457(b) Plans – special deferred compensation opportunity for non-profit entities

The executive team of non-profit entities can be provided a wonderful employee benefit above and beyond the traditional 401(k) or 403(b) plan that may offered by their agency. A §501(c) tax-exempt entity may also adopt a 457(b) plan to benefit the executive team. Governmental instrumentalities and certain other entities may also offer 457(b) plans, but this article focuses exclusively on plans for non-profits.

ESTABLISHING A PLAN

A 457(b) plan is for a select group of employees, or even one specific employee. These are sometimes called a “private” 457(b) or a “top hat” plan. A plan document is drafted to outline the plan parameters in writing before any contributions may be made on behalf of the eligible participants.

CONTRIBUTION LIMITS

Contributions to a 457(b) may be made by the eligible employee, or by the employer, or both. The contribution is limited to the same annual limit as 401(k) plans (§402(g) limit). In 2015 that limit is $18,000, or 100% of pay, whichever is lower. The employee can defer $18,000 to the 457(b) plan without impacting his 401(k) or 403(b) contribution limit for the year; it is a separate limit. If the employer wishes to contribute to the plan, they can contribute any amount up to the $18,000 limit considered with the employee’s contributions. For example, if the employee deferred $8,000 to the 457(b) plan, the employer could contribute another $10,000 to the plan for that individual that year. Deposits are free from federal income tax until withdrawn.

CATCH-UP CONTRIBUTIONS457 plan, top hat plan, non-profit retirement plan

Catch-up provisions for private 457(b) plans are different than the $6,000 available in 401(k) and 403(b) plans. If designed in the plan, there can be a Final 3-Year Catch-Up provision. Under this special provision, an employee who hasn’t taken advantage of the maximum contribution available in prior years may make up those contributions in any of the 3 years prior to attaining normal retirement age. The maximum amount that can be contributed during any of these years is 100% of the 402(g) limit in place for that year ($18,000 in 2015).

FUNDING

Funds in a private 457(b) plan are often deposited to a separate account, but unlike a qualified plan, this account is not a trust account. All deposits to the plan are considered employer property until funds are made available to the participant or other beneficiary. The plan document outlines the circumstances under which an employee is eligible to receive a benefit from the plan.

DISTRIBUTIONS

Distributions from a private 457(b) plan are paid as wages from the employer when they are withdrawn, and are subject to income tax withholding at that time. A flat rate of withholding of 26% may be used as alternative to regular wage withholding in the event that the employee is being paid a lump sum benefit from the plan. The plan sponsor is responsible for withholding and remitting tax payments. These payments, since they are considered wages, are to be reported on a Form W-2.

Typically distributions are not available until the participant terminates employment with the company, or faces an unforeseeable emergency (e.g., illness, accident, casualty, etc.) Withdrawals must begin by age 70 ½.

Distributions may be rolled over to another entity’s 457(b) plan. They may not be rolled into an IRA or another type of qualified plan.

Payments made to the beneficiary of a deceased participant are reported on a Form 1099R.

REPORTING REQUIREMENTS

An annual Form 5500 is required for private 457(b) plan unless the plan unless the sponsoring entity notifies the Department of Labor of the establishment of their “top hat” plan at the time that the plan is adopted.

SUMMARY

A private 457(b) plan is a wonderful option for the executive team of non-profit entities as a supplement or in lieu of an alternative qualified plan. If you are a candidate for a private 457(b) plan, click here to have one of our pension consultants contact you.

 

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