457 Plans

Section 457 of the Internal Revenue Code--which was enacted with section 401(k) in 1978--extends salary reduction plans to employees of state and local governments and selected employees of nonprofit organizations. In 2001, Section 457 plans limited tax-free contributions by employees to $8,500. Beginning in 2002, however, the higher limits of 401(k) plans applied. Despite being equal, the 401(k) and 457 limits are applied separately, allowing those whose employers sponsor both types of plan to contribute twice as much.

Employers who offer 457 plans seldom match employees' contributions. When they do, the contributions count against the limit as if they were made by employees. Under EGTRRA, 457 plans began to more closely resemble 401(k) plans, but significant differences remain:

• nondiscrimination rules and rules for top-heavy plans do not apply to 457 plans;
  
  
• Participants in 457 plans can contribute twice the usual limit during the three years before they reach the normal retirement age; and
  
  
• Distributions from a 457 plan before age 59½ are not subject to a penalty tax.