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A 457(b) plan is a deferred compensation arrangement for employees of state and local governments and certain tax-exempt organizations. Employees defer pay pre-tax or, if the plan allows, as Roth contributions, subject to an annual limit the IRS adjusts each year. Governmental and tax-exempt versions differ sharply in funding protection and rollover rights.
Section 457(b) plans come in two flavors that behave very differently. Governmental 457(b) plans hold assets in a trust for the exclusive benefit of participants, are protected from the employer creditors, and allow rollovers to and from IRAs and other qualified plans. Tax-exempt 457(b) plans, offered only to a select group of management or highly compensated employees, remain unfunded promises. That top-hat design is the exception rather than the rule, since most tax-favored benefits, including an adoption assistance program, must not discriminate in favor of highly compensated employees. Their assets stay subject to the employer general creditors and cannot be rolled over except to another tax-exempt 457(b) plan.
The deferral limit is separate from the limit for 401(k) and 403(b) plans, so an employee with access to both can defer under each in the same year. That dollar cap is separate from the annual compensation limit that applies to qualified plans. Two catch-up features are unique to 457(b), as the IRS overview of 457(b) plans describes: the standard age-based catch-up in governmental plans, and a special final three-year catch-up that can double the limit for employees approaching normal retirement age who under-contributed in earlier years. The two cannot be used in the same year.
A notable advantage is distribution treatment. Amounts taken from a governmental 457(b) after separation from service are not subject to the 10% early distribution penalty regardless of age, though ordinary income tax still applies. Employees who roll a 457(b) into an IRA can inadvertently give up that exemption.
Yes. The 457(b) deferral limit is separate from the limit that applies to 401(k) and 403(b) plans, so an employee with access to both can defer up to each limit in the same year. This is a meaningful advantage for public sector and nonprofit employees who want to save more aggressively.
Because they are unfunded top hat arrangements. To stay outside the ERISA funding and vesting rules that would otherwise apply, participation must be limited to a select group of management or highly compensated employees. Opening the plan to the broader workforce would jeopardize that status and the tax treatment that goes with it.
It can. Money kept in a governmental 457(b) escapes the additional tax on early distributions after separation from service, regardless of age. Once those dollars move into an IRA, the usual early distribution rules apply to them. Employees who plan to retire early should weigh that before consolidating accounts.