T—457 Plans

Section 457 plans are nonqualified deferred compensation plans available to employees of state and local governments and tax-exempt organizations. By deferring income, employees are able to reduce current income taxes while saving more for retirement than they would with the typical after-tax savings plan. “State and local governments” include a state, a political subdivision of a state, or any agency or instrumentality of either of them (e.g., a school district or sewage authority). Tax-exempt organizations include those types of nongovernmental organizations exempt from tax under Code Section 501 (i.e., most nonprofit organizations that serve their members or some public or charitable purpose, but not a church or synagogue). Under “eligible” plans, only individuals may participate, not partnerships or corporations. Partnerships and corporations may participate in “ineligible” plans. Section 457 plans can also be made available to independent contractors, but under somewhat different rules.

ELIGIBLE PLANS. Under “eligible” plans, in 2025, deferrals are limited to the lesser of $23,500, or 100 percent of includable compensation. Benefits usually are not subject to forfeiture. Eligible plans are most often used for the “rank and file” employees of state and local governments, who desire to defer limited amounts of compensation on an attractive tax deferred basis. The term “eligible plans” is used to describe the deferred compensation plans of state and local governments and tax-exempt organizations that comply with the provisions of Section 457. When a plan provides for deferrals in excess of the lesser of $23,500 or 100 percent of compensation, Section 457(f) states, “compensation shall be included in the gross income of the participant or beneficiary for the 1st taxable year in which there is no substantial risk of forfeiture.” Plans falling under Section 457(f) are variously referred to as “ineligible” plans and “Section 457(f)” plans.