457(b) Plans

The Internal Revenue Code (IRC) rules require that employees eligible for a 457(b) Plan be limited to individuals who perform services for the employer (this includes independent contractors).

457(b) Plans may define eligible or excluded employees based on reasonable business classification. The terms of the Plan specify when participants may enroll. 

If permitted by the Plan design, 457(b) Plans may receive the following pre-tax and post-tax contributions. Unlike a 403(b) Plan, 457(b) Plan limits do not have to be coordinated with contributions to 401(k) or 403(b) Plans. Contributions may be made to a 457(b) Plan, even if the annual maximum contribution limit is reached on other retirement plans.

Employee Pre-Tax Contributions: Amounts deducted from your wages before tax. These contributions grow tax deferred. At distribution, income tax will be due on the contribution and investment gain.

Roth Contributions (governmental 457(b) Plans only): Amounts deducted from your wages after tax is paid. These contributions grow tax deferred. At distribution, if certain conditions are met, income tax is not due on the contributions or investment gain.

After-Tax Contributions: Amounts deducted from your wages after tax is paid. These contributions grow tax deferred. At distribution, income tax is due on the investment gain. These contributions are not subject to the annual maximum limitations.

Employee contributions may not exceed the lesser of:

• The amount annually stated by the IRS ($23,000 for 2024, $23,500 for 2025); or

• 100% of your salary

If permitted by Plan design, Employers may choose to offer contributions in addition to employee contributions, such as: 

Matching Contributions: Contributions based on a pre-determined formula that matches all or a portion of your applicable contributions.

Non-Discretionary Contributions: Generally, a specific dollar amount or percentage of income allocated based on a pre-determined formula to a defined group of employees regardless of their participation in employee contributions.

Discretionary Contributions: Contributions with flexibility as to time, amount, eligible participants, allocation, and basis for the contribution.

The combination of both employer and employee contributions may not exceed the lesser of:

• The amount annually stated by the IRS ($69,000 for 2024, $70,000 in 2025); or

• 100% of your salary

Catch-up contributions allow you to add funds over the maximum elective deferral limit. To make catch-up contributions, you must meet certain requirements. 

Age 50 Catch Up:

If permitted by the Plan, an additional $7,500 per year (for 2024 and 2025) can be contributed to a 457(b) Plan if employees are age 50 and older at any time during the calendar year.

Last 3 Years Rule for 457(b) Plans:

If permitted by the Plan, for the three years prior to attaining the Plan's normal retirement age, employees may contribute the lesser of:

• Twice the annual limit ($46,000 in 2024, $47,000 in 2025); or

• The regular annual limit plus the amount of the additional regular limit not used in prior years

AFPlanServ will provide forms for each type of distribution allowed under the Plan and will approve transactions across all vendors.

While most Plans allow participants to begin taking distributions when they reach normal retirement age, many Plans allow earlier distributions under certain circumstances.

Distributions are permitted upon severance from employment or death. If permitted by the Plan, in service distributions are permitted from governmental 457(b) plans for:

• Attainment of age 59 1/2 or older
• Unforeseeable Emergency (more below)
• Qualified Disaster Recovery
• Qualified Birth or Adoption 
• Survivors of Domestic Abuse
• Emergency Savings 
• Firefighter age 50

457(b) Plans must also meet the required minimum distribution rules, which require distributions after a participant attains age 72 (if not still employed). SECURE 2.0 has updated this age to 73.

If a participant or their beneficiary is faced with an unforeseeable emergency, they may qualify for a distribution without tax penalty. Although similar to the hardship withdrawal rules for a 403(b) Plan, fewer specified situations qualify for an Unforeseeable Emergency Distribution under the 457(b) Plan.

Qualifications:

The Expense Must be From:

• Illness or accident (may include the participant, their spouse, dependent, or beneficiary)

• Loss of property due to casualty

• Similar extraordinary and unforeseeable circumstances arising as a result of events beyond their control (For example: imminent foreclosure or eviction from a primary residence, or to pay for medical expenses or prescription drug medication)

Must Show the Unforeseeable Emergency Can Not be Relieved by:

• Stopping contributions

• Reimbursement by insurance

• Reasonable liquidation of assets

• Borrowing from commercial resources

Self-Certification Rules:

If your plan offers unforeseeable emergency distributions, it’s important to understand the requirements for certification. SECURE 2.0 states a retirement plan sponsor may rely on a participant’s written self-certification for an unforeseeable emergency withdrawal. This means the participant needs to retain records providing proof that they meet the unforeseeable emergency requirements in case the Internal Revenue Service requests it. This may include documents that provide:

• Total cost and details of the event causing the need. For example: Total cost and type of medical care, details about payment needed to avoid foreclosure or eviction, or total costs and details about a casualty loss sustained.
• Proof that the participant, spouse, dependent, or primary beneficiary under the plan incurred the expense.
• The address of the location and proof that it is the participant’s principal residence.

Specific information for each type of unforeseeable emergency request► 

Participants can only transfer, roll over or exchange funds if all Plans involved allow these distributions. These may be done without paying income tax or a tax penalty, as long as they follow some simple rules. 

Plan-to-Plan Transfers:

If allowed by both Plans, the participant may move their balance from a former employer’s Plan to their current employer’s Plan. With a plan-to-plan transfer, money is moved directly between Plans and is never distributed to them. This helps ensure a non-taxable transaction, but it can only be done if they have a qualifying distribution event (such as severance of employment).

Rollovers:

If allowed by both Plans, the participant may roll over funds from a former employer’s retirement account into a new employer’s Plan. Unlike a plan-to-plan transfer, money is distributed to them. They then have to deposit the balance into the new Plan within a set period of time to ensure a non-taxable transaction. This transaction also requires that they have a qualifying distribution event (such as severance of employment).

Participants may take out a loan against their Plan account balance.* 

Maximum Amounts:

• 50% vested balance**, 

• $50,000, whichever is less

Qualified Disaster Recovery Loans:

The loan limit is the lesser of:

• 100% of vested account balance
• $100,000

Repayment:

• Within five years (may be extended by one year for Qualified Disaster Recovery Loan)

• Substantially equal payments

• Quarterly payments, at minimum

• 15 years, if for the purchase of a principal residence

Other Requirements:

• The employer's plan document must allow for plan loans

• Loan approval and application requirements must be met 

*Individual vendor contracts may or may not allow for this feature.

**If 50% of the vested balance is less than $10,000, you may borrow up to $10,000. Plans are not required to include this exception.