Anyone who has ever dealt with Internal Revenue Code section 457 and the deferred compensation plans authorized by it will understand the title to this article.   Code section 457 describes the tax consequences of two kinds of plans:  eligible deferred compensation plans (457(b) plans) and ineligible plans (457(f) plans). The two have very different tax consequences. Participants in an eligible plan generally do not recognize the benefits as income until they are received. Under an ineligible plan benefits are taxed when vested.

Additionally, Code section 457 addresses unfunded deferred compensation plans of both State and local governmental entities and tax exempt organizations. Section 457 plans have very different characteristics and personalities depending on whether they are sponsored by a governmental entity or a tax exempt organization.  Governmental 457(b) plans are much more like a qualified plan, including the requirement that the assets be held for the exclusive benefit of employees in a trust, custodial account, or annuity. On the other hand, a 457(b) plan sponsored by a tax exempt organization is much more similar to a nonqualifed deferred compensation plan. Further Code section 457 provides the polar opposite with respect to assets, providing that the plan assets must remain the employer’s subject to its creditors.

I will be discussing the different characteristics, similarities and differences between 457 plans in a webcast titled “The Bipolar 457 Plan” for the National Institute of Pension Administrators on June 14. I hope you will join me.