Comparison of 457(b) Plans, 401(k) Plans, 403(b) Plans, and Deemed IRAs

Carol V. Calhoun, Counsel
Venable LLP
600 Massachusetts Avenue, NW
Washington, DC 20001
Phone: (202) 344-4715
Fax: (202) 344-8300
Mobile: (202) 441-5592
E-mail: Click here to send e-mail.

The attractiveness of a 457(b) plan as compared with a 403(b) plan or a 401(k) plan may vary greatly depending on the circumstances. For example, a state or local governmental entity other than a public school or university may need to have a 457(b) plan, because it cannot normally have either of the other types of plans. A private university that is tax-exempt under Internal Revenue Code (“I.R.C.”) § 501(c)(3) but maintains a health maintenance organization that is tax-exempt under I.R.C. § 501(c)(4) and/or taxable research subsidiaries may prefer a 401(k) plan, so that it can cover all employees under the same plan. A private school that does not have affiliates, and wants to provide only for salary reduction contributions, may find that a 403(b) plan gives it the greatest ability to cover rank-and-file employees while minimizing administrative requirements. A public or private nonprofit school or university that maintains a qualified defined contribution plan may want to have a separate 403(b) plan as well, since it need not combine 403(b) contributions with contributions to the school or university’s qualified plans in applying the I.R.C. § 415(c) limits.

Because 457(b) plan deferrals do not have to be coordinated with 401(k) or 403(b) deferrals, employers may want to consider maintaining more than one type of plan to maximize total permitted deferrals. This is particularly true given that 457(b) and 403(b) plan money, as well as 401(k) plan money, can be used to purchase service credit under a defined benefit plan.

The following chart sets forth some primary differences among the different types of plans:

