Increased Retirement Benefits for Nonprofit Executives
Not-For-Profit Advisor, 2004 Winter


Nonprofit executives frequently have inadequate retirement savings. By adding a Section 457 plan, organizations may be able to substantially increase the retirement benefits available to their executives.

A Section 457 plan is a nonqualified deferred compensation plan available to nonprofits and state and local governments. In contrast to both 403(b) and 401(k) plans, which cannot discriminate in favor of highly compensated employees, a Section 457 plan generally must restrict participation to a select group of management or highly compensated employees.

Section 457 plans come in two flavors: 457(b) plans (eligible) and 457(f) plans (ineligible). Section 457(b) plans are more secure for the employee, but must limit the dollar amount of contributions. Section 457(f) plans are less secure, but place no significant limitations on contributions. With both plans, assets must be subject to the organization’s general creditors. However, if a plan uses a Rabbi Trust arrangement, an executive’s account will be protected in all but the most adverse financial circumstances.

Section 457(b) Plans (Eligible)

For 2003, employee contributions to a 457(b) plan are limited to 100% of compensation not to exceed $12,000. This limit will increase through 2006 (see table on page 5) and then will be adjusted for inflation. Because of a recent tax law change, the 457(b) contribution limit no longer has to be reduced by employee contributions to a 403(b) or 401(k) plan.

During the three-year period before normal retirement age, employees may make a one-time (per employer) catch-up contribution. This contribution is limited to the lesser of (1) twice the normal contribution limit or (2) the allowable contribution limit plus any unused contributions from prior years.

Upon reaching age 50, participants in 401(k), 403(b), and governmental 457(b) plans may be given the opportunity to make extra catch-up contributions, subject to tax law limits.

Section 457(f) Plans (Ineligible)

A Section 457(f) plan is usually used when the contribution limits applicable to other retirement plans restrict executive contributions or when retention until retirement is important. Annual employee contributions to a 457(f) plan are limited to 100% of compensation with no other dollar limitation. To avoid having contributions taxed to the executive, benefits must be subject to a substantial risk of forfeiture. Most employers implement this restriction by including a provision requiring the executive to work for the employer for a specified number of years. Once the risk lapses, the assets are taxed to the employee.

A Simple Solution

Section 457 plans are less complicated to administer than either 401(k) or 403(b) plans. However, recent IRS audit statistics indicate that organizations need to do a better job of monitoring the existing rules on an ongoing basis. Call us to explore whether a Section 457(b) or 457(f) plan would work well for your organization.

Contribution Limits

Year 401(k)/403(b) 457(b) Total

2003 $12,000 $12,000 $24,000

2004 $13,000 $13,000 $26,000

2005 $14,000 $14,000 $28,000

2006 $15,000 $15,000 $30,000

Catch-up contributions and employer contributions are not reflected.