Comparing 457(b), 457(f) Plans: Which is the Right Fit For Your Organization?

When it comes to retirement planning, nonprofit organizations, government entities, and certain tax-exempt employers often provide supplemental deferred compensation plans to attract and retain top talent. Two common plans used in this space are the 457(b) and 457(f) plans. 

While both offer deferred compensation benefits, they differ significantly in structure, eligibility, and tax treatment. Understanding these differences is essential in selecting the right fit for your organization. 

Key Differences Between 457(b) and 457(f) Plans 

To help clarify the differences, here’s a side-by-side feature comparison of these two plans: 

Can an Employer Exclude Individuals from a 457(b) Plan? 

Yes, an employer can exclude certain individuals from contributing to a 457(b) plan if it is a tax-exempt (non-governmental) 457(b) plan. These plans can be limited to a select group of management or highly compensated employees, similar to how a top-hat plan works. However, for governmental 457(b) plans, all eligible employees must be allowed to participate—employers cannot selectively exclude employees in this case. 

Combined 2025 Maximum Contribution Limits with a 403(b) Plan 

If an employee is enrolled in both a 457(b) and a 403(b) plan, they can contribute the maximum amount to each plan separately. That means: 

• 457(b) Contribution Limit → $23,500 (or up to $47,000 with special catch-up) 
• 403(b) Contribution Limit → $23,500 (plus an additional $7,500 catch-up if age 50+) 

Total Possible Contributions (2025): 

• Standard Limit: $47,000 ($23,500 to each plan) 
• With Age 50+ Catch-Up: $54,500 ($23,500 + $7,500 to 403(b) + $23,500 to 457(b)) 
• With Special 457 Catch-Up: Up to $70,500 (if the participant qualifies for the 457 special catch-up in the three years before retirement) 

This makes having both plans highly beneficial, as employees can contribute significantly more than those with only a 401(k) or 403(b) alone.

Tax Benefits for Employers 

Employers, especially tax-exempt organizations and government entities, gain several advantages by offering 457(b) and 457(f) plans: 

1. No Payroll Taxes on 457(b) Contributions 

• For non-governmental 457(b) plans, contributions are not subject to FICA (Social Security & Medicare taxes), which reduces employer payroll tax liability. 
• For governmental 457(b) plans, however, contributions are subject to FICA taxes, but they still reduce taxable income for employees. 

2. Retention & Recruitment Tool 

• 457(f) plans are often used to attract and retain key executives by offering additional deferred compensation that vests over time, reducing turnover. 

3. No Employer Matching Required 

• Unlike 401(k) or 403(b) plans, 457(b) and 457(f) plans do not require employer contributions. If the employer does contribute, it counts toward the total contribution limit. 

4. No ERISA Compliance for Governmental Plans  

• Governmental 457(b) plans are exempt from ERISA, reducing administrative and compliance costs. 
• Non-governmental 457(b) and 457(f) plans must comply with deferred compensation rules but are still more flexible than traditional pension plans. 

Key Differences at a Glance 

• Contribution Limits: 457(b) plans have specific annual contribution limits, while 457(f) plans do not. 
• Taxation Timing: In 457(b) plans, taxes are deferred until funds are withdrawn. In 457(f) plans, taxes are due when the deferred compensation vests. 
• Risk of Forfeiture: 457(f) plans have a substantial risk of forfeiture until vesting occurs, whereas 457(b) plans do not typically have this condition. 
• Eligibility and Use: 457(b) plans are more broadly available to employees of state and local governments and certain non-profits, while 457(f) plans are generally restricted to higher-level employees. 

These differences make each plan suitable for different purposes and employee groups within an organization. 

Non-Governmental 457(b) Plans (Tax-Exempt Employers) 

• Can be modified to restrict participation to a select group of management or highly compensated employees (often referred to as a “top-hat” group). 
• This means an employer does not have to close the existing plan—they can amend the plan document to limit participation going forward. 
• However, employees who were already contributing may need to be grandfathered in, depending on plan rules and legal considerations. 

Key Considerations When Modifying a Non-Governmental 457(b) Plan: 

1. Plan Document Amendment: The employer must formally amend the plan and communicate changes to affected employees. 

2. Legal & Compliance Review: Any change must comply with ERISA (if applicable) and IRS regulations for non-governmental 457(b) plans. 

3. Grandfathering Existing Participants: Some plans may choose to allow existing participants to continue contributing rather than removing them immediately. 

4. Alternative Retirement Benefits: Employers may need to consider offering alternative retirement plans for excluded employees, such as a 403(b) or a defined contribution plan. 

By understanding the distinctions between these plans, your organization can make an informed decision that aligns with your compensation and retention strategies.