457(b) and 457(f) Plans for Tax-Exempt Organizations
457 plans for tax-exempt organizations come in two “flavors:” 457(b) “eligible” versus 457(f) “ineligible” plans. Read on to learn some key differences.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Washington is representative of a common question on deferred compensation plans.
"I have a client that is a tax-exempt organization and is considering establishing a deferred compensation plan for executives and key employees. What are the differences between 457(b) and 457(f) plans for tax-exempt employers?"
Highlights of the discussion
While both state and local governments and tax-exempt organizations may sponsor 457 plans, this discussion is limited to the 457(b) and 457(f) plan rules applicable to non-governmental tax-exempt organizations. (1) Below is a chart that highlights some of the differences between the two types of 457 nonqualified deferred compensation plans for tax-exempt entities.
457(b) Plans | 457(f) Plans | |
Authority | “Eligible” plans meet IRC §457(b) requirements | “Ineligible” plans fail to satisfy one or more of the statutory requirements that apply to 457(b) plans |
Participation | Limited to a select group of management or highly compensated employees | Same |
Funding | Plan must be unfunded; benefits must be paid from the general assets of the employer and subject to creditors | Same |
Contribution limits | Contributions are subject to an aggregate annual limit ($23,500 for 2025). (2)(3) | Not limited to a specific dollar amount |
Subject to nondiscrimination requirements? | No | No |
Distribution restrictions | Generally, not permitted until the earlier of severance of employment or age 70½, with exception for earlier distributions due to an “unforeseeable emergency” and other limited exceptions. | See below regarding the application of IRC §409A |
Are distributions eligible for tax-free rollover? | No | No |
Do RMD rules apply? | Yes | No |
Taxation of benefits | Generally, taxed when they are paid or “otherwise made available” to the participant (i.e., the earliest date on which the plan allows distributions to commence after severance of employment). However, plans may permit participants to elect to defer payment and taxation of benefits beyond that date in certain circumstances. | Benefits are taxable as soon as they are no longer subject to “a substantial risk of forfeiture” (e.g., vested), even if they have not been distributed yet. An example of a substantial risk of forfeiture would be a requirement that the participant work a certain number of years before becoming entitled to receive the benefit. |
Subject to IRC §409A rules on nonqualified deferred compensation? | No | Yes, but most plans will be structured so that they are exempt from the extensive 409A rules on elections, distributions, and forms of payment. |
Reporting requirements | Exempt from annual Form 5500 filing requirements, but an initial “top hat” notice must be filed with the DOL when the plan is established. | Same |
Conclusion
457(b) plans and 457(f) plans both offer options for tax-exempt organizations to provide deferred compensation benefits to executives and key employees. As the table illustrates, there are important differences between the two types of arrangements.
(1) The IRS provides a chart which highlights the differences between 457(b) plans of governmental employers and tax-exempt organizations at Comparison of tax-exempt 457(b) plans and governmental 457(b) plans.
(2) The contribution limit applies separately and independently from the 402(g) limit applicable to 401(k) and 403(b) plans; thus a 457(b) plan participant may maximize their contributions to a 457(b) plan while also contributing up to the 402(g) limit to a 401(k) or 403(b) plan.
(3) 457(b) plans may permit participants to make special catch-up contributions in the three years prior to normal retirement age. These catch-up contributions are generally subject to an “underutilized limitation” which considers the participant’s contributions in prior years and the extent to which the normal annual limit was not fully utilized in previous years.