	457(b) Plan	401(k) plan	403(b) Plan	Deemed IRA
May state or local governmental employer maintain this type of plan?	Yes.	No, unless it has a grandfathered 401(k) plan.	Only if it is a public school or university, or a portion of another agency that is treated as an educational institution (e.g., an educational program for convicts that is part of a state prison system).	Yes.
Can a church employer that has not made an election under I.R.C. § 410(d) to be subject to ERISA (“nonelecting church”) maintain?	A nonelecting church is exempt from I.R.C. § 457(b). Thus, it can maintain a deferred compensation plan, but is not subject to the I.R.C. § 457(b) requirements. To avoid unfavorable tax consequences, such a plan must not be funded and must meet the requirements of I.R.C. § 409A.	Yes.	Yes.	Yes.
Can a tax-exempt employer, other than a government or nonelecting church, maintain?	Only for highly compensated and management employees.	Yes.	Only if it is a § 501(c)(3) organization.	Yes.
Can the plan cover employees of related taxable entities?	No, although an unfunded deferred compensation plan can be maintained for highly compensated and management employees of taxable affiliates.	Yes.	No.	Yes. However, because a deemed IRA can be part of another kind of plan (e.g., 401(a) or 403(b)), a related taxable entity that also wishes to maintain a deemed IRA may have to use a different plan for the deemed IRA, if it is not eligible to maintain the plan of which the deemed IRA is a part.
Are there limits on elective deferrals?	Lesser of a dollar limit or 100% of pre-plan compensation. The dollar limit is $22,500 in 2023, and is indexed for cost-of-living changes in future years. 457(b) plans need no longer be combined with other plans in applying limits.	Lesser of a dollar limit or 100% of pre-plan compensation. The dollar limit is $22,500 in 2023, and is adjusted for cost of living changes in future years. 401(k) plans need to be combined only with other 401(k) plans or 403(b) plans (not 457(b) plans) in applying limits.	Lesser of a dollar limit or 100% of pre-plan compensation. The dollar limit is $22,500 in 2023, and is indexed for cost-of-living changes in future years. 403(b) plans need only be combined with other 403(b) plans or 401(k) plans (not 457(b) plans) in applying limits.	$6,500 in any one year. (This limit will be subject to cost-of-living adjustments for years after 2023.) To the extent that an employee covered by a deemed IRA has income in excess of certain specified levels, and also participates in an employer plan, the deductibility of contributions may be limited. However, contributions are not offset against other types of employer plans, but only against other IRAs or deemed IRAs.
Are catch-up provisions available to increase the maximum elective deferrals?	Catch-up available under 457(b)(3) for one or more of the participant’s last 3 taxable years ending before he attains normal retirement age under the plan. Catch-up available under 457(e)(18) and 414(v) for governmental plans only, for participants age 50 or over. If both catch-ups apply, only the higher of the two, not both of the two, may be taken.	Catch-up available under 402(g) and 414(v), for participants age 50 or over.	Catch-up available under 402(g) and 414(v), for participants age 50 or over. Catch-up available under 402(g)(7) for employees who have at least 15 years of service with certain organizations. If both catch-ups apply, the individual can take the sum of the two.	Limit is increased to $7.500 if you are age 50 or older.
Are there limits on total contributions?	Same as the limit on elective deferrals.	Lesser of $66,000 (for 2023; as indexed in later years) or 100% of pre-plan compensation. Other qualified plans are combined in determining the limit. 403(b) and 457(b) plans do not count in determining the limit for a governmental 401(k) plan.	Lesser of $66,000 (for 2023; as indexed in later years) or 100% of pre-plan compensation. Qualified plans, other than a plan maintained by a business the employee controls, do not count in determining the limit for 403(b) plans. 457(b) plans do not count in determining the limit for a governmental 403(b) plan. Other 403(b) plans are combined in determining the limit.	Same as the limit on elective contributions.
Is there an excise tax on excess contributions?	No.	Governmental plans are exempt.	Only if the 403(b) contract is a custodial account described in Code Section 403(b)(7), as opposed to an annuity contract.	Yes.
Can the plan provide for participant loans?	Yes, in the case of a governmental 457(b) plan, subject to maximum limits under 72(p) to avoid taxation of the participant; loans from other 457(b) plans will give rise to participant taxation.	Yes, subject to maximum limits under 72(p) to avoid taxation of the participant.	Yes, subject to maximum limits under 72(p) to avoid taxation of the participant.	No. A loan is always taxed as if it were a distribution.
