Deferred compensation arrangements, such as 401(k) plans, are widely used in the corporate world. Under the tax code, a similar deferred compensation arrangement is available to government employees and employees of certain tax-exempt nonprofit organizations. These plans—called 457(b) plans—operate similarly to 401(k) plans, allowing employee to earn wages or benefits that are
paid out at a later date, typically upon retirement or termination of employment.
The federal government has recently enacted regulations that modify the rules governing 457(b) plans. Qualifying tax-exempt organizations should be aware of their impact on compliance, reporting, and overall plan administration.
Nonprofit organization employers, specifically non-governmental employers exempt under Internal Revenue Code section 501, that offer deferred compensation plans under IRC 457(b) should be aware that recent changes under the SECURE 2.0 act will require amendments to their 457(b) plan documents. Please note that governmental 457(b) plans follow different rules and are not covered here.
So what is changing?
- The required minimum distribution age is being raised from 70½ to 73, with a planned increase to 75 in 2033. This change allows participants more time for investments to grow, aligning retirement distributions with longer life expectancies.
- Non-spouse beneficiaries have new restrictions on taking distributions. Previously, non-spouse beneficiaries could “stretch” distributions over their life expectancy. Under the new rules, most non-spouse beneficiaries must complete the distributions within 10 years.
- Employers have expanded tax credits for plan startup costs. For employers with up to 50 employees, the tax credit has been raised from 50% to 100% of startup costs. Employers may also receive a tax credit for contributions to employee plans, up to $1,000 per employee, encouraging small employers to offer retirement plans.
- For 457(b) participants in the three years before retirement, catch-up contributions are increased to the greater of $10,000 or 150% of the regular catch-up limit, allowing employees to save more as they approach retirement.
- New rules provide greater flexibility in emergency withdrawals and small account distributions, improving access to funds for employees facing genuine needs.
- Employers may now offer matching contributions for employees who are making qualified payments on student loans.
Tax-exempt employers were required to finalize their 457(b) plan amendments by December 31, 2025, to include the new requirements. To ensure compliance, employers should contact their plan document provider to confirm that these amendments were adopted before the year-end deadline.
