457 Plans Create New Opportunities for Tax Exempt Clients
Rev. 04/14/05, E-Mail Alert 2005-7

Changes to the tax laws made by Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) brought good news to the employees of governmental and not-for-profit employers in that employees of these entities can participate in both a 403(b) tax sheltered annuity and a 457 plan at the same time thus doubling employees savings opportunities. Current sponsors of 403(b) plans are supplementing their existing tax sheltered annuity plans with 457 plans. The results are significant tax savings and retirement accumulation opportunities for employees who participate in both plans. A 457 plan is a non-qualified, tax-deferred plan of deferred compensation. It operates similar to a 403(b) plan with some important distinctions that make a 457 plan very attractive.

For example:

• Special catch-up provisions apply to 457 plans that permit the employee to double-up deferrals in the three years before retirement.
  
• 457 plan withdrawals are available at any time after severance from employment with special rules in the case of financial emergencies.
  
• 457 plans are exempt from the 10% premature distribution penalty for distributions made prior to age 59½ .
  
• 457 plans offer a broader eligible participation definition that includes non-traditional employees and independent contractors.
  
• There are no coverage or nondiscrimination rules with respect to 457 plans. This allows the plan sponsor to design the plan to benefit certain targeted employees.

However, unlike 403(b) plans that can be designed as individual arrangements between the investment company and the plan participant, 457 plans must be employer sponsored. This means that in order for employees to take advantage of the additional deferral opportunities, their employer must adopt a 457 plan. McKay Hochman offers both a governmental 457 plan and a 457 plan for certain employees of not-for-profit entities as well as the administrative forms needed to adopt and operate a 457 plan. Contact us for more information on how these plans will benefit your clients.