What are other effects of violating limits on total contributions?	In the case of a governmental plan that includes the limits in the plan but violates them administratively, the plan continues to be considered a 457(b) plan until the first day of the first plan year that begins more than 180 days after the date the IRS notifies the employer of the problem and will continue to be a 457(b) plan then if the employer has fixed the problem. In the case of a nongovernmental plan, a covered employee must pay income taxes in the year in which the amounts vest. The employer must deduct and pay FICA (Federal Insurance Contributions Act) taxes in the year in which the amounts become reasonably ascertainable; however, the employer need not deduct and pay income tax withholding before it actually or constructively pays the wages. [TAM 199903032 (Oct. 2, 1998)] Thus, income taxes, income tax withholding, and FICA taxes may occur in three separate years. There may be additional penalties if the plan violates Code Section 409A, since a plan that does not meet the requirements of Section 457(b) is subject to Section 409A.	Disqualification of the plan.	Only amount in excess of the limits is taxable.	If the deemed IRA is a free-standing plan, only the amount in excess of the limits is taxable. However, if the deemed IRA is part of another plan (e.g., a 401(a) plan), a violation on the part of the deemed IRA can jeopardize the qualification of the entire 401(a) plan.
Are correction programs available?	IRS will accept submissions relating to governmental 457(b) plans on a provisional basis outside of EPCRS. However, due to a governmental plan’s ability to self-correct, as noted above, obtaining IRS approval for a correction is typically unnecessary. IRS generally will not enter into an agreement to address problems associated with a nongovernmental plan. However, it may consider a submission where, for example, the plan was erroneously established to benefit the entity’s nonhighly compensated employees and the plan has been operated in a manner that is similar to a qualified plan.	EPCRS.	EPCRS. While initially 403(b) plans could use EPCRS only to a very limited extent, revenue procedures culminating in Revenue Procedure 2021-30 [2021-31 IRB 172] have greatly expanded the circumstances in which EPCRS is available. However, the more limited procedures (found in Revenue Procedure 2008-50 [2008-35 I.R.B. 464]) must still be followed for 403(b) plan failures occurring prior to January 1, 2009.	No.
Can money be rolled in from a 401(k) or other qualified plan, or from a 403(b) plan?	Yes, for a governmental 457(b) plan; no for nongovernmental plans.	Yes.	Yes.	Yes.
Can money be rolled in from a 457(b) plan?	Yes, if both the transferring and receiving plans are governmental 457(b) plans. For a nongovernmental 457(b) plan, rollovers from another 457(b) plan are not available, but similar results may in some instances be available by direct transfer from another 457(b) plan.	Yes, if the transferring plan is a governmental 457(b) plan. No if the transferring plan is a nongovernmental 457(b) plan.	Yes, if the transferring plan is a governmental 457(b) plan. No if the transferring plan is a nongovernmental 457(b) plan.	Yes, if the transferring plan is a governmental 457(b) plan. No if the transferring plan is a nongovernmental 457(b) plan.
Can tax on distributions be deferred by rolling them into another plan or an IRA?	No for nongovernmental plans; yes for governmental plans. For nongovernmental plans, can defer taxes only by direct transfer to another 457(b) plan.	Yes.	Yes.	Yes.
Is there a trust requirement?	A governmental 457(b) plan must be funded by assets insulated from the claims of the employer’s creditors, such as a trust or an insurance contract. A nongovernmental plan may not be funded, except by an investment that is subject to the claims of the employer’s general creditors.	Yes, unless plan is fully insured.	No, but must have annuity contracts or custodial accounts.	No, but must have a custodial account. However, a governmental employer can itself be the custodian.
Are funds protected from creditors of employees?	Yes. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Pub.L. 109–8, 119 Stat. 23, 2005).	Yes. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Pub.L. 109–8, 119 Stat. 23, 2005).	Yes. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Pub.L. 109–8, 119 Stat. 23, 2005).	The protection afforded IRAs (whether traditional or Roth) is limited to an “aggregate value” of $1 million, which is adjusted once every three years for inflation. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Pub.L. 109–8, 119 Stat. 23, 2005).
Is there a prohibition on discrimination in favor of highly compensated employees?	No. In fact, a nongovernmental 457(b) plan must be limited to a select group of management or highly compensated employees, in order to prevent the prohibition on funding under section 457(b) from conflicting with the normal ERISA requirement that a plan be funded.	Yes, except in the case of a governmental or church plan. These rules include restrictions on the actual level of contributions as well as on the opportunity to contribute. The rules do not apply, however, if no highly compensated employees participate in the plan.	In the case of salary reduction contributions, simplified rules measure only availability of the right to make contributions, not actual contribution levels. In the case of other contributions, governments and nonelecting church plans are not subject to nondiscrimination requirements, but other employers are. For this purpose, a church-controlled organization is not a church.	Yes, as to availability. However, no testing need be performed on the amounts actually deferred by employees.
Are there salary reduction distribution restrictions?	Yes.	Yes.	Apply to elective deferrals made after December 31, 1988, and to earnings accrued after December 31, 1988 on both pre-1989 and post-1988 deferrals.	There are penalties on early withdrawal, but not prohibitions.
