403(b) Plans: What is the difference between a 403(b) and a 457?

A 457 plan is also called a deferred compensation plan. 457 plans are usually offered by State and Local governments and school districts but may be offered by non-profit organizations as well. 457 plans are not subject to universal availability or non-discrimination rules that a 403(b) plan is subject to. The 457 plan was originally established for the benefit of upper management or the “top hat” of the organization. The assets in a 457 plan are held in trust. The assets in a 403(b) plan are not held in trust.

The most notable differences between a 403(b) Plan and a 457 plan is in distribution rules, contribution limits and catch up provisions.

The contribution limits are currently the same for both the 403(b) and 457 at $18,000 annually. The limits are not aggregated between a 403(b) plan and a 457 plan. A participant can contribute up to the maximum annual limit for each type of plan at the same time.

The catch up provisions for both include an age related catch up amount of $6,000 (as of 2016) that can be used by any participant who will be 50 years or older by the end of the tax year. This limit is raised from time to time on an annual basis by the IRS. The other catch up provisions differ between the two types of plans. The 403(b) plan can utilize a “special 15 year” catch-up provision of $3,000 annually up to $15,000 total, which is not available under the 457 plan. The 457 plan can utilize a “final three year” catch up before the year of retirement of up to 100% of the annual limit for 457 contributions which is not available under the 403(b) plan. Because the annual limit for 2016 is $18,000, if utilizing the final year catch-up, a participant could contribute up to $36,000 annually. The participant must meet further eligibility rules for either the 403(b) or 457 catch up provisions.

A participant may elect to take a distribution from their 403(b) account when they have met one of the following triggering events:

  • Attained age 59 ½ (in service)
  • Severance from employment (however the participant is subject to early withdrawal penalty if a distribution is taken before age 55.)
  • Death
  • Disability
  • Hardship (conditions apply)

A participant may elect to take a distribution from their 457 account upon the following triggering events:

  • Attained age 70 ½ (in service)
  • Severance from employment at any age
  • Death
  • Disability
  • Unforeseen emergencies (conditions apply)

The type of events that qualify for a 403(b) Hardship withdrawal and a 457 unforeseen emergency distribution are different. A participant may be able to take a 403(b) hardship withdrawal to purchase a principal residence or to pay for tuition. However to take a 457 unforeseen emergency distribution, the event must truly be unforeseen so some 403(b) hardships would not be allowed under 457 unforeseen emergency. Both would allow distributions for medical bills, funeral expenses, to avoid foreclosure or eviction or due to a catastrophic event.

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