A nongovernment 457(b) plan is a type of deferred compensation plan offered to eligible highly compensated employees by tax-exempt organizations such as private universities and hospitals. And although 457(b) plans are similar to qualified retirement plans such as 401(k) and 403(b) plans regarding allowed employee salary deferrals, this type of plan is not a qualified retirement plan; thus, the funds remain the property of the employer, making the funds in a 457(b) plan subject to a risk of loss to the organization’s general creditors if the organization is ever subject to litigation or bankruptcy. Conversely, 401(k) plans and most 403(b) plans are qualified retirement plans; thus, protected from an organizations creditors by ERISA.
Regarding nongovernmental 457(b) plans, participants generally have a few options when they terminate their employment:
- Leave the contributed funds within the plan.
- Take the entire amount of funds now as a taxable distribution. An employee would owe income taxes on the payout to them, but the distributed funds are not subject to the 10% early withdrawal penalty.
- Receive payments in taxable installments – but employees would need to check the plan’s policy as this may not be an option of the company’s specific plan.
- Rollovers are generally not an option. Employees cannot rollover the distribution to an IRA or to either a 401(k) or 403(b) plan. However, if the person’s new employer is a nongovernmental entity and offers a nongovernmental 457(b) plan to eligible employees, then he/she may be allowed to rollover the funds into their new employer’s 457(b) plan. However, employees would need to check with both their prior employer and their new employer to see if both employer plans’ policies allow 457(b) plan rollovers.
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