457 plan

The 457 plan is a type of nonqualified,tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis. For the most part the plan operates similarly to a 401(k) or 403(b) plan most people are familiar with in the US. The key difference is that unlike with a 401(k) plan, there is no 10% penalty for withdrawal before the age of 55 (59½ for IRA accounts) (although the withdrawal is subject to ordinary income taxation). 457 plans (both governmental and non-governmental) can also allow independent contractors to participate in the plan where 401(k) and 403(b) plans cannot.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made a number of changes in how governmental 457 plans are treated, the most notable of which is that the coordination of benefits limitation was removed. This allows a person whose employer has a 401(k) or 403(b) and a 457 to defer the maximum contribution amounts to both plans instead of coordinating the total and only being able to meet a single limit amount. Thus a participant can contribute the maximum $18,000 for 2015 into his/her 401(k) and also the maximum $18,000 into his/her 457 plan. If that person's age is at least 50 at the end of the current tax year, he can contribute the additional catch up amount into each plan also, meaning an additional $6,000 into the 401(k) and another $6,000 into his governmental 457 (catch-up contributions are not provided for non-governmental 457 plans). The total would then be $48,000 deferred instead of the $24,000 [18,000 + 6,000] that would have been allowed if the coordination of benefits provision had not been repealed in regard to the governmental 457 plan. As a result, many governmental employers have now set up 457 and 401(k) plans for their employees, and non-profit employers have set up 403(b) and 457 plans each allowing their employees to invest in both. Some state universities and school districts have access to all three tax-deferred plans. However, the total combined annual contribution to 401(k) and 403(b) plans is subject to the $18,000 limit and $6,000 catchup limit.

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