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If 457b plans are designed primarily for state and local government employees whose mean compensation is typically lower than 100K in the U.S., why would some institutions that employ state/local civil servants require a salary many standard deviations above the mean to be eligible?

Examples:

Chris W. Rea
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iskandarblue
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1 Answers1

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Non-governmental 457(b) plans aren't designed for rank-and-file employees, they're designed for highly-compensated employees, management, and executives.

The three examples you provided also have 403(b) plans (Cornell calls theirs a tax-deferred annuity), which are designed for rank-and-file employees. 403(b) plans share a number of similarities to 401(k) plans.

457(b) plans are considered "deferred compensation plans", and are not subject to ERISA rules that cover 401(k) and 403(b) plans. This is one reason why they're only available to highly-compensated employees or management. If the proportion of eligible employees vs. the total employee pool is too high or if the average salary of the eligible group is too close to the average salary of the total employee pool, ERISA rules could be triggered (there are other tests that are used as well).

Some differences of non-governmental 457(b) plans compared to 403(b) plans include the following. Non-governmental 457(b) plans...

  • Are not subject to ERISA
  • Must remain unfunded and assets are not held in trust for employees
  • Are considered the property of the employer (i.e. available to general creditors in the event of bankruptcy or litigation)
  • Don't allow age 50 catch-up contributions
  • Can allow catch-up contributions for participants within 3 years of normal retirement age
  • Don't allow plan loans
  • Are taxable at the earlier of 1) distribution or 2) when made available

You can find more information about non-governmental 457(b) plans on the IRS' page on the topic.

Stan H
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