Understanding the 457 Top Hat Plan and Its Benefits

A 457 top hat plan is a type of retirement plan that offers tax benefits to eligible individuals. It's designed for executives and highly compensated employees of tax-exempt organizations.

Contributions to a 457 top hat plan are made with after-tax dollars, meaning you've already paid income tax on the money. This sets it apart from other retirement plans.

The plan allows for contributions of up to 50% of an employee's compensation, up to a maximum annual limit. This limit is determined by the IRS.

The funds in a 457 top hat plan can be invested in a variety of assets, including stocks, bonds, and mutual funds.

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There are two primary types of plans: governmental and nongovernmental. Governmental plans were previously under 457(g), but those plans are no longer being created.

Most governmental and nongovernmental plans are 457(b) plans.

Here are the main differences between the two types of plans:

Governmental Plans are designed to address large-scale environmental issues, such as pollution and deforestation. They often involve collaboration between government agencies and private organizations.

These plans can be implemented at the local, national, or international level, as seen in the United States' Clean Air Act, which regulates emissions nationwide. The plan aims to reduce air pollution by setting standards for emissions from vehicles and industrial facilities.

Governmental Plans can also focus on conservation efforts, like the United States' Endangered Species Act, which protects threatened and endangered species. This plan has led to the recovery of several species, including the bald eagle and the gray wolf.

Governmental Plans often rely on public education and awareness campaigns to encourage individual action, as in the case of the United States' recycling programs. These programs have increased recycling rates and reduced waste disposal costs.

The implementation of Governmental Plans can be slow and bureaucratic, but they can have a lasting impact on the environment. For example, the United States' National Park Service, established in 1916, has protected millions of acres of land and preserved natural and cultural resources.

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Nongovernmental plans are a type of plan that's limited to a select group of management or highly compensated employees. These plans are often referred to as "top hat" plans.

Nongovernmental plans are typically created under Section 457(b) of the Internal Revenue Code. They're not meant to be tax-qualified, which means they don't offer the same tax benefits as an opt-in employer-sponsored plan.

Top hat plans are usually limited to highly compensated employees or a select group of executives. The compensation limit is often the same as that used for 401(k) participation testing purposes.

Some examples of employees who might be eligible for top hat plans include directors, officers, or other high-level executives. Each company determines its own membership requirements for the plan.

A key feature of top hat plans is that they're unfunded, meaning the employer retains ownership of the assets until the employee leaves the company. The employer also gets to decide who can participate and how much to contribute.

Here are some key characteristics of top hat plans:

457 top hat plans are limited to a group of more highly compensated employees.

The level of compensation required for eligibility is not specified by ERISA, but must be according to some ascertainable standard set by the employer.

The highly compensated limit is $125,000 a year for the preceding year of 2019 and $130,000 for the preceding year of 2020 or 2021, which is the same as the 401(k) discrimination testing limit.

Restricting the plan to a class of employees such as directors or officers is also an acceptable limitation.

Because of this limitation to higher-compensation employees, 457 top hat plans are occasionally referred to as "top hat" plans.

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A 457 top hat plan is an exclusive benefit offered to a select few employees, usually executives. This plan is not a traditional retirement plan, but rather a way to defer compensation, meaning you'll be paid and taxed at a future date for services provided today.

Contributions to a 457 top hat plan are limited to the 457(e)(15) limit, which in 2016 was a combined total of $18,000 for both employer and employee contributions. This plan is unfunded, meaning the employer owns the assets, and contributions remain their property.

Employee and employer contributions count towards the 457(e)(15) limit, and these contributions can be made on a calendar-year basis. Withdrawals from the plan are subject to specific rules, including being able to withdraw funds upon retirement, separation from service, or death.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made significant changes to governmental 457 plans, removing the coordination of benefits limitation.

This allows participants to defer the maximum contribution amounts to both their 401(k) or 403(b) and 457 plans, making it possible to contribute up to $19,500 to each plan in 2021.

If you're at least 50 years old by the end of the tax year, you can also contribute an additional $6,500 to each plan, bringing the total to $52,000 deferred.

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Governmental employers have since set up 457 and 401(k) plans for their employees, and nonprofit employers have set up 403(b) and 457 plans, allowing employees to invest in both.

The total combined annual contribution to 401(k) and 403(b) plans is still subject to the $19,500 limit and $6,500 catch-up limit.

The EGTRRA legislation also increased the maximum deferral amount to the same level as 401(k) and 403(b) plans, and eased restrictions on some plan rollovers.

Governmental 457 plans can now be rolled into other types of retirement plans, such as 401(k), 403(b), and IRAs, with few restrictions.

On a similar theme: Non Governmental 457 Plan

Top hat plans are unfunded, meaning the assets remain the property of the employer company until the employee leaves.

Each company determines its own membership requirements for the sponsored plan, so not everyone can participate, even if they have equal company stature.

The employer chooses who can participate in a top hat plan and decides whether and how much to contribute.

A nonqualified deferred compensation plan allows participants to defer income into the plan during each calendar year, giving them a way to save for the future.

The employer funds a supplemental executive retirement plan entirely, which is a key difference from other types of plans.

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A 457(b) nongovernmental plan, or Top Hat plan, is a valuable tool for attracting and retaining top-level employees. These plans are designed to "defer compensation", meaning you'll be paid and taxed at some future point for services provided today.

One huge benefit of a 457(b) plan is that it allows participants to contribute fully to the separate 457 plan limit, whereas traditional qualified plans may have contribution limits. This can be particularly beneficial for employees who are restricted from contributing to a 401(k) plan.

Employee and employer contributions to a 457(b) plan count towards the 457(e)(15) limit, which is $18,000 in 2016. This means that combined contributions from employees and employers can reach a total of $18,000.

Features that are not allowed in nongovernmental 457(b) plans include loans, hardships, unforeseeable emergencies, transfers, rollovers, and Roth contributions or rollovers. This is in contrast to governmental 457(b) plans, which may have more flexible rules.

The total combined annual contribution to 401(k) and 403(b) plans is subject to the $19,500 limit and $6,500 catch-up limit. This is a key difference between governmental and nongovernmental 457(b) plans.

Here's a summary of the key benefits of a 457(b) nongovernmental plan: