal orders
• farmers cooperatives

Distribution Requirements

There are many factors to consider when taking a distribuition from your 457 plan. These factors are beyond the scope of this article so please check with your plan administrator or a tax professional for additional information on distribution requirements.

Other Benefits of a Section 457 Plan

In addition to deferring the maximum allowable under the eligible 457 plan, an employee may also defer allowable contributions from other plans.

Resources

Can I Contribute to Both a 401k and a 457 Plan?
About Taxes