457 Plans – 457(b) and 457(f)
457(b) is an “eligible” nonqualified deferred compensation plan for tax-exempt organizations. The structure is simple and largely mirrors the provisions, including limits, of qualified plans such as 401(k) or 403(b) plans.
This type of plan allows participants to defer compensation on a pre-tax basis, subject to certain deferral limits. Participants’ account balances have tax-deferred growth potential with ordinary income taxes due upon distribution.
The major difference is that unlike qualified plans, deferrals under 457(b) are subject to creditors of the corporation. Although 457(b) plans are predominantly used for employee deferrals, it is acceptable to allow employer deferrals.
- Attract, retain and motivate key employees
- Defer more pre-tax compensation than what is possible with a 401(k) or 403(b)
457(f) is an “ineligible” nonqualified deferred compensation plan. 457(f) plans allow unlimited pre-tax deferrals and are predominantly used for employer contributions.
This structure requires that the employer place a predetermined “vesting” schedule on the participant’s account. It also requires that the account be subject to a “Substantial Risk of Forfeiture” (SRF). Employers use these plans because of the inherent employee retention value.
- Increase retention of key employees through vesting schedule (golden handcuffs)