457 Plan: What It Means for Employers

What it means in practice

What the term means. Section 457 of the Internal Revenue Code covers deferred compensation plans of state and local governments and tax-exempt organizations. The IRS explains that they are either "eligible" plans under section 457(b), which defer income tax on retirement savings, or "ineligible" plans under section 457(f), which are taxed differently. In everyday use, "457 plan" usually means a 457(b) plan. Eligible employers are states, political subdivisions and their agencies or instrumentalities, and tax-exempt entities; churches, qualified church-controlled organizations and the federal government are excluded (26 CFR 1.457-2(e)). Only people who perform services for the employer may participate, and section 457(e)(2) treats service as an independent contractor as service for the employer.

Governmental 457(b) plans. The IRS notes that state and local governments generally cannot maintain 401(k) plans (unless adopted before May 6, 1986), so the governmental 457(b) is their main salary deferral plan. It works much like a 401(k): section 457(g) requires assets to be held in trust for the exclusive benefit of participants and beneficiaries; there is no coverage or nondiscrimination testing; and the IRS comparison chart shows it may offer designated Roth contributions, loans, automatic enrollment and rollovers to other plans and IRAs. Amounts are taxed only when paid to the participant (section 457(a)(1)(A)).

Tax-exempt (top-hat) 457(b) plans. A 457(b) plan of a nongovernmental tax-exempt employer is very different. The IRS says it must remain unfunded: assets are the employer's property and available to its general creditors, even if held in a "rabbi trust." It must be limited to a select group of management or highly compensated employees; otherwise ERISA Title I funding rules apply and, being funded, the plan fails section 457(b)(6), making contributions immediately taxable. Roth contributions, loans, age-50 catch-ups and rollovers to other plan types are not allowed, and amounts are taxed when paid or made available, if earlier. No Form 5500 is filed, but under 29 CFR 2520.104-23 the employer files an electronic top-hat statement with the Department of Labor within 120 days after the plan becomes subject to ERISA Part 1.

457(f) plans. A plan of an eligible employer that does not meet the 457(b) rules is an ineligible 457(f) plan, which tax-exempt employers use to allow deferrals above the 457(b) limit. Under section 457(f) and 26 CFR 1.457-11, deferred amounts, with earnings to that date, are included in income in the first year there is no "substantial risk of forfeiture," which section 457(f)(3)(B) defines as rights conditioned on the future performance of substantial services. Later payments are taxed under section 72. The W-2 instructions put amounts includible under section 457(f) in box 1, and they are Social Security and Medicare wages once the forfeiture risk ends. For broader context, see deferred compensation.

2026 dollar limits. The IRS COLA table lists 457 elective deferrals at $24,500 for 2026 ($23,500 for 2025). Notice 2025-67 confirms the section 457(e)(15) limit for 2026. Unlike a 401(k), one limit covers salary reduction and employer contributions together, so any employer contribution reduces what the employee can defer (IRS). The limit is also capped at 100% of includible compensation (section 415(c)(3) compensation, 26 CFR 1.457-2(g)). As of November 4, 2026, the IRS COLA page and the IRS newsroom had not announced 2027 limits, so this entry gives none.

Age-50 catch-up. Only governmental 457(b) plans may allow it. For 2026 a participant who is 50 or older by year end may defer an extra $8,000, and one who turns 60 to 63 in 2026 may defer up to $11,250 instead, if the plan allows. The IRS says that participants with prior-year wages above the indexed threshold must designate age-50 catch-ups as Roth contributions; Notice 2025-67 sets the threshold for 2025 wages, applied in 2026, at $150,000. If the plan has no Roth option, those participants cannot make age-50 catch-ups. The IRS adds that the special 457(b) catch-up below may still be made pre-tax.

Special 3-year catch-up. Both governmental and tax-exempt plans may allow a higher limit in one or more of the participant's last three taxable years ending before the plan's normal retirement age. Under 26 CFR 1.457-4(c)(3), the limit is the lesser of twice the basic dollar limit or the "underutilized limitation": the current-year limit plus unused limits of earlier eligible years, ignoring age-50 catch-ups. The plan's normal retirement age generally falls between the earlier of 65 or the unreduced-benefit age under the employer's basic defined benefit plan and 70 1/2 (as early as 40 for police and firefighters). A governmental participant eligible for both catch-ups gets whichever gives the larger ceiling, never both (26 CFR 1.457-4(c)(2)(ii)). The IRS warns that errors are common because historical records are often missing or inaccurate.

How 457(b) interacts with 403(b) and 401(k) plans. The IRS says the deferral limit is aggregated across 401(k), 403(b), SIMPLE and SARSEP plans, but a 457(b) plan has a separate limit "not combined with your deferrals made to a 403(b) or other plans." An employee eligible for both a 403(b) plan and a 457(b) plan can therefore defer the full limit to each. Section 457(c) and 26 CFR 1.457-5 apply one individual limit across all 457(b) plans of all of a person's employers.

Deferral elections. Section 457(b)(4), as amended by SECURE 2.0, requires a governmental plan's deferral agreement to be in place before the compensation is currently available to the individual. A tax-exempt employer's plan still requires it before the month begins. Under 26 CFR 1.457-4(b), a new employee may defer first-month pay by signing on or before the first day of work, and an election may stay in effect until changed.

