Section 457 Deferred Compensation Plans

Abstract

There are two types of deferred compensation plans allowed under Section 457 of the Internal Revenue Code. They receive little attention in the benefits media, yet they are of considerable importance to certain employers and their employees. Section 457(b) plans are similar to the better known 401(k) and 403(b) but with important differences that make them important to state and local governments, especially for their public safety employees, and to certain other tax-exempt organizations. Section 457(f) plans are more akin to executive compensation arrangements that are predicated on the achievement of specified objectives or performance. Since the addition of Section 409A to the Internal Revenue Code in 2004 (effective 2005), 457(f) plans have been under scrutiny as to whether the compensation deferred is at substantial risk. This article examines both types of Section 457 plans.