457(b) – A Powerful Way to Reward Government Employees

Retaining and hiring the best and brightest employees often comes down to an attractive benefits package. Offering a 457(b) plan to your employees can be a great way to boost the rewards offered to your most important assets!

457(b) plans have been established to allow employers and employees to contribute to investment accounts.  Contributions are generally made through payroll deduction and sent to a funding company. Contributions and accompanying interest grow until withdrawn.

After-tax or Roth contributions may be allowed. With this option, taxes are paid at the time of the contribution. Contributions and the accompanying interest then grow tax free and remain so upon withdrawal.

Contribution limits are separate from those of other qualified plans, meaning that one can make maximum contributions to a 457(b) and still contribute freely to their 403(b), 401(k), or 401(a) plan. This is particularly helpful for participants closing in on retirement who wish to increase their retirement savings.

Unlike other qualified plans, employer contributions count towards the 457(e)(15) limit (that is where the IRS tells us how much we can contribute to the plan). This means that in 2016, employer and employee contributions combined can reach $18,000.

As participants benefit from deferring taxes to some future date, the IRS does place some regulations on when you can take the money out. Generally, funds can only be taken out at retirement, severance of service, death, disability, or attainment of the age of 70 1/2.

457(b) plans are not subject to a 10% penalty for early withdrawal. If you meet one of the previously mentioned distribution criteria before the age of 70 1/2 there is no additional penalty fee.

Loans can be an attractive option in a 457(b) plan but you do have to pay yourself back with interest. This helps make-up for the gains that you did not make as your money was not invested in the market. Rules vary between funding companies and employers so be sure to check with your personal investment provider before applying for a loan.

In the event of an emergency, the IRS allows for unforeseeable emergency withdrawals (similar to a hardship distribution in a 403(b) or 401(k) plan).  Again, situations may vary between plans and funding companies so make sure to check with them before applying.

Funds from 457(b) governmental plans can be transferred between other qualified plans (401(k), 403(b), etc.) or may be rolled to the plan of a new employer.

457(b) plans can be a valuable tool to boost the rewards offered to your government employees, help them prepare for retirement, and to defer compensation (and taxes!) for a future date.