Payroll withholding. Publication 15 (2026) lists employee salary reduction contributions and employer contributions to a section 457(b) plan as generally exempt from federal income tax withholding (subject to the 457(b) limit) but taxable for Social Security, Medicare and FUTA. A pre-tax 457(b) deferral is therefore a pre-tax deduction for income tax only. In practice FUTA often does not apply: state and local government wages are not subject to it (Pub 15), and section 501(c)(3) organizations are exempt (Pub 15-A). Government wages are subject to Social Security and Medicare "with certain exceptions" (Pub 15). For a tax-exempt 457(b) plan, elective and nonelective deferrals are Social Security and Medicare wages when the services are performed or, if later, when the forfeiture risk ends (W-2 instructions).

Form W-2 reporting. The 2026 Form W-2 instructions use code G for elective deferrals and employer contributions to any 457(b) plan, excluding amounts still subject to a substantial risk of forfeiture. Pre-tax deferrals are left out of box 1 but included in box 3 as Social Security wages and box 5 as Medicare wages. Designated Roth contributions to a governmental 457(b) plan use code EE and are included in boxes 1, 3 and 5. The box 13 "Retirement plan" box is not checked for contributions to a section 457(b) plan.

When money can come out. Section 457(d) generally allows distributions no earlier than the calendar year the participant reaches age 59 1/2 (governmental plans) or 70 1/2 (tax-exempt plans), severance from employment, or an unforeseeable emergency. The IRS chart also lists plan termination, qualified domestic relations orders and small account distributions of $5,000 or less. Unforeseeable emergencies include illness or accident, casualty loss and funeral expenses of a spouse or dependent, limited to what insurance, other assets and stopping deferrals cannot cover; under Revenue Ruling 2010-27, credit card debt does not qualify. Since SECURE 2.0, section 457(d)(4) lets a governmental plan administrator rely on the participant's written certification.

Reporting distributions. Governmental 457(b) distributions go on Form 1099-R, not Form W-2, with withholding reported on Form 945 (Pub 15). Under the Form 1099-R instructions they are generally not subject to the 10% additional tax under section 72(t), except amounts attributable to a rollover from another type of plan or IRA (code 2 in box 7a otherwise). Eligible rollover distributions not directly rolled over are subject to 20% mandatory withholding. Distributions to employees from a tax-exempt 457(b) plan are wages: they go in boxes 1 and 11 of Form W-2, and income tax withheld is reported on Form 941, 943 or 944.

Correcting excess deferrals. A tax-exempt 457(b) plan must distribute excess deferrals with earnings by April 15 of the following year, or it becomes an ineligible 457(f) plan; a governmental plan must do so as soon as administratively practicable (IRS; 26 CFR 1.457-4(e)). Governmental plans also get until the first plan year beginning more than 180 days after IRS notification to fix failures (section 457(b)).

Step by step for an employer. (1) Confirm whether the plan is governmental or tax-exempt (and, if tax-exempt, limited to a select group). (2) Collect elections on time. (3) Each payroll, remove pre-tax deferrals from income tax wages only. (4) Track deferrals plus employer contributions against the 2026 limit and each participant's catch-up, applying the Roth rule. (5) At year end, report codes G and EE and leave box 13 unchecked for 457(b)-only participants.

Example 1 (illustration): one employee, two plans. A 45-year-old public school employee earning $90,000 in 2026 is eligible for both a 403(b) and a governmental 457(b) plan. Because the limits are separate, the employee could defer $24,500 to each, $49,000 in total. At age 52, if both plans allow age-50 catch-ups and 2025 wages were $150,000 or less, the employee could defer $32,500 to each.

Example 2 (illustration): special catch-up versus age 50. A governmental plan sets normal retirement age at 65. A participant who turns 65 in 2029 and is 62 in 2026 has $15,000 of unused limits from earlier years. The special catch-up ceiling for 2026 is the lesser of $49,000 or $24,500 plus $15,000, which is $39,500. The age-based ceiling would be $24,500 plus $11,250, or $35,750. The larger figure, $39,500, applies, and the two cannot be added together.

Example 3 (illustration): one paycheck. A city employee in a job covered by Social Security is paid $2,500 every two weeks and defers $250 pre-tax to the 457(b) plan. Federal income tax withholding is figured on $2,250; Social Security and Medicare tax on $2,500. Over 26 paychecks with no other deductions, box 1 shows $58,500, boxes 3 and 5 show $65,000, and box 12 shows G 6500.00.

Where states differ. State income tax treatment of 457 deferrals does not always follow federal rules. One example: the Pennsylvania Department of Revenue lists contributions to a qualified deferred compensation plan as always taxable Pennsylvania compensation, but lists deferrals to some section 457(b) plans (subject to a substantial risk of forfeiture or not funded by the employer) as never taxable when deferred. It also says Act 2005-40 applied the federal constructive receipt rules to unfunded section 457 plans. Check your state revenue agency for its treatment of the plan type you offer.

Question: Can a small private business offer a 457(b) plan? No. Only a state or local government or a tax-exempt organization can establish one (IRS). Private for-profit employers use other plan types, such as a 401(k).

Question: Do 457(b) deferrals reduce Social Security and Medicare wages? No. Publication 15 lists them as taxable for Social Security and Medicare, and the W-2 instructions include them in boxes 3 and 5.

This entry summarizes federal rules and one state example; it does not decide whether a particular plan, employee or payment meets them.

Why it matters and common mistakes

How Remindax helps

Related terms

See all terms in Benefits & Insurance or browse the full HR Glossary.