What are the Differences Between 457(b) and 457(f) Plans, and How Do They Work?

How does a 457(b) Plan Work?

Since 457(b) plans are available to all employees, most 401(k) or 403(b) plan administrators have the capability to add the 457(b) options.

Employees will go through an enrollment process similar to a 401(k) or 403(b). Amounts deferred are vested and will not be taxable until received. Once you reach age 72, you must take required minimum distributions (RMDs). If you are still working for the company that holds your 457(b) you can continue to defer taking RMDs until the April after the year you retire.

Contribution limits under this plan allow all employees to defer income on a pre-tax bases up to $20,500 for 2022. Additionally, an age 50 and above catch-up contribution is allowed for 2022 of $6,500.

457(b) plans are nonqualified accounts meaning that they are subject to creditors of the organization.

How does a 457(f) Plan Work

A 457(f) nonqualified deferred compensation arrangement is a written agreement between the employer and each eligible highly compensated executive to pay benefits when the executive retires, dies, or becomes disabled.

The agreement contains certain conditions that executives must meet before benefits are paid to them.  There is no limit on the amount of money that can be deferred on behalf of qualifying executives. Executives can invest up to 100% of their compensation.  Deferred amounts and their earnings are employer assets and subject to the claims of general creditors.

Although allowed, most executives do not contribute to 457(f) because they would be required to have those deferrals subject to ongoing vesting. Taxes are due when the executive vests in the account regardless of whether or not they are still employed. For this reason, many 457(f) plans will use a periodic vesting or lump sum at termination.