1. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? A plan designed to comply with IRS Code Section 457, which provides rules for all nonqualified deferred compensation plans of - governmental units - governmental agencies - non-church controlled tax exempt organizations

2. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it indicated? When - governmental units - governmental agencies - non-church controlled tax exempt organizations want employees to have a deferred compensation plan

3. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Design Features: What employers are covered by Section 457? 1.a state, a political subdivision of a state, and any agency or instrumentality of a state or political subdivision of a state 2.any organization exempt from federal income tax, except for a church or synagogue or an organization controlled by a church or synagogue

4. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Design Features: Limit on Amount Deferred Eligible Section 457 plans –plans include limits on the amounts deferred –typically cover broad class of employees –eligible for favorable tax treatment

5. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Design Features: Limit on Amount Deferred Ineligible Section 457 plans –plans provide greater deferral levels than annual dollar limit –generally designed for executives –taxed in first year in which no longer ‘substantial risk of forfeiture’ –generally taxable in full no later than the year of the executive’s retirement

6. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Basic limit for eligible plan, amount deferred annually by participant cannot exceed 100% compensation Or applicable dollar amount: 2006$15,000 2007$15,500 2008$15,500 2009$16,500

7. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Design Features: Limit on Amount Deferred Section 457 plans allow ‘double dipping’ salary reduction contributions do not reduce contributions to any other type of salary reduction plans, e.g. Section 403(b) or Section 401(k) plans 100% of compensation limit applies to gross compensation before salary reductions

8. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Design Features: Limit on Amount Deferred 50 or over catch-up provisions governmental employees can have an additional salary reduction contribution 2006$5,000 2007$5,000 2008$5,000 2009$5,500

9. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Design Features: Limit on Amount Deferred 50 or over catch-up provisions (cont’d) –cannot exceed the excess of the participant’s compensation over all regular elective deferrals –Section 415 limits (annual additions to participant’s account cannot exceed the lesser of $49,000 (2009) or 100% of compensation) does not limit use of the 50-or-over catch- up

10. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 Design Features: Timing of Salary Reduction Elections Employee generally must elect to defer compensation under agreement made before compensation earned e.g. if paid monthly, must enter agreement to defer compensation at beginning of the month

11. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Design Features: Distribution Requirements Plan distributions cannot be made before: 1. calendar year in which the participant attains age 70½ 2. severance from employment 3. ‘unforeseen emergency’ as defined in regulations

12. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 Design Features: Distribution Requirements Additional issues: –in certain situations, participant can receive involuntary cash-out of $5,000 –participant can make on-time election to defer commencement of distributions

13. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 Design Features: Distribution Requirements Additional issues: –must comply with minimum distribution rules –Qualified Domestic Relations Orders follow qualified plan rules

14. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 Design Features: Coverage and Eligibility Section 457 plans have no specific coverage requirements –governmental organization can offer to any one or more employees or employee groups –most private non-governmental organizations may be subject to ERISA eligibility rules can avoid if utilize ERISA exemptions

15. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 Design Features: Funding Nongovernmental tax-exempt organizations –cannot be funded –can ‘finance’ the plan with insurance or annuity contracts –‘no funding’ of Sec. 457 conflicts with ERISA

16. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 Design Features: Funding Governmental organizations –- governmental plans MUST be funded –- plan assets must be in trusts or custodial accounts

17. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 Tax Implications 1. sponsoring employer does not pay income tax 2. limited nonrefundable tax credit available to some lower income tax payers 3.if plan permits voluntary employee contributions to ‘deemed’ IRA, amounts so contributed will reduce limit for other traditional or Roth IRA contributions

18. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 Tax Implications 4.benefits are taxable –governmental plan distributions included in income when paid –non-governmental or tax exempt plan distributions included in income when paid or otherwise made available

19. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company19 Tax Implications 5.Sec. 457 plan distributions no eligible for 10-year averaging for lump sum distributions 6.in certain situations, plan participants can exclude from income amounts directly transferred from a Sec. 457 plan to governmental defined benefit plan 7.certain rollovers permitted Sec. 457  IRA Sec. 457  Sec. 457

20. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company20 ERISA Requirements Governmental employers and church-related organization are NOT subject to ERISA Tax-exempt private employers have difficulty with ERISA funding requirements

21. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company21 Alternatives Tax-exempt employers can adopt qualified pension and profit sharing plans Sec. 403(b) plans Sec. 401(k) plans SIMPLE IRA SIMPLE 401(k) Governmental employers can adopt governmental pension plans

22. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company22 True or False? 1.Beth Shalom Synagogue can have a Section 457 plan. 2. Contribution to one Section 457 plan will reduce contributions to a second Section 457 plan. 3.Contribution to a Section 457 plan will reduce contributions to other types of salary reduction plans such as Sec. 401(k) or Sec. 403(b) plans

23. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company23 True or False? 4.Participants in a Sec. 457 plan in a private tax exempt organization aged 50 and over are eligible for an additional ‘catch-up’ contribution. 5.A nongovernmental tax-exempt organization can use a trust fund to finance a Sec. 457 plan. 6.Funds can be withdrawn from a Sec. 457 plan prior to time for normal distribution to pay for purchase of residence or child’s college education.

24. Section 457 Plan Chapter 27 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company24 Discussion Question How can a governmental or tax-exempt employer provide a substantial deferred compensation benefit for an executive or key employee for whom the annual dollar limit would be inadequate?