Tax Exempt Entity with 457 covering all employees?

[Guest TBick]

My understanding is a 457 for a non-governmental tax exempt organization needs to be a "top hat" type arrangement.

I am being contacted by an HR person with a tax exempt entity who is sure their plan is a 457 and it allows all employees to contribute. (sure smells like a 403(b) to me)

Can they do this?

[Everett Moreland]

There is the occasional tax-exempt with a 457 plan covering all employees.

You are right that it must be top hat.

[401 Chaos]

Is there any possibility that your client could be classified as a governmental entity or quasi-governmental entity rather than a general tax-exempt? I have seen some entities where the lines were blurred and thus resulted in establishment of a 457 for a governmental entity.

[E as in ERISA]

Tax exempts are generally subject to ERISA. So a 457 plan is subject to ERISA funding requirements (trust for the benefit of employees). There is an exception for top hat plans. But that only applies if the participation is limited to a select group of management and highly compensated employees. If it if not a top hat plan, then there must be a trust for the benefit of employees. That would make the amounts taxable to employees, which defeats the purpose of setting up a 457 plan.

Governmentals are generally not subject to ERISA. Therefore no ERISA funding requirement. 457 not defeated. (457 may have some of its own trust requirements for governmentals, but they don't ruin the tax benefit).

[mbozek]

Why not check out the employer's tax exempt status. A 403(b) plan can only be adopted by a NP that is exempt under IRC 501©(3). A govt instrumentality eligible for a 457 plan can be designated as tax exempt under the IRC if the IRS approves its tax exempt org status.