By Edward “Ed” V. O’Neal, Vice President and Manager, Retirement PlansPrint This Post
Tax-exempt entities share many of the same concerns as other employers in terms of attracting and retaining quality employees. Determining the ‘right’ mix of competitive compensation and benefit programs to entice new employees, while also rewarding existing employees can be a challenge for all types of employers. However, some tax-exempt groups have limitations on the type of retirement plans they can offer to their employees. For example, municipal, state and local governmental groups are not eligible for certain retirement plan types (i.e. 401(k) plans) and must look at other options for attracting and retaining employees.
The 457(b) Governmental Plan has become a popular option for local government and state entities (i.e. municipalities, police/fire departments, etc.) in search of a ‘401(k) look-alike’ program for their employees. 457(b) Governmental Plans are nonqualified deferred compensation plans that work similarly to 401(k) plans, allowing participants to make pretax salary deferrals, with these plans having the same contribution limits as 401(k) plans. There are, however, some unique provisions with 457(b) plans that distinguish them from a 401(k); a special contribution catch-up provision for participants within 3 years of retirement, the ability to receive distributions prior to age 59 ½ without incurring the 10% penalty and the ability to maximize contributions to a 457(b) plan without needing to aggregate those contributions with other plans (i.e. 403(b), 401(k), etc.).
There are also several other types of 457 plans (i.e. 457(b) Non-governmental Plan and 457(f) Plan) that focus more on benefitting highly compensated and select key employees of nonprofit groups. This is in addition to many traditional retirement plan alternatives available to all employers, such as SEP IRAs, SIMPLE plans and defined benefit plans.
While there are some restrictions, local government and state entities still have a variety of great options in selecting an employer retirement program to attract and retain employees. To learn more, contact your Benjamin F. Edwards financial advisor, and remember before initiating any employer sponsored retirement program to consult with your tax/legal advisor.