A “section 457 plan” is a deferred compensation plan that is maintained by an eligible employer and that complies with the specific requirements set out in IRC Section 457(b).
- An eligible deferred compensation plan under IRC Section 457(b) is an agreement or arrangement (which may be an individual employment agreement) under which the payment of compensation is deferred (whether by salary reduction or by nonelective employer contribution). See Treas. Reg. Section1.457-2(k).
- An eligible employer may be a State, a political subdivision of a State, an agency or instrumentality of a State or political subdivision of a State, or any other organization that is otherwise tax-exempt under the Code – except that churches or church-controlled organizations, as defined in IRC Section 457(e)(13), are not allowed to sponsor eligible deferred compensation plans.
- An eligible IRC Section 457(b) plan must be a written plan that is maintained, in form and in operation, in accordance with requirements of IRC Section457 and Treasury Reg. SectionSection1.457-4 through 1.457-10 [Treas. Reg. Section1.457-3(a)].
(Note: Taxable entities, who may not sponsor a 457(b) plan, have other rules for non-qualified deferred compensation arrangements. See, IRC Section409A)
Written Document Required
- The written plan document must contain all the applicable provisions of Treas. Regs. Sections 1.457-4 through 1.457-10.
- The plan must be adopted and the plan document exist before the first day of the month in which the compensation is paid or made available in order to provide that compensation has been properly deferred by salary reduction, and an agreement providing for the deferral must have been entered into prior to the deferral.
- Certain provisions are optional, such as the age 50 catch-up limit, the special 457 catch-up limit, distributions for unforeseeable emergences, loans, plan-to-plan transfers, additional deferral elections, acceptance of rollovers, and involuntary distributions of smaller accounts. However, the plan document must contain provisions for any of the options that the employer wishes to include in the plan.