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Employment Law Update: The Interrelation of §457(b) and §457(f) Plans, A Quick Guide

The question is often raised as to why an employer would maintain both a §457(b) plan and a §457(f) arrangement for the same participant. Even though these are separate regimes, they can work together: the §457(b) plan provides limited elective deferral, while the §457(f) arrangement generally provides additional compensation, subject to a substantial risk of forfeiture. Thus, the latter is really deferral of income versus additional compensation for the employee.
 

Basics of a §457(b)

A §457(b) plan must satisfy the requirements for an “eligible deferred compensation plan.” Deferred compensation and related earnings generally are included when paid to a participant under a governmental plan, or when paid or otherwise made available under a tax-exempt employer plan.
 

Basics of a §457(f)

A §457(f) arrangement is not an eligible §457(b) plan. Unlike a §457(b) plan, a §457(f) arrangement generally is not limited by the §457(b) annual deferral ceiling, which is its primary advantage. However, the deferral is not permanently tax-free. When the risk of forfeiture lapses, the participant must recognize the present value of the vested compensation, including earnings to the extent specified in the regulation. That is a significant disadvantage; i.e., a more limited deferral of the extra compensation.
 

A typical structure could work as follows:

• In 2026, an executive defers $24,500 under the employer’s §457(b) plan. That amount is generally not included in income until the applicable distribution event.
• The employer separately promises a $200,000 retention benefit under a §457(f) arrangement, forfeitable if the executive leaves before completing three years of service.
• If the service condition is genuine, the $200,000 generally is not income merely because it is promised or credited during the vesting period.
• When the benefit vests, the participant generally recognizes its present value under §457(f), even if payment is deferred until a later year.

 

Conclusion

A §457(b) plan is the participant’s limited, eligible tax-deferred savings vehicle; a §457(f) plan is a separate supplemental compensation arrangement whose taxation is postponed only while a genuine substantial risk of forfeiture exists. The §457(f) benefit generally does not use the participant’s §457(b) contribution limit, but it can produce income and FICA liability when it vests, before cash is paid. Therefore, careful planning is needed to ensure cash will be distributed shortly after vesting in order for the employee to pay the required taxes. Whiteford's Labor and Employment Practice Group will continue to monitor developments affecting §457(b) and §457(f) plans and advise clients as further guidance emerges.

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The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.