457(f) Non-Qualified Deferred Compensation Plan

457(f) Plans are Non-Qualified Deferred Compensation Plans for employees of tax-exempt organizations and state and local governments. These plans are designed to provide employees with the opportunity to defer compensation, typically after retirement, while also providing employers with a means of retaining key employees and offering additional benefits.

Here are key points about Section 457(f) Plans:

  1. Non-Qualified Deferred Compensation: Section 457(f) Plans are a type of nonqualified deferred compensation plan. This means that they do not meet the requirements of qualified retirement plans like 401(k) plans, and they do not receive the same tax benefits.
  2. Taxation: The amount of compensation deferred under a Section 457(f) Plan is not currently included in the employee's gross income for tax purposes until it is actually paid out or made available to the employee. This allows employees to delay paying taxes on their compensation when they could be in a lower income tax bracket.
  3. Substantial Risk of Forfeiture: To defer taxation, Section 457(f) Plans typically require that the compensation be subject to a substantial risk of forfeiture. This means that the employee must have a real risk of losing the deferred compensation if certain conditions are not met. This condition is designed to prevent highly compensated employees from deferring taxes on their income without a valid reason.
  4. Timing of Taxation: Once the substantial risk of forfeiture lapses and the compensation is no longer subject to forfeiture, the deferred amount becomes taxable as ordinary income to the employee. This could occur upon retirement, separation from service, or other triggering event specified in the plan.
  5. Exemption for Tax-Exempt Employers: For tax-exempt organizations (such as certain non-profit organizations) and governmental entities, Section 457(f) Plans are subject to somewhat different rules compared to those applicable to for-profit organizations. There are also separate provisions for Section 457(b) Plans, which are available to employees of state and local governments and certain tax-exempt organizations.

If you are contemplating participation in a Section 457(f) Plan, or have questions about how it applies to your specific situation, you should consult with a CERTIFIED FINANCIAL PLANNER™ professional to understand the tax implications, and make an informed decision which may significantly impact your personal financial situation.