457(b) Plans - Is there something called a 10% rule?

[Guest GoldenBear03]

I understand that there is supposedly something in the 457(b) world referred to as the 10% rule, dealing with eligibility. This, in effect, states that only 10% of HCE's can be included in the plan. Is this true? The person telling me about this was unclear himself, and I am just trying to chase down his information and find out what I can. From what I can tell, those arguing against the 10% rule, say that in order for an HCE to be eligible, they must simply be grouped properly with the other HCE's. As you can tell, I'm very green on this. Thanks in advance for your help!

[Locust]

My guess is that issue is whether the plan of a nonprofit organization is a top hat plan. If it is not a top hat plan, it is subject to ERISA funding requirements, and you can't have a funded 457 plan for a nonprofit (required to have funding if a governmental employer). If a nonprofit's 457 plan is funded, it results in taxation of the employees.

The 10% rule may be a rule of thumb that not more than 10% of your employees could be considered highly compensated employees for ERISA. The top hat group under ERISA consists of "a select group of management or highly compensated employees." (See for example ERISA ss 401(a)(1)) If you have too many employees, no matter how much they may make, covered by the plan, can you still consider all of those employees to be a "select group"?

It is confusing because the ERISA and Internal Revenue Code definitions of "highly compensated employee" do not coincide.