Eligibility for 457 Plan Year-by-Year

I have a client we just took over that has a 457 Plan.  The document I was given doesn't tell me much, unfortunately.

I just got the following question, so I wanted to see if anyone had any insight:

"They have an employee that has reduced their hours and are no longer making $120,000 a year. They have been eligible for the 457 in the past – are they still eligible? Or do they have to meet eligibility each year?"

Thanks in advance!

If this is a plan the employer intends to restrict to a select group (as ERISA sections 201, 301, and 401 describe it), a written plan might state that the employer decides, in its business discretion, who is eligible for deferrals under the plan.

Your description of the document you were given suggests your client’s plan might not be so stated.

If the document leaves an ambiguity, you might ask the employer for its interpretation.

Agree with Peter--is it a 457(b) or (f) Plan ?

14 hours ago, Bob the Swimmer said:

Agree with Peter--is it a 457(b) or (f) Plan ?

457(b)

Doesn't matter (b) or (f), still likely needs to be a "top-hat" employee to remain eligible.

However, a reduction in hours resulting in a reduction in pay does not necessarily mean the person is no longer "top-hat" - that is, select management or highly compensated (not IRS definition). If a CFO, for example, goes from full time to half-time and pay goes from $200k to $100k, does that mean (s)he is no longer select management? I'd say no. It it's a higher paid middle manager in the same situation, the answer may be different.

There is also the argument that these plans must be primarily, but not exclusively, for benefit of top-hat employees. If the plan covers 10 or 20 and it's just one person in question, continuing to include probably still satisfies that requirement. If it's 1 out of 4 or 5 (or less) then that's a tougher argument.

A good plan document would provide clear direction here but absent that, as Peter said, it should be the employer's interpretation (not yours) and may best be done in consultation with its ERISA counsel if the liability risk warrants.