Are Section 457 Plans Required to Follow ERISA Guidelines?

Section 457 plans are deferred compensation arrangements, and ERISA is a federal law safeguarding employee benefits. Understanding their interaction is important for participants and administrators. This article clarifies their relationship.

Understanding Section 457 Plans

Section 457 plans are non-qualified deferred compensation plans available to employees of state and local governments, as well as certain tax-exempt organizations. These plans allow eligible employees to defer a portion of their income, along with any investment earnings, until a later date, typically retirement or separation from service. The deferred amounts grow on a tax-deferred basis, meaning taxes are not paid until distributions begin.

There are two primary types of Section 457(b) plans. Governmental 457(b) plans are offered by state and local government entities, including public schools and universities. Contributions to these plans are typically made on a pre-tax basis, reducing current taxable income, and distributions are taxed as ordinary income in retirement. These plans often hold assets in a trust for the exclusive benefit of participants.

Non-governmental 457(b) plans, sometimes called “top-hat” plans, are offered by tax-exempt organizations that are not governmental bodies. Unlike governmental plans, these non-governmental plans are generally unfunded, meaning the assets remain part of the employer’s general assets and are subject to the claims of the employer’s general creditors. Eligibility for non-governmental 457(b) plans is typically restricted to a select group of management or highly compensated employees.

Both types of 457(b) plans have specific contribution limits. For 2025, the standard elective deferral limit is $23,500. Governmental 457(b) plan participants aged 50 or over can contribute an additional $7,500. A special pre-retirement catch-up provision may also allow eligible governmental participants within three years of retirement to contribute up to twice the normal limit. These limits are separate from those for 401(k) or 403(b) plans, allowing for increased tax-advantaged savings.

Understanding ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law established to protect the interests of participants and beneficiaries in employee benefit plans. ERISA sets minimum standards for most retirement and health plans voluntarily established in private industry. Its enactment aimed to address concerns about the mismanagement of pension plans and ensure that individuals would receive their promised benefits.

ERISA regulates several key aspects of covered plans. It mandates specific reporting and disclosure requirements, obligating plans to provide participants with important information about plan features and funding. The law also establishes fiduciary responsibilities, setting standards of conduct for individuals who manage plan assets, requiring them to act in the best interests of participants. Additionally, ERISA includes provisions for vesting, which dictates when participants gain non-forfeitable rights to their benefits, and funding requirements to ensure plans have sufficient assets.

ERISA provides participants with avenues for recourse, including the right to sue for benefits or breaches of fiduciary duty. The law generally applies to private-sector employers and their employee benefit plans. However, ERISA specifically excludes plans established or maintained by governmental entities and churches from its comprehensive regulations. This distinction is fundamental when examining the applicability of ERISA to Section 457 plans.

The ERISA Exemption for Section 457 Plans

Whether Section 457 plans must comply with ERISA depends on the plan type. Governmental 457(b) plans are generally exempt from ERISA’s requirements. This exemption stems from ERISA’s specific exclusion of governmental plans from its provisions. Consequently, governmental 457(b) plans are not subject to ERISA’s detailed rules regarding reporting, disclosure, fiduciary standards, or funding.

Non-governmental 457(b) plans also operate largely outside of most ERISA provisions, but under a different rule. These plans typically qualify for the “top-hat” exemption. To meet this exemption, the plan must be unfunded and maintained primarily for a select group of management or highly compensated employees. While exempt from most of ERISA’s substantive requirements, non-governmental 457(b) plans do have a minimal reporting obligation; the plan sponsor must file a one-time notice with the Department of Labor.

This exemption from ERISA means that both governmental and qualifying non-governmental 457(b) plans operate under different regulatory frameworks compared to ERISA-covered plans, such as 401(k)s. This distinction has significant implications for how these plans are structured, administered, and the protections afforded to participants. The absence of comprehensive ERISA oversight allows for greater flexibility in plan design but also shifts certain responsibilities and risks.

Key Differences and Protections

The exemption from ERISA for Section 457 plans results in several notable differences concerning participant protections and plan operations.

Fiduciary responsibilities are less strictly defined for 457 plans than for ERISA-covered plans. Governmental 457(b) plan administrators are not subject to ERISA’s rigorous fiduciary standards. Their duties and liabilities are instead governed by varying state or local laws.

Creditor protection differs significantly. Governmental 457(b) plans generally offer strong protection, comparable to ERISA-covered plans, as funds are held in trust. Non-governmental 457(b) plans, being unfunded and part of the employer’s general assets, usually provide less protection. In employer bankruptcy, deferred compensation in these plans could be subject to general creditors’ claims.

Spousal and beneficiary rights, detailed under ERISA for covered plans, are not automatically extended to 457 plans. ERISA requires specific spousal consent for beneficiary designations and provides for survivor annuities. These federal protections are generally not mandatory for 457 plans, though some may voluntarily incorporate similar provisions. Participants should review their plan documents to understand beneficiary designation rules and spousal rights.

The level of reporting and disclosure for 457 plans is less extensive than for ERISA-covered plans. While ERISA demands comprehensive disclosure, 457 plans, especially governmental ones, have less stringent federal reporting obligations. Participants may need to proactively seek information about their plan’s financial health and investment options. Understanding these distinctions is important for individuals considering a Section 457 plan.