What is a 457?

The law allows public school districts and other governmental employers to sponsor voluntary savings plans for their employees under Section 457 of the Internal Revenue Code. These plans are technically "non-qualified deferred-compensation plans." However, Congress has effectively given them the same characteristics as qualified retirement plans, such as 401(k) plans, through a series of changes in federal laws made from 1996 through 2001.

A 457 plan is sponsored by the local employer and in many ways works like a 401(k) plan. The employer can pick the vendors offering investments in the plan and remove them if they do not do a good job. The employer can set all of the other rules. Federal laws make compliance for such plans much easier than for 401(k) plans since there are no "non-discrimination tests" to perform.

Federal law allows an employee to defer up to the lesser of 100% of compensation or $15,500 to a 457 plan on a tax-deferred basis. For individuals age 50 or older, the dollar limit goes up to $20,500. This limit is in addition to the limit for any other plan. Thus, an employee can defer $15,500 under a 457 plan and also defer the maximum amount to a 403(b) or other salary deferral plan. There is also a "Catch-up" provision that if the employee is in their last three years of employment they may contribute up to a maximum of $22,000 per year. There are restrictions on this provision, so please consult with your tax advisor.

Updated: Monday, December 03, 2007 11:47:04 PM  Eastern