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Similar to a 401K and a 403B plan and based on section 457 of the Tax Code, a 457 plan is a non-qualified tax-deferred compensation scheme for governmental employees and employees of non-church controlled tax-exempt organizations. Only eligible employers can establish a 457 plan. A 457 plan allows their employees to defer compensation on a pre-tax basis though payroll deduction. Through a 457 plan, holders defer federal and sometimes state taxes until the assets are withdrawn. An eligible 457 plan includes limits on the amounts deferred. Annual contribution to a 457 plan cannot exceed the lesser of 100% of the employee’s compensation or $14,000 in 2005 rising to $15,000 in 2006. After 2006, the applicable dollar amount for a 457 plan will be adjusted for cost-of-living increases in increments of $500. With a 457 plan, distributions are made only when the employee reaches the calendar year of age 70, is severed from employment, or has a great financial need due to an unforeseeable emergency. Participants in a 457 plan may rollover distributions into an Individual Retirement Account. In addition, 457 plan holders may rollover a 457 plan to another 457 plan without incurring income tax on the amount rolled over. |