Is there an exception to salary reduction distribution restrictions for hardships?	Only if the hardship represents an “unforeseeable emergency.”	Yes.	Yes, but the exception applies only to the salary reduction contributions themselves, not to income on them.	NA
Is there an exception to salary reduction distribution restrictions for plan terminations?	Yes.	Yes.	Yes. Treas. Reg 1.403(b)-10.	NA
Do the minimum distribution requirements of section 401(a)(9) apply?	Yes.	Yes.	Yes, for elective deferrals made after December 31, 1988, and to earnings accrued after December 31, 1988 on both pre-1989 and post-1988 deferrals. Pre-1987 account balances are subject to less stringent rules under which distributions need not commence until the later of termination of employment or the date on which the employee attains (or in the case of a deceased employee, would have attained) age 75.	Yes.
Does Title I of ERISA apply?	Governmental 457(b) plans are exempt from Title I of ERISA (but there may be concerns as to a plan’s continuing status as a governmental plan if it covers independent contractors). Nongovernmental plans covering employees must limit coverage to a select group of management or highly compensated employees in order to avoid ERISA Title I coverage, which would require funding incompatible with a nongovernmental 457(b) plan. An elective governmental or nongovernmental 457(b) plan covering only independent contractors is not subject to ERISA. (A nonelective deferred compensation plan covering only independent contractors is not subject to 457(b).)	Yes, except in the case of a governmental or church plan.	No, in the case of a salary-reduction-only plan that meets certain requirements, or a governmental or church plan; yes in other instances.	No.
Do prohibited transaction rules apply?	Cross-reference to Code Section 401(a) in Code Section 457(g) may make Section 503(b) prohibited transaction rules applicable to governmental 457(b) plans. Nongovernmental 457(b) plans are not covered by prohibited transaction rules.	Strict prohibited transaction rules under I.R.C. § 4975 apply to plans other than governmental or nonelecting church plans. Looser prohibited transaction rules under I.R.C. § 503(b) apply to governmental plans. In addition, some states apply prohibited transaction rules to governmental plans.	No, unless imposed by state or local law.	Yes, under Code section 408.
Are IRS determination letters available?	Only possible through National Office private letter ruling; no prototype submissions.	For individually designed plans, only upon the inception or termination of the plan, or certain corporate events. In future years, the IRS may permit determination letter requests in certain other situations, subject to IRS staffing availability. Rev. Proc. 2016–37, 2016-29 IRB 136, as modified by Rev. Proc. 2019-20, 2019-20 I.R.B. 1182 and Rev. Proc. 2022-40. Opinion letters will continue to be available for pre-approved plans on a six-year cycle.	Opinion letters available for prototype 403(b) plans, and advisory letters available for volume submitter 403(b) plans. Effective July 1, 2023, determination letters will be available for individually designed 403(b) plans upon their inception or termination, or in the case of a corporate merger, acquisition, or other similar business transaction. Rev. Proc. 2022-40.	No.
Is there IRS audit activity?	IRS is targeting 457(b) plans for audit.	No specific focus on 401(k) plans.	IRS is targeting 403(b) plans for audit.	No specific focus on deemed IRAs.
What state income tax considerations apply?	A few states have not brought their rules regarding 457(b) plans into conformity with federal law, which may lead to more restrictive rules in those states.	Typically none.	Some states (e.g., New Jersey and Pennsylvania) impose income taxes on all 403(b) contributions.	Typically none.
Are amounts deferred treated as "remuneration" for purposes of the Code section 4960 excise tax on excess remuneration?	Yes, at that point at which they are vested, in the case of a nongovernmental 457(b) plan. No, in the case of a governmental 457(b) plan.	No.	No.	No.
What practical considerations apply?	457(b) plans are not really understood as a 401(k) equivalent. Fewer entities provide services to 457(b) plans than to 401(k) or 403(b) plans. In many instances, the investment choices readily available are much less favorable. 457(b) plans have become quite attractive as a supplement to 401(k) or 403(b) plans, if an employer wishes to provide for larger tax deferred contributions. For state and local governmental entities other than public schools, a 457(b) plan may be the only form of elective pre-tax contributions available.	Determination letters available for individually designed 401(k) plans on their inception or termination, or on certain corporate events. Opinion letters available for pre-approved 401(k) plans on a six-year cycle. Overwhelming popularity makes 401(k) plans a recognizable commodity to most individuals. Good software and support materials are available. Better understanding in vendor community	Opinion letters available for prototype 403(b) plans and advisory letters available for volume submitter 403(b) plans. 403(b) plans are not really understood as a 401(k) equivalent. Good 403(b) software not as available. Vendor understanding of 403(b) plans more limited.	These plans do not provide a tax advantage over independently owned IRAs. Rather, they are designed to allow an employer to facilitate IRA ownership by employees.

Comparison of 457(b) Plans, 401(k) Plans, 403(b) Plans, and Deemed IRAs (Posted on November 24, 2022 by Carol V. Calhoun)

Related Posts: