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PLAN
The 457 plan is a type of non-qualified tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis. For the most part the plan operates similarly to a 401(k) or 403(b) plan most people are familiar with in the US. The key difference is that unlike with a 401(k) plan, there is no 10% penalty for withdrawal before the age of 59½ (although the withdrawal is subject to ordinary income taxation). Also 457 plans (both governmental and non-governmental) can allow independent contractors to participate in the plan where 401(k) and 403(b) plans cannot.
457(f) (ineligible) plans
IRS code section 457(f) allows for non-governmental, non-profit organizations to set up a plan that can be tax deferred and exceed the normal defined contribution employee deferral limit. Ineligible 457 plans are made available because non-profit organizations are not allowed to have another kind of non-qualified deferred compensation plan.
Generally, these deferred amounts would be currently taxable under Section 83 of the Code, unless the employee faces a “substantial risk of forfeiture” which has been clarified by the IRS to mean that in addition to the money remaining available to general creditors of the organization or subject to not vesting if the employee does not stay with the employer for the full vesting period. When the risk of forfeiture is gone, the value of the property given to the employee ceases to be deferred from taxation and is included in current ordinary gross income.
Another plan design, the rabbi trust, gives the employee deferred money in a trust and is funded, but must be available to creditors. This is to make the employer junior to general creditors so that the employee can avoid current inclusion into income.
These general deferral of current income conditions of Section 83 (as explained in Revenue Ruling 60-31) would give the 457(f) plan the deferral of tax desired.
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In 2004 Congress passed a tax act which added Section 409A to the tax code and applies to deferred nonqualified compensation which also covers some 457(f) plans. This was in response to the executive bonus plans given to key employees at Enron which allowed them early access to their deferred compensation if financial conditions of the employer deteriorated (i.e., if Enron got into trouble)
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