Boost Your Executive Benefits with a 457(b) Top Hat Plan

Competition is always fierce to recruit and reward top employees and this is certainly no different for nonprofits. With the 30th anniversary of nonprofit organizations being allowed to have 457 plans rapidly approaching, there is no better time to take a look at these plans!

Whether you’re a local charity helping the community, a university or hospital bettering the region, or a worldwide nonprofit working on global issues, you need the best employees to accomplish your organization’s objectives.

A special type of 457(b) plan has been established for nonprofits that is much different than 457(b) plans for governmental agencies covered here.

A nongovernmental 457(b) plan, or Top Hat plan as it is commonly referred to as, is far different than similarly sounding qualified retirement accounts. In fact, they are not retirement plans at all and rules vary greatly from 401(k), 403(b) and even 457(b) governmental plans.

These plans are technically not for retirement (though commonly used as such) and are by definition – designed to “defer compensation”. Basically this means you will be paid (and taxed) at some future point for services provided today.

These plans must be “exclusive” to executives as only a small portion of a company’s employees are allowed to participate. Actually, one big reason why an employer would get in trouble with the IRS, is by allowing too many people into the plan. This exclusivity is why they receive the super cool name of “Top Hat” plans.

One huge benefit to a 457(b) plan is found with those whose contributions are severely limited with traditional qualified plans. These participants are often restricted to the amount that they can contribute to a 401(k) but with a 457(b) nongovernmental plan they can contribute fully to the separate 457 plan limit.

A 457(b) nongovernmental plan must be “unfunded”, meaning all contributions remain property of the employer. Funds may certainly be set aside in an account with a funding company or Rabbi trust, but the funds continue to remain property of the employer. As employer property, funds can still be made available to creditors or lost in bankruptcy.

This is particularly important when an employee makes a deferral to the plan. These contributions do remain property of the employer and not the participant.

Employee and employer contributions count towards the 457(e)(15) limit (that is where the IRS tells us how much we can contribute to the plan). This means that in 2016, employer and employee contributions combined can reach a total of $18,000.

There are several other differences with these types of plans, making them far different than governmental 457(b), 403(b) or 401(k) plans. For example, several of the withdrawal rules do not apply to nongovernmental 457(b) plans. Features that are not allowed include:

  • Loans
  • Hardships
  • Unforeseeable Emergencies
  • Transfers
  • Rollovers
  • Roth contributions or Roth rollovers

Even upon termination, funds from 457(b) plans for nonprofit entities cannot be transferred to a qualified plan (401(k), 403(b), IRA etc.).

Funds can be withdrawn upon retirement, separation from service, attainment of age 70 1/2, death and disability (preferably one of the first three). As is the case with other 457(b) plans, those for nonprofits are not subject to a 10% penalty for early withdrawal.

These 457(b) nongovernmental plans can be an extremely valuable tool in attracting, retaining, and rewarding your executive level employees.