Updated July 15, 2026
Key Takeaways:
- Nonprofits and associations often use 457(b) and 457(f) plans to attract, retain, and reward key employees and executives. The two plans are related but serve different goals.
- A 457(b) plan is a supplemental savings vehicle that lets a select group of highly compensated employees defer additional pre-tax pay beyond their 401(k) or 403(b) limits.
- A 457(f) plan is a retention and incentive tool with no IRS contribution limits, built around a vesting condition.
- Choosing between 457(b) vs. 457(f) plans often comes down to what your organization is trying to accomplish.
- Both plans are unfunded and nonqualified. The deferred amounts remain assets of the organization, subject to its creditors, until distribution.
- These arrangements typically carry significant tax, funding, and governance implications for the organization, so it is often beneficial for legal counsel, a tax adviser, and an investment adviser to be part of the conversation on plan design.
Common Deferred Compensation Plans
Nonprofits and associations that want to offer key employees or executives deferred compensation beyond what a standard 401(k) or 403(b) allows typically turn to 457(b) and 457(f) plans, often to attract, retain, and reward top talent. Only tax-exempt organizations and state and local governments can offer them, so an organization’s tax-exempt status is the eligibility gate. Both are governed by Section 457 of the Internal Revenue Code, which sets the rules for deferred compensation at these employers, and that shared origin is why the two plans are usually evaluated together.
When considering offering one or both of these plans, it is important to understand that they support different goals. A 457(b) plan is intended to supplement savings, while a 457(f) plan is usually tied to retention.
“A 457(b) plan is intended to supplement savings, while a 457(f) plan is usually tied to retention.”
457(b) vs. 457(f): A Side-by-Side Comparison
What are 457(b) Plans: Supplemental Retirement Savings
A 457(b) plan is a tax-advantaged deferred compensation plan that a nonprofit can offer to a select group of employees, letting them set aside additional pre-tax pay for retirement. Its primary purpose is to supplement retirement savings for executives and other highly compensated employees who have maxed out their annual 401(k) or 403(b) contributions. These plans function similarly to 401(k)s or 403(b)s, but they differ in a few important ways that often lead to misconceptions: eligibility is limited to a select group rather than all staff, the contribution limit stacks on top of a 401(k) or 403(b) instead of counting against it, the assets stay the organization’s until they are paid out, and distributions cannot be rolled into an IRA.
How 457(b) Plans Work
Contribution Limits
A 457(b) has its own annual contribution limit, set by the IRS and adjusted periodically, with current figures published on the IRS website. It generally matches the standard 401(k) or 403(b) limit, though that is subject to change. The key feature is that this limit is separate from the qualified plan limit: an eligible employee can contribute the maximum to a 401(k) or 403(b) and the maximum again to the 457(b) in the same year, roughly doubling what they can set aside pre-tax. At a tax-exempt organization, the employee’s deferrals and any employer contributions count toward that single 457(b) limit rather than stacking separately, and all of it grows tax-deferred.
Eligibility
A 457(b) can only be offered to a select group of management or highly compensated employees, an arrangement often called a “top-hat” plan. In practice that means senior leaders and the organization’s most highly paid staff, not the general workforce, so it cannot be offered to everyone the way a 403(b) can. If the eligible group is too broad, the plan can lose its tax-deferred treatment, which is the whole benefit: participants could be taxed on the money right away instead of deferring it. For a plan participant, that can matter, since paying tax during working years may mean a higher rate than deferring the income to retirement, when their rate may be lower.
Neither the IRS nor the Department of Labor defines an exact size or salary cutoff for this group, which is the part that causes confusion. Generally it is a small percentage of total staff, though at a small organization where most employees are already senior or highly compensated it can be a larger share, as long as each person genuinely qualifies. Because there is no set number, legal counsel usually helps decide who is eligible.
Vesting and Distributions
An employee’s own contributions to a 457(b) are fully vested. If the organization also makes contributions, it can put those on a vesting schedule, so whether they vest immediately is the employer’s design choice.
The balance usually becomes payable when the employee leaves, whether they resign, are let go, or retire. Leaving does not automatically start payments right away: if the plan allows it and the participant elected it, payments can begin at a later date, such as a target retirement age. These options vary by plan, and federal rules require payments to begin by a set age.
If the plan provides for it, the employee need not take the whole balance at once, choosing instead between a lump sum and installments over a set number of years. Installments are often set to begin at departure and spread the tax across those years, instead of the whole balance landing in a single year. However it is paid, the money is taxed as ordinary income in the year received and cannot be rolled into an IRA. Unlike a 401(k), a 457(b) has no early-withdrawal penalty, so leaving before a traditional retirement age adds no penalty.
Because vesting and distributions are very plan specific, it can help to include legal counsel, your investment adviser, and a tax professional in plan document discussions.
