457 Retirement Plan Eligibility Requirements

The 457 retirement plan is offered by both government and non government employers. In most ways, the 457 plan is very similar to a 401k or 403b plan. However, there are some differences in the plan options that make it more appealing to employers. If you are an employer looking to set up a 457 plan, you will face similar requirements as those imposed on 401k and 403b plans. If you are an individual, your employer will be the one deciding whether or not you can participate.

Employer Eligibility Requirements

An employer that is eligible to set up a tax deferred retirement plan is eligible to select the 457 option. However, there are some unique requirements with this plan. First, you are permitted to allow independent contractors to use your 457 plan. This makes the 457 plan excellent for companies who employ a number of full-time independent contractors. These individuals can make tax deferred contributions directly from their paycheck to the retirement plan. The contribution works like 401k plans. If you are offering any other type of retirement plan, particularly a Roth plan, you may not be allowed to offer a 457 plan. Any individual contributing to a 457 cannot contribute to a Roth plan.

Personal Eligibility Requirements

As an employee, you must determine your eligibility directly with your employer. Often, employers reserve the 457 plan option for those individuals earning a high amount of income each year. For example, the plan may only be optional for those earning more than 100 percent of the highly compensated employee rate. The reason for this specification is because the 457 plan may appeal more to highly compensated employees.

Employees with smaller or moderate salaries would benefit more from a Roth plan. The Roth plan allows an employee to pay taxes today, in a low income bracket, and removes the future tax liability. With the 457 plan, taxes are not deducted today, insteadd they are deducted in the future.

Unique Features

Like all tax deferred retirement plans, the 457 plan has a saving limit. The maximum amount any individual may contribute as of 2010 is $16,500. This is representative of all retirement contributions, not just contributions to the 457. Another unique features of this plan is the fact there is no early withdrawal penalty. Instead, any individual making a withdrawal before the minimum qualified age would only pay taxes on the withdrawal. This is an invaluable option to an individual who may retire prior to the minimum qualified age of 59 1/2.

Again, this feature appeals most to high income employees because early retirement is a viable and potential option. Other than these key features, the 457 plan operates very similar to other plans. It is designed to encourage individuals to save for the future by permitting them specific, measurable tax advantages. If your employer offers the 457 plan, contact your employer to see which employees qualify for these benefits. 

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