What Is a 457(b) Plan?

A 457(b) plan is a type of tax-advantaged, non-qualified deferred compensation plan available to employees of certain governmental and tax-exempt organizations. Established under Section 457(b) of the Internal Revenue Code, the plan allows eligible participants to defer a portion of their salary on a pre-tax basis, with earnings on those contributions also growing tax-deferred until withdrawn. The 457(b) plan functions similarly to 401(k) and 403(b) plans in terms of deferral mechanics, but it is governed by a different set of rules that are tailored to the unique structure of public sector and nonprofit employers.

The plan is most commonly used by state and local government employees, including teachers, police officers, and municipal workers, as well as by employees of certain nonprofit organizations such as hospitals, charities, and religious institutions.

Eligibility and Participation

Participation in a 457(b) plan is limited to employees of eligible organizations. For governmental 457(b) plans, this includes state and local government agencies and certain subdivisions. For tax-exempt organizations under IRC 501(c), only a select group of highly compensated employees or executives are allowed to participate in a 457(b) plan, and these plans must be structured carefully to avoid violating non-discrimination rules.

Employees voluntarily elect to defer a portion of their compensation, up to annual limits set by the IRS. In 2025, the maximum contribution limit for elective deferrals is $23,500, with an additional $7,500 in catch-up contributions allowed for participants age 50 or older.

Contributions and Tax Treatment

Employee contributions to a 457(b) plan are made on a pre-tax basis, reducing the participant’s taxable income for the year. Investment earnings within the plan accumulate tax-deferred. Taxes are not due until the funds are distributed, typically in retirement or upon separation from service.

Unlike qualified retirement plans such as 401(k)s, employer contributions to 457(b) plans are rare, though they are permitted. Contributions by employers count toward the same annual deferral limit as employee contributions. The combined total of employee and employer contributions must remain within the IRS limit.

A unique feature of governmental 457(b) plans is that they are not subject to the 10% early withdrawal penalty that applies to most other retirement plans when distributions are taken before age 59½. However, distributions are still taxed as ordinary income.

Catch-Up Provisions

457(b) plans offer two types of catch-up contributions. The first is the standard age 50+ catch-up, which mirrors the provision found in 401(k) and 403(b) plans. The second, known as the “final three years” catch-up, is specific to 457(b) plans and allows participants to contribute up to double the annual limit in the three years prior to the plan's normal retirement age, provided they have underutilized contribution limits from earlier years.

Participants cannot use both types of catch-up contributions in the same year; they must choose the higher of the two allowable amounts.

Distribution Rules

Distributions from a 457(b) plan can begin once a participant separates from service, regardless of age. This flexibility makes the plan particularly appealing to workers who retire early. Participants may also take distributions in cases of unforeseeable emergencies, subject to strict criteria and documentation.

Required Minimum Distributions (RMDs) apply to 457(b) plans starting at age 73 (as of 2025) unless the participant is still working. Rollovers are permitted from a 457(b) plan to another eligible retirement plan, including IRAs, 403(b) plans, and 401(k)s, though special care must be taken to ensure tax compliance if the source plan differs in structure.

Governmental vs. Non-Governmental 457(b) Plans

Governmental 457(b) plans and non-governmental 457(b) plans share similar structures but differ significantly in regulation and treatment. Governmental plans are held in trust for the exclusive benefit of participants, offering stronger protections. Non-governmental plans, by contrast, are considered assets of the employer and subject to claims from creditors, since they are not required to be funded in a trust.

Because of this risk exposure, non-governmental 457(b) plans are generally limited to a select group of management or highly compensated employees and cannot be rolled over into an IRA or other qualified plan unless transferring to another non-governmental 457(b) plan of a similar employer type.

Investment Options

The investment options available within a 457(b) plan vary depending on the plan provider. Most governmental plans offer a selection of mutual funds and other investment vehicles similar to those found in 401(k) plans. Investment selection, fees, and performance can vary widely, so participants are encouraged to review their plan’s offerings carefully.

Compliance and Oversight

Governmental 457(b) plans are generally subject to public sector oversight and must comply with IRS rules on contribution limits and distributions. Non-governmental 457(b) plans fall under ERISA rules but are exempt from many ERISA funding and fiduciary requirements due to their limited participant base.

Both types of plans must operate in accordance with written plan documents and are subject to IRS audit and reporting requirements. Employers must also ensure that contributions do not exceed the limits and that proper withholding and reporting of distributions occur.

The Bottom Line

A 457(b) plan is a valuable retirement savings option for employees of governmental and certain nonprofit organizations. It allows for tax-deferred savings with relatively flexible withdrawal rules, particularly for governmental plan participants. However, the distinction between governmental and non-governmental versions is critical, as it affects plan protections, rollover options, and participant eligibility. For those who qualify, the 457(b) plan can be an important complement to other retirement strategies.