Catch-Up Provisions
A 457(b) can also offer a special catch-up, though not every plan includes it because it adds administrative complexity. Set by federal tax rules, it applies only in the final three years before the participant’s normal retirement age and lets someone make up for years when they contributed less than they were allowed. In each of those years, the participant may contribute up to twice the normal limit, but only up to the total they left unused earlier. Because that figure depends on past under-contributions, the plan administrator calculates what each participant can use.
Pros and Cons of 457(b) Plans
For the organization, a 457(b) is a relatively low-cost way to strengthen an executive compensation package.
Pros of 457(B) Plans
- A recruiting and retention tool that offers senior leaders meaningful tax-deferred savings beyond the 401(k) or 403(b) limits.
- Flexible and optional to fund: executives can defer their own pay, or the organization can add employer contributions on a vesting schedule.
- Can be simpler to set up and run than a 457(f), which often involves more complex vesting and tax rules.
Cons of 457(b) Plans
- Eligibility is restricted to a select top-hat group, and going too broad can jeopardize the tax treatment.
- The organization takes on administration: the plan document, distribution elections, income-tax withholding, and W-2 and Form 990 reporting.
- Because the assets stay the organization’s and are exposed to its creditors, participating executives carry a risk the organization should be ready to explain and manage.
Logistical Considerations for 457(b) Plans
Running a 457(b) comes with a few responsibilities. The organization needs a written plan document, approved by the board or the compensation committee, that sets out eligibility, the contribution structure, and distribution timing. It also decides how the retirement plan’s investments are selected and monitored, usually under the same fiduciary process it applies to its 403(b) or 401(k). The plan then has to be administered day-to-day, including income-tax withholding when amounts are distributed and reporting them on the employee’s W-2 and the organization’s Form 990. Because distributions are taxed as ordinary income and cannot be rolled to an IRA by the employee, how the organization structures the payout options shapes the tax outcome for participants, which is worth weighing during plan design.
On the funding side, the money remains the nonprofit’s until it is distributed, so the employee is deferring ownership of those dollars and stands as an unsecured creditor of the organization until paid.
What Are 457(f) Plans: Retention and Incentive Tool
A 457(f) plan is a nonqualified deferred compensation arrangement designed to retain and incentivize key executives. Unlike a 457(b), it has no IRS contribution ceiling, and the employer, not the employee, funds it. The defining feature is that the promised amount is taxable to the executive when it vests, not when it is paid, which shapes how these plans are designed and communicated.
How 457(f) Plans Work
No IRS Contribution Limits
A 457(f) has no specific contribution limit, so an employer can set aside substantial sums, sized to the role in the employment agreement. There are no employee contributions; only the employer sets aside funds for the key employee. That flexibility is what makes the 457(f) useful as a retention or recruiting incentive.
Substantial Risk of Forfeiture
For the deferred compensation to stay out of the executive’s taxable income during the deferral period, the executive’s right to the money must be subject to a substantial risk of forfeiture. In practice that means a vesting schedule tied to continued service through a stated date or to the achievement of stated performance goals. If the executive leaves before vesting, the award is forfeited, which is what creates the retention pull. Because a 457(f) is an unfunded promise, a forfeited award is simply never paid, and any assets the organization had set aside to fund it remain the organization’s to use.
“If the executive leaves before vesting, the award is forfeited, which is what creates the retention pull.”
Tax Timing
When a 457(f) award vests, the entire amount becomes taxable to the executive that year, regardless of when it is paid. That drives the payout design: most organizations pay at vesting, often a lump sum after five to ten years of service, so the executive has cash to cover the tax. An organization can spread the payout over more years for its own budget reasons, but it generally still pays enough at vesting to cover the tax, since paying later without that would leave the executive taxed before receiving the money.
Section 409A Compliance
Section 457(f) sets the income tax treatment, but a second set of rules, Section 409A of the Internal Revenue Code, also applies. Section 409A is the federal tax law governing nonqualified deferred compensation, with strict requirements for when payment timing and deferral elections must be locked in. It applies to 457(f) plans, not to an eligible 457(b). The errors that trigger penalties are timing and documentation problems, such as letting the executive change when they are paid, accelerating a payment, or a non-compliant plan document. The penalty then falls on the entire deferred amount, not just the mistake: it can become taxable to the executive early and carry an added tax. Because of that risk, a 457(f) should be drafted by counsel familiar with both 457(f) plans and Section 409A.
Pros and Cons of 457(f) Plans
For the organization, a 457(f) plan is a highly beneficial tool for executive retention, with the tradeoff of additional plan design and administrative work.
Pros of 457(f) Plans
- No IRS contribution limit, so the organization can size the award to the role and the goal.
- Highly customizable vesting, which makes it a strong tool for retaining or recruiting key executives.
