An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

457(b) Retirement Plan

457(b) Retirement Plan

What Is a 457(b) Retirement Plan?

A 457(b) retirement plan refers to a deferred compensation plan. This plan is given in the form of an annuity or mutual fund to two types of employees: state and local government employees and certain nonprofit employees.

How Does a 457(b) Retirement Plan Work?

457(b) plans are specifically designed for individuals who work for governmental and certain nonprofit entities. These nonprofit groups are tax-exempt under IRC Section 501.

Eligible employees can elect to automatically deduct money from their paychecks on a pre-tax basis. This money is put into their retirement and investment accounts.

Employees may be given the option of investing their contributions in mutual funds or annuities. Both are tax-deferred, meaning the interest and earnings are not taxed until employees withdraw their funds during retirement.

What Are the Contribution Limits for a 457(b) Plan?

According to the IRS, employers or employees can contribute annually the lesser of:

Employees aged 50 and over may make annual catch-up contributions ($6,500 in 2020 and 2021). This allows participants to contribute additional money three years before they retire.

Catch-up contributions must not exceed:

Do Employers Match 457(b) Plans?

Not all employers match the amount their employees contribute to 457(b) plans. Businesses that do match choose the amount and limit.

For example, if they match 40 percent and their employee contributes $1,000 a month, the employer contributes $400 a month to their account.

What Is the Difference between a 401(k) and a 457(b) Plan?

Here are some key differences between a 401(k) and 457(b) plan:

What Is the Difference Between a 403(b) and a 457(b) Plan?

Though they both are given to public-sector and non-profit employees, 403(b) and 457(b) plans hold key differences employers should be aware of:

What Are the Pros and Cons of a 457(b) Plan?

Pros and Cons for Employers

The Pros

The Cons

Pros and Cons for Employees

The Pros

The Cons