The provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) significantly improved several aspects of employer-sponsored retirement plans, particularly those pertaining to 457(b) Deferred Compensation Plans. Increased contribution limits, enhanced portability, and the elimination of the dollar offset between 457(b) plans and 403(b)/401(k) plans make 457(b) plans even more attractive.
457(b) plans are nonqualified, tax-deferred compensation plans that function in many ways like other types of retirement or tax-deferred annuity plans, and offer many of the same tax advantages to employees.
Individuals that participate in a 457(b) plan can contribute on a before-tax basis without paying any federal income taxes on contributions or on any earnings, until withdrawal. Participation in 457(b) plans sponsored by private employers must be limited to a select group of highly compensated or executive level employees (i.e., a top-hat group). In the case of public 457(b) plans, employers may extend eligibility to a broad-based group of employees if desired.