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These are plans available to employees of a state or local government or agency, or any non-church controlled tax-exempt organization (civic; religious, charitable, educational, etc.; business leagues; certain credit unions; and mutual insurance funds).
Section 457 plans, like 403(b) and 401(k) plans, allow you to make elective pre-tax contributions to the plan and to defer tax on income until retirement. Amounts deferred are set aside by the employer and invested. Distributions from a 457 plan are taxed as ordinary income.
What Makes a 401(k) Plan Different From A Section 457 Plan?
The major differences between a 401(k) plan and a Section 457 plan are as follows:
- There are no minimum vesting standards required under a 457 plan as in a 401(k) plan. Your employer has full discretion in establishing a vesting schedule.
- Unlike a 401(k) plan, a 457 plan is not required to meet a discrimination test. This means that your employer can choose which employees will receive a matching contribution.
- You may be able to take an in-service distribution, prior to age 70½, from a 457 plan under the following circumstances: 1) if your total account balance does not exceed a specified dollar amount, 2) if you did not make a contribution to the plan during the prior two years, and 3) if you did not previously receive an in-service distribution. 401(k) plans do not generally make in-service distributions prior to age 70½, other than hardship withdrawals.
- You can access funds from your 457 plan due to an unforeseeable emergency, but the test is stricter under Section 457 plans than hardship distribution rules from a 401(k) plan. An unforeseeable emergency is defined as a severe financial hardship resulting from a sudden and unexpected illness or accident, loss of property due to casualty, or other extraordinary circumstances beyond your control. Note that home acquisition and college expenses are not considered an unforeseeable emergency as they would be for a hardship withdrawal in a 401(k) plan.
- 401(k) plans may offer a host of investment options under the plan, while a Section 457 plan maintained by a government employer may be regulated by state law as to what type of investments may be held for the plan. (Non-government employers can offer any investments.)
- There is no early distribution penalty tax for distributions made prior to age 59½, as there are in a 401(k) plan. However, since assets from other types of plans may be rolled over into a 457 plan, any amounts distributed from the plan that are attributable to assets rolled over from another type of plan may be subject to the 10% early distribution penalty tax.
- While all assets of a 457 plan maintained by a state or local government must be held in trust for the exclusive benefit of employees and beneficiaries, assets of 457 plans established by a tax-exempt organization that is not a governmental entity shall remain the property of the employer, subject only to the claims of the employer's general creditors. All assets of a 401(k) plan generally must be held in a trust.
- If the plan is maintained by a governmental entity, account balances after separation from service can be rolled over or transferred to an IRA or another qualified plan. Plans maintained by tax-exempt organizations that are not governmental entities are not eligible for these rollover provisions.
- While 401(k) plans have catch-up provisions, a 457 plan offers a special 'catch-up' provision. This special catch-up provision applies during one or more of the three-year period preceding normal retirement age. See Catch-Up Provisions for more information.
Section 457 Contribution Limits
The total annual contribution that can be made to your 457 plan in 2019 cannot exceed 100% of your compensation or $56,000 ($55,000 in 2018), whichever is less. The amount of income an employee can elect to defer is $19,000 in 2019 ($18,500 in 2018). The $19,000 dollar limit is applied across all employers during the year.
Just like in a 403(b) and 401(k) plan, the same catch-up election allows you to increase these limits if you are at least age 50 and participating in a plan of a governmental employer (but not a private tax exempt organization). The catch-up amount is up to $6,000 in 2019 (same in 2018). In addition, a special catch-up provision applies only to 457 plans. During one or more of the three-year period preceding retirement, the catch-up amount is up to an additional $19,000 raising the total applicable dollar limit ($38,000 in 2019, $37,000 in 2018). This catch-up amount is available only if you were a participant in preceding years, and you did not make the maximum contribution for those years.
This special catch-up rule applies to all eligible 457 plans, not just eligible 457 governmental plans. However, if you are over age 50, you cannot take advantage of both the age 50–catch-up amount and the special Section 457 plan catch-up amount.
If you are eligible to participate in a Section 457 plan, and require more detailed information, contact your benefits department.
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