Taxes relating to 457 plans can be confusing for tax exempt entities. Here are some key points to know:
- 457b and 457f plans are deferred compensation retirement plans that are offered to a select group of higher compensated or key management employees in a tax exempt entity.
- Both employees and employers can make contributions to the 457b plan up to a certain IRS limit each year on a tax deferred basis. Only the employer can make contributions to a 457f.
- With a 457b plan, contributions are not subject to income tax withholding until a distribution is made from the plan. But amounts are subject to FICA tax generally when the employee becomes vested.
- With a 457f plan, amounts are subject to both income tax withholding and FICA tax upon vesting.
- Employee and employer annual deferrals to a 457b plan are reported in Box 12g on the Form W-2. The amounts are reported as wages on Form W-2 with a 457f plan.
- Schedule J of the Form 990 asks if any of the individuals listed on Schedule J participated in or received payment from a supplemental nonqualified retirement plan (Part I, #4b). If any of the listed employees either participated in or received a distribution from a 457f plan, you must mark “yes” and then describe the arrangement in Part III, including the amounts. You would not mark “yes” for this question if you only had a 457b
- Taxable distributions from a 457 plan are not reported in Part VII of the Form 990.
- Deferrals to a 457f plan (because they are taxable) are reported as bonus/incentive compensation on the Form 990.
- Deferrals to a 457b plan (because they are not taxable) are reported as retirement and other deferred compensation of the Form 990.
Colette Kamps, CPA, Partner