A Section 457 Deferred Compensation plan — allowed under section 457¹ of the Internal Revenue Service Code — applies to state, county and municipal governments and other, non-governmental, tax-exempt organizations (except churches) and allows a portion of each eligible employee’s current and future salary to be deferred for later use as a retirement benefit.

Farm Bureau can help determine if a Section 457 Deferred Compensation plan may be a good fit for your organization. The plan has these advantages:

You and eligible employees may participate

Contributions are tax-deductible

Earnings accumulate tax-deferred

Valuable employee benefit to help you recruit and retain quality employees

Section 457 Deferred Compensation Eligibility
Eligible employers include state and local governments and non-governmental, tax-exempt organizations. Churches are not eligible to participate in Section 457 Deferred Compensation plans.

All employees of a state, county, municipality or non-governmental tax-exempt organization are eligible to participate in a Section 457 Deferred Compensation plan. Independent contractors who perform services for a county or municipality are also eligible.

Section 457 Deferred Compensation Guidelines
You must create a formal agreement with employees to describe provisions and conditions of the payment of the deferred compensation benefits, including the amount of benefits to be paid, how long the benefits will continue, when the benefits will begin and whether or not benefits will be paid at the time of retirement, death or disability.

You may set up the plan any time during the year, but for a county or municipality, it is recommended that enrollment take place in November for the ease of administration. The plan affects only income earned after the date the plan is established.

Eligible employees may defer up to 100 percent of compensation (up to a cap, contact an agent for current limit). Participants who are age 50 or older before the end of 2008 may be allowed an additional $5,000 “catch-up contribution.” Contributions are deducted pre-tax directly from employees’ paychecks.

Employees may receive distributions from a Section 457 Deferred Compensation plan upon severance from employment, when faced with an unforeseeable emergency or upon attaining age 70½. Generally, distributions are taxed as ordinary income. Employees must begin receiving distributions from the plan by April 1 of the year following the year in which they reach age 70½, or a penalty tax may be imposed.²

You, as the employer, maintain control of the deferred funds until distribution. This prevents funds from being considered part of your employees’ current income and subject to taxation.

A Section 457 Deferred Compensation plan can be funded by a number of products ― a Farm Bureau agent can help you choose the best options for your plan. To learn how a non-qualified deferred compensation plan can meet your business goals and objectives, find an agent today.

¹ Plans discussed here are covered by Section 457(b). Plans covered by Section 457(f) are subject to different rules.
² If the distribution does not begin by age 70½ or does not equal the minimum distribution required, a penalty tax may be imposed that is equal to 50 percent of the difference between the amount that should have been withdrawn and the amount that was withdrawn.

Amounts deferred under the deferred compensation plan are not considered includable income for the year.