3585 / What are the rules regarding permissible participants in a Section 457(b) “eligible” nonqualified deferred compensation plan?

Under “eligible” plans, only individuals may participate, but they may be either employees or independent contractors. Partnerships and corporations cannot be participants.¹ Where local government employees were hired by a for-profit water company as part of privatization, they could no longer continue to participate in the local government’s Section 457 plan.²

It should be noted that plans for nongovernmental private tax-exempt employers are subject to ERISA (unlike a governmental plan), except for church plans. Therefore, private tax-exempts must structure their 457 plans to take advantage of a top hat ERISA exemption (e.g., by allowing only a select group of management or highly compensated employees to participate). Otherwise, the plan would be subject to the exclusive purpose and funding requirements of Title I of ERISA, and a nongovernmental tax-exempt Section 457 plan cannot, by definition, meet those requirements.³