457(b) vs. 457(f)

[Guest LVanSteeter]

Really basic question:

Can someone, in simple terms, explain the difference between a 457(B) & 457(f)?

Many thanks!

[E as in ERISA]

457(B) has lots of rules that you have to comply with and limits that you have to apply -- kind of like a qualified plan.

457(f) is used by those who want to go above the limits of 457(B) and allow certain employees to defer more. But the monies have to be subject to a "substantial risk of forfeiture" in order not to be taxed. (The money is essentially "unvested" and once it becomes "vested" then its taxable -- even if the person hasn't received it yet).

Does that make sense?

[Guest Napili]

What then is the advantage of the 457b over the 457f?

What is a 457e?

[E as in ERISA]

If the participant doesn't meet the conditions of the 457(f) plan (e.g., continuing to be employed by the company for a specific time period), then the the participant gets nothing. And once the conditions of the 457(f) plan are met, the money is taxable.

So even though less money can be deferred under a 457(B) plan, the taxation is more like a 401(k) plan (no extra conditions and no taxation until distributed). And the 457(B) plans are better now that the amount deferred doesn't have to be offset by deferrals to a 403(B) plan, etc.

[Guest DeanT]

My question is with the 'substantial risk of forfeiture'. I understand at some point the employee will be considered 'vested' in the money but how does the taxation work on that money? If the employee hasn't started distributions yet, is the money considered income and taxed as such when the employee reaches the 'vesting' point?

[E as in ERISA]

A 457(f) plan might subject the participant to forfeiture/loss of benefits if the participant doesn't continue in employment for five years. If the participant leaves in four and a half years, the participant gets nothing. If he is still there at the end of five years, then it is no longer subject to forfeiture and it is immediately taxable regardless of whether or not it is distributed. There is no limit on the dollar amount that can be deferred. It is very well suited for employer-provided benefits to a key employee to whom the employer wants to provide a "golden handcuff" to get him to stay around for a few years.

The benefits of a 457(b) plan do not have to be subject to forfeiture. A participant could build up benefits with no risk of loss. They would not be taxable until they are distributed according to the terms of the plans (subject to the rules of 457(b)). There are limits on the dollar amounts that can be deferred (they have recently improved). These plans are better suited for deferral of a participants own money (that he doesn't want to forfeit but also doesn't want to be currently taxed on).

Both plans can be offered by the same employer.

[Guest DeanT]

So if a participant has deferred $150,000 into a 457(f) plan, when he/she is no longer subject to the risk of forfeiture, the total amount is considered taxable income? Or is does the employee break this amount down somehow where all of it isn't considered taxable at one time?

Would this happen immediately after the risk is no longer there?

[E as in ERISA]

Its taxable as soon as the risk is gone -- some people try and defer it further with "rolling risk of forfeiture" -- renewing the risk every time it is about to go away -- but the IRS has indicated its disapproval of that.

[IRA]

Can a 457(b) plan have a rolling risk of forfeiture?

[mbozek]

not exactly. If the amount of compensation deferred under a 457b plan during the taxable year is subject to a substantial risk of forfeiture when the contribution is made, then the amount of the contribution that that is taken into account as an annual deferral in the taxable year in which the substantial risk of forfeiture lapses must be adjusted to reflect gain or loss allocable to the compensation deferred until the risk of forfeiture lapses. reg 1.457-2(b)(2). The amount vested cannot exceed the annual limit for the tax year when the risk of forfeiture lapses, e.g., $18,000 in 2015.