457 Plan – Deferred Compensation Plan
A 457 Plan is a tax-exempt deferred compensation plan for government employees, usually supplementing another retirement plan offered by the employer. There are two types of 457 plans:
- Public-sector plans allow salary deferrals for state and local government workers, but not allowing employer contributions,
- Secular, non-profit institution plans allow employer contributions but do not allow employee contributions
The 457 plan has the following regulations for 2006:
Maximum deferral dollar amount: $15,000
Maximum percentage of compensation which can be deferred: 50%
Total deferral limit including full catch-up contribution: $22,000 ($11,000 catch-up + $11,000 contribution)
Catch-up contribution limits for over age 50: $5,000
457 plan contributions affect other tax-deferred plans, depending on if the employer sponsors the plan and if the plans are salary deferral plans.
Employer Sponsored Plans
Employer sponsored plans are either Defined-Contribution Plans or Defined Benefit plans.
1. Defined Contribution Plans allow the employee to defer some amount of his/her salary into the plan. 401(k), 403(b), profit-sharing plans and money purchase plans may be offered along with the 457 plan. Amounts for a 457 plan deferral do NOT reduce 401(k) or 403(b) deferrals.
Employer contributions into 401(k) or 403(b) are either pay-based or matching. If this is pay-based, the employer contributes a specific part of the employee’s compensation; however, the “pay” may not include 457 deferrals, so contributing some of your pay to the 457 would cause a lower employer contribution to the pay-based plan. If the employer contributions to the 401(k) or 403(b) plans are matching, the employer pays the same amount as the participant’s salary deferrals. However, it must be remembered that employers cannot match funds only in a 401(k) or 403(b) plan but NOT in a 457 plan.
The maximum amount that can be deferred is $40,000 per year, which applies to the total of employer contributions plus 401(k) and 403(b) deferrals, but not to 457 deferrals.
2. Defined Benefit Plans are plans in which a retired employee receives a specific amount as a monthly payment for life, beginning at age 65, based on salary history and years of service. The defined benefits plan may not include 457 plan deferrals, so always check with your human resources office.
Non-Employer plans
If you are self-employed or have a second employer, the total amount you may contribute in 2006 to a 457 plan is $15,000. For example, if your defer $11,000 in your first job’s 457 plan, you are limited to deferring $4,000 in your second job’s 457 plan.
IRA contributions are not affected by 457 plan deferrals. Furthermore, the tax deductibility of your IRA contribution will not be affected by participating in a 457 plan.
For information on the 457 Plan in Minnesota, please view the Minnesota Deferred Compensation site.