- Any funds the organization sets aside can be invested much like its reserve portfolio. Additionally, if an executive leaves before the vesting date, the organization keeps those funds to use for its own purposes.
Cons of 457(f) Plans
- Setting up and running the plan takes real work: a customized legal document, Section 409A compliance, and ongoing administration.
- The organization has to fund the promise and budget for what can be a large payout when the award vests, including paying payroll taxes and potentially other employer taxes.
- The full award shows up as compensation on the organization’s public Form 990 that year, so it can appear as a large, visible pay figure depending on the organization.
Logistical Considerations for 457(f) Plans
Running a 457(f) falls almost entirely on the organization, beginning with tax and reporting. Payroll taxes are generally due when the award vests rather than when it is paid, so the organization has to withhold and report on the right schedule. The vested amount is also reported as compensation on the organization’s public Form 990, so a sizable award can appear there as a large, visible pay figure. If the executive’s total pay for the year crosses $1 million, the organization also owes a 21% excise tax on the amount above that, so it can be beneficial to have a tax adviser model the number before an award is approved.
Because the payout can be large, organizations often set money aside in advance, usually in a dedicated account or trust tied to the obligation, with the board overseeing how it is invested and whether it is keeping pace with the projected payout. That money is not protected for the executive; it remains the organization’s asset until it is paid out.
Because a 457(f)’s terms are negotiated separately for each executive, it is usually documented individually, either as its own plan or as a separate agreement under a single plan, and administered year to year.
Questions Your Compensation Committee Should Ask Before Approving or Selecting a Deferred Compensation Plan
The questions below cover choosing between 457(f) vs 457(b) plans and the details specific to each. Committees usually work through them with additional advisers such as legal counsel, a compensation consultant, their investment adviser, and a tax adviser.
Choosing between 457(b) vs 457(f) Plans
- What is your organization trying to accomplish: helping executives save more for retirement, or retaining and rewarding key leaders? A 457(b) is built for the first, a 457(f) for the second, but an organization can also choose to offer both.
- Who do you want to offer the plan to, an individual or a group of employees? If a group, do they qualify as management or highly compensated employees?
- How does the arrangement fit the organization’s overall compensation philosophy and budget?
Questions for a 457(b)
- Will the organization make employer contributions on top of what executives defer, and if so, will they vest immediately or on a schedule?
- What distribution options, such as a lump sum or installments, will the plan offer, and who will administer it?
- Who will select and oversee the plan’s investment options, and under what fiduciary process?
- Will the plan include the special catch-up in the final three years before retirement age?
Questions for a 457(f)
- Is the substantial risk of forfeiture strong enough to withstand IRS scrutiny?
- What is the vesting schedule, and what happens to the award on each form of early separation (voluntary, for cause, death, disability)?
- How will the obligation be funded between now and the vesting date, and who monitors the funding against the projected payout?
- In the year the award vests, how large will the publicly reported compensation figure on Form 990 be, and how will the board be prepared to explain it?
- Has counsel confirmed Section 409A compliance, including the timing of elections and distributions?
- What happens if the organization is acquired, dissolved, or restructured before the vesting date?
Considering a 457(b) or 457(f) for your organization?
Raffa works alongside boards and compensation committees on the investment side of these plans.
Final Thoughts on Deferred Compensation Plans
457(b) and 457(f) plans serve distinct purposes in nonprofit executive compensation. A 457(b) supplements retirement savings, while a 457(f) is a retention tool with significant tax and liquidity implications. Understanding the differences and planning needs of each helps an organization select and design the appropriate deferred compensation plan or plans for their needs.
Raffa supports the investment discussions surrounding these plans: for assets set aside to support a 457(f) obligation, we provide investment management and reporting; for a 457(b), we provide investment fiduciary support, plan benchmarking, and participant education, under the same fiduciary process we apply to your 403(b) or 401(k). As Raffa is an investment advisory firm, we do not act as legal counsel, draft plan documents, or provide tax advice; those roles belong to your legal counsel and tax adviser.
Frequently Asked Questions: 457(b) and 457(f) Plans for Nonprofits
What is the difference between a 457(b) and a 457(f) plan?
A 457(b) is a supplemental savings plan with annual IRS contribution limits, available to a select group of management or highly compensated employees; contributions are generally vested when made, and distributions are taxed when received. A 457(f) is a deferred compensation arrangement with no IRS contribution limits, built around a substantial risk of forfeiture, and the deferred amount becomes taxable when it vests rather than when it is distributed. In short, a 457(b) is typically for additional tax-deferred savings and a 457(f) for retention or recruiting.
Can a nonprofit offer both a 457(b) and a 457(f) to the same executive?
Yes. Many organizations use both together: the 457(b) adds tax-deferred savings on top of the 403(b) or 401(k), and the 457(f) serves as a