Tax Facts

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

1. Sen. Rep. 95-1263 (Revenue Act of 1978), reprinted in 1978-3 CB (vol. 1) 364.)

2. IRS Information Letter 2000-0300.

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