Advanced Underwriting Consultants

Question of the Day – September 13

Ask the Experts!

Here’s the question of the day.

Question: I have a client who works at a nonprofit and participates in a Section 457(f) plan.  What options does the client have for continued deferral of the plan benefit at retirement?

Answer: Unfortunately, there are no options for continued income tax deferral at retirement.

Section 457 plans are a special kind of deferred compensation available only to employees of nonprofits and government entities.  The usual kind of 457 plan is governed by Section 457(b) of the Revenue Code, and it has strict rules about plan configuration.

A government entity or nonprofit may also have a plan that permits excess contributions in favor of a highly compensated management group.  In general, these plans are called ineligible plans, and are governed by Code Section 457(f).

Distributions from a government entity-sponsored 457(b) plan may be eligible for rollover to an IRA, so continued tax deferral to the participant is possible.  However, distributions from a nonprofit 457(b) plan, and distributions from 457(f) plans, are not eligible for rollover.  Distributions from a nonprofit 457(b) plan are potentially eligible for rollover to another nonprofit 457(b) plan.

Once the employee is entitled to distributions from a 457(f) plan, no further tax deferral is possible.

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