Benefits Plans - 457(b) Deferred Compensation Plan: How Does the 457(b) Plan Work?

What is a 457(b) Plan?

A 457(b) is a non-qualified deferred compensation plan. You authorize pre-tax payroll contributions that are invested with mutual funds and annuities through TIAA-CREF and/or Fidelity Investments. Contributions and earnings are tax-deferred until you take a distribution. You do not pay state or federal income taxes on your contributions at the time they are made. However, you still pay the 7.65% FICA (Medicare and Social Security) tax.

What is the purpose of a 457(b)?

The purpose of a 457(b) is to allow a person to postpone or defer receiving earned compensation and the associated tax liability until a future date, typically in retirement.

Who may sponsor a 457(b)?

These plans can only be offered by state or local governments and nonchurch nongovernment tax-exempt organizations. Any agency or instrumentality of a state may offer a 457(b), including a public college or university.

Who contributes?

You contribute a fixed dollar amount with each paycheck; there is no University contribution.

What is the 457(b) contribution limit?

The annual limit for 2014 is $17,500; the limit is $23,000 if you are age 50 or older.

May I contribute to both the U-M 457(b) and the Retirement Plan?

Yes. Contributions made to one plan do not offset the amount you may contribute to the other. This allows you to essentially double your pre-tax contributions by participating with both plans.

What are my income options?

You can select a variety of payment methods at any age once you have terminated employment or retired, such as a lifetime or fixed-period annuity, cash withdrawals, or minimum distribution at 70½.

Is a 457(b) plan subject to IRS Minimum Distribution?

Yes. You must begin taking distributions by April 1 following the calendar year in which you reach age 70 ½, or retire or terminate employment, whichever is later.

May I rollover a 457(b)?

Yes. Once you have terminated employment or retired, you may rollover your accumulations into an IRA, 401(k), 401(a), 403(b), or another governmental 457(b). You may also elect a rollover at age 70 ½ as a current member of the faculty or staff. You lose an important tax benefit if you elect a rollover, see Rollovers Out of the U-M 457(b) Plan for details.

Are 457(b) withdrawals made prior to age 59 ½ subject to the IRS 10% penalty?

No. The withdrawal penalty does not apply to contributions and earnings in a 457(b) plan. However, withdrawals of amounts you have rolled into the U-M 457(b) from another type of plan are generally still subject to the penalty. Your ability to take a withdrawal from the U-M 457(b) while a current member of the faculty or staff is very limited. See Cash Withdrawals for details.

Enrolling in the 457(b) does not enroll you in the Retirement Plan.

The 457(b) allows you to save on a tax-deferred basis. However, it is not the retirement plan for University faculty and staff. The 457(b) is a separate plan that can help you reach your savings goals, but remember to enroll in the U-M Basic Retirement Plan, if you are eligible.

Next: 457(b) or an SRA?

Limitations
The University of Michigan in its sole discretion may modify, amend, or terminate the benefits provided with respect to any individual receiving benefits, including active employees, retirees, and their dependents. Although the university has elected to provide these benefits this year, no individual has a vested right to any of the benefits provided. Nothing in these materials gives any individual the right to continued benefits beyond the time the university modifies, amends, or terminates the benefit. Anyone seeking or accepting any of the benefits provided will be deemed to have accepted the terms of the benefits programs and the university's right to modify, amend or terminate them.