What Is a 457(b) Plan? Rules and Features Explained

A 457(b) plan is a type of deferred compensation retirement plan available to employees of state and local governments and certain tax-exempt organizations. This plan allows eligible individuals to contribute a portion of their salary on a pre-tax basis, reducing their current taxable income. Contributions and any investment earnings grow tax-deferred until funds are withdrawn, typically during retirement.

Eligibility and Types of 457(b) Plans

Eligibility for a 457(b) plan depends on the employer offering it, as these plans are established by either a state or local governmental entity or a tax-exempt organization under Internal Revenue Code Section 501(c). Governmental 457(b) plans are available to employees of state and local governments, including public schools, hospitals, and law enforcement agencies.

Non-governmental 457(b) plans are offered by tax-exempt organizations, such as non-profit hospitals, charities, and educational institutions. These plans typically limit participation to a select group of management or highly compensated employees. This limitation helps these plans avoid certain requirements of the Employee Retirement Income Security Act (ERISA), which mandates that covered plans be adequately funded through a trust.

Governmental 457(b) plans are exempt from ERISA, meaning their assets are held in trust for the benefit of participants, providing protection from the employer’s creditors. Non-governmental 457(b) plans are unfunded and remain the property of the employer, subject to the claims of their general creditors. While these plans may use “rabbi trusts” to hold employee deferrals, the assets in these trusts are still accessible by the employer’s creditors.

Contribution Rules for 457(b) Plans

Contributions to a 457(b) plan generally come from employee salary deferrals, where a portion of gross pay is contributed before taxes. Some plans also allow for employer contributions, which are included in the overall contribution limits. The maximum amount an individual can contribute to a 457(b) plan is set annually by the IRS. For 2024, the elective deferral limit was $23,000, and for 2025, it increased to $23,500.

Participants aged 50 or older can make additional “catch-up” contributions. For both 2024 and 2025, this age-based catch-up contribution is $7,500, allowing those eligible to contribute up to $30,500 in 2024 and $31,000 in 2025. This age 50+ catch-up is generally available only in governmental 457(b) plans; non-governmental plans do not typically offer this provision.

A “special pre-retirement catch-up” rule is available for both governmental and non-governmental 457(b) plans. This rule allows participants within the three years immediately preceding their plan’s normal retirement age to contribute up to double the regular annual limit, provided they have unused contribution capacity from prior years. For example, in 2025, this could allow a participant to contribute up to $47,000. However, a participant cannot use both the age 50+ catch-up and the special pre-retirement catch-up in the same year.

Distribution Rules for 457(b) Plans

Funds from a 457(b) plan can generally be distributed upon certain triggering events, including separation from service, death, or disability. Distributions can also begin when a participant reaches age 73 for those turning 73 after December 31, 2022.

In-service distributions, which occur while still employed, are typically limited. One common allowance is for an “unforeseeable emergency,” which includes severe financial hardship resulting from an illness, accident, or other qualifying event. Governmental 457(b) plans may offer more flexible in-service distribution options.

Upon withdrawal, distributions from a traditional 457(b) plan are taxed as ordinary income. 457(b) plans offer flexibility for rollovers. Participants can typically roll over their funds into another eligible retirement plan, such as an IRA, 401(k), 403(b), or another 457(b) plan, to continue tax deferral. Roth 457(b) options also exist, allowing for tax-free distributions in retirement if contributions were made after-tax.

Distinguishing Features of 457(b) Plans

One notable feature of governmental 457(b) plans is the absence of the 10% early withdrawal penalty that often applies to other retirement accounts, such as 401(k)s and 403(b)s, for distributions taken before age 59½. If an individual separates from service, they can access their governmental 457(b) funds at any age without incurring this penalty, though the distributions remain subject to ordinary income tax. This penalty exception typically does not apply if the funds were rolled into the 457(b) from another type of plan or IRA.

Another distinct advantage is that the contribution limits for a 457(b) plan are separate from those of 401(k) or 403(b) plans. This allows individuals who are eligible for both a 457(b) and another employer-sponsored plan to contribute the maximum amount to each. For instance, an employee could contribute the maximum to both a 401(k) and a 457(b) plan.

The creditor protection of 457(b) plans varies by type. Governmental 457(b) plans hold assets in a trust, protecting them from both the employer’s and the participant’s creditors. Non-governmental 457(b) plans are unfunded and remain assets of the employer, subject to the claims of the employer’s creditors.