A 457f plan is a deferred compensation method used by companies to prevent top executives from leaving. The employer contributes money to the plan, but technically remains the owner of the funds, allowing the employee to defer tax liability. The plan is legal if there is a substantial risk of loss, meaning the employee would lose all funds if they left for another job. The employee can take possession of the funds at retirement, and the plan is separate from their individual retirement account or 401K.
A 457f plan is a deferred compensation method used by companies or businesses as a way to prevent their top executives from leaving to join other employers. When such a plan is used, the employer essentially contributes money to this plan, but technically remains the owner of the funds within it, allowing the employee to defer tax liability for this money. At the time of the employee’s retirement, he or she takes possession of all funds within the 457f plan. The tax laws of the United States stipulate that there must be a substantial risk of loss for the plan to be legal, which means that the employee would lose all funds in the plan if they went to another job.
Senior executives and management staff are often in high demand, which means their employers have to deal with the negative impact when one of those top employees leaves. As such, companies need ways to prevent that high-end talent from leaving for greener pastures. The 457f is one way to accomplish this, as it provides the employee with a great incentive to stay and gives the employer some protection should the employee decide to leave.
Funds in a 457f plan are technically owned by the employer for as long as the account exists. This is how the employee can avoid paying taxes on the amount of the fund. The risk of this situation for the employee occurs if the employer ever goes bankrupt, because the employee would have no right to claim the lost funds.
By using a 457f fund, the employee is essentially getting another benefit or investment plan that is separate from their individual retirement account or 401K plan. These plans, as beneficial as they are to the employee, are generally reserved for highly paid executives or managers within a company. The money in the fund can be invested but cannot be claimed by the employee until a specified date, usually at retirement. In the event of the death or disability of an employee, funds may also be transferred from the employer.
There must be a substantial risk of loss for a 457f plan to be legal. This means that there has to be a solid possibility that the employee could go to another job before claiming the money within the fund. If this occurs, the employee loses the fund and it remains in the possession of the employer. The forfeiture provision ensures that the money in the fund actually belongs to the employer until such time as it is legally passed.
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