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457(b) Retirement Plans

For Tax-Exempt Non-Profit Organizations

A 457(b) plan is a non-qualified, tax-deferred compensation plan offered by many tax-exempt institutions to their employees. This plan allows For Tax-Exempt Non-Profit Organizationsselected executive employees to save for retirement or to have their savings augmented by the employer without additional discrimination testing.

Contributions are made from pre-tax wages, and the Internal Revenue Code sets the maximum contribution limits. The limit for tax year 2016 is the lesser of $18,000 or 100% of an employee’s salary.

An individual may contribute to a 457(b) plan plan and another plan, such as a 403(b) or 401(k) plan, at the same time, and contribute the maximum amount allowed into each plan for a total of $36,000 (in 2016).

Contributions to a 457(b) plan plan can also be made by the employer. The total contribution to a 457(b) plan plan cannot exceed $18,000 regardless of whether it is made by the employer or the employee/participant or both.

Although “catch-up” contributions are often discussed in the literature, catch-up is only available for a government sponsored 457(b) not one sponsored by a 501(c)(3) organization.

Unlike matching or other employer contributions to 403(b) plans, employer contributions to 457(b) plans plans are not subject to discrimination testing. 457(b) plans are frequently used to accommodate special contribution commitment made by the Board to an executive when s/he was hired. Because no discrimination testing is necessary, such contributions do not “fail” testing and are not subject to removal from the plan for that reason.

Because contributions are made before tax, this means that taxes are due when withdrawals are made.

However, unlike qualified plans such as 403(b) plans, the 457(b) plans plans do not impose a penalty on early withdrawals.

Participants in 457(b) plans sponsored by 501(c)(3) organizations are not allowed to roll funds from their 457(b) plans to a qualified plan or an IRA.

Unlike other ERISA retirement plans, the assets in a 457(b) plan do not legally belong to the individual participant but essentially represent a promise from the employer to the Participant. If the tax-exempt organization declares bankruptcy, the funds in a 457(b) plan become available for creditor claims. The Participants become claiming creditors in such an action.

-Patricia Neal Jensen