When it comes to retirement planning, 457(b) plans offer a valuable opportunity for physicians to save and invest for their golden years. However, not all 457(b) plans are created equal. There are two primary types of 457(b) plans: governmental and non-governmental. While both share the common goal of providing tax-advantaged retirement savings through deferred compensation, they differ in several key aspects. In this article, we will explore the nuances between governmental 457(b) plans and non-governmental 457(b) plans, helping you to make informed decisions about your retirement strategy.
Governmental 457(b) Plans
Governmental 457(b) plans are designed for physicians employed by certain tax-exempt organizations. They are backed by state or local governments. These plans often exhibit unique characteristics that set them apart from their non-governmental counterparts.
- Eligibility & Participation
Governmental 457(b) plans typically offer flexibility in terms of eligibility. A wider range of physicians and practice types are generally eligible to participate in these plans. Like other employer-sponsored plans, contributions reduce taxable income and grow tax-free in the plan until withdrawals in retirement. Contributions to these plans are held in trust, providing protections to employees similar to those of 401(k) or 403(b) plans.
One enticing feature of governmental 457(b) plans is the catch-up contribution provision. Physicians over the age of 50 can utilize the same age 50 catch-up provisions available with 401(k) and 403(b) plans. That feature is not available with their non-governmental counterpart. This can be a game changer for physicians who haven't been able to maximize their savings in previous years. Another added bonus is that 457(b) plan contributions do not count against annual deferral limits in 401(k) or 403(b) plans. Like several other employer-sponsored plans, governmental 457(b) plans can offer a Roth contribution option. This is an option not available in the non-governmental counterpart.
- Rollovers & Withdrawals
457(b) plans share similar rollover rules to employer-sponsored plans like 401(k) and 403(b) plans in that physician participants cannot roll their balances into other retirement accounts unless they switch employers or quit. However, if a physician retires early, they may withdraw funds without incurring the usual 10% early withdrawal penalty.
Non-Governmental 457(b) Plans
Non-governmental 457(b) plans cater to physicians of tax-exempt organizations that are not backed by state or local governments and are instead owned by the employer. These plans offer their own unique benefits and considerations.
- Eligibility & Legal Requirements
Non-governmental 457(b) plans often impose stricter eligibility requirements. These plans are commonly referred to as “top hat” plans. Typically, participation is limited to a select group of management or highly compensated employees. 457(b) plans are required to remain exempt from Title I or ERISA since it would require the investments to be held in trust. Assets in these plans are permitted from being held in anything but a rabbi trust. Due to this, assets in non-governmental 457(b) plans can be subject to your employers’ creditors in the case of a bankruptcy issue.
- Contributions & Withdrawals
Like their governmental counterparts, non-governmental 457(b) plan withdrawals are not subject to the 10% early withdrawal penalty. One significant disadvantage of non-governmental 457(b) plans is their limited flexibility in regard to distributions. Physician participants are subject to the withdrawal rules set by the plan. The default schedule is a lump-sum distribution within 60 to 90 days of severance from your employer. This distribution will be sent to your employer as the holder of the assets and routed to you via payroll as ordinary taxable W2 income. Conversely, contributions are generally subject to FICA and Medicare at the time they vest. Some non-governmental 457(b) plans offer more flexible distribution options over many years, but this decision is often irrevocable once elected.
- Rollover Options
Unlike their governmental counterparts, physician participants in non-governmental 457(b) plans cannot rollover their balances into other retirement accounts—with the exception of other non-governmental 457(b) accounts—if they change employers or retire. This lack of portability means less flexibility upon separation of service or retirement.
What to Consider
In summary, 457(b) plans offer valuable opportunities for tax-advantaged retirement savings, but the differences between governmental and non-governmental plans can significantly impact a physician’s retirement strategy. Governmental plans tend to be more accessible to a broader range of physicians, offering more advantageous contribution options. Non-governmental plans, on the other hand, have limited flexibility and fewer protections due to certain legal requirements. This puts a greater emphasis on proactive planning before electing to take part in these plans.
If you have questions or need assistance, please reach out to a professional at FORVIS or use the Contact Us form below. Understanding these distinctions can help empower physicians to make well-informed decisions that align with their financial goals and employment circumstances. When considering the nuances of each of these plan types, consulting a FORVIS Private Client™ professional can provide valuable guidance to help you evaluate if contributing to a 457(b) makes sense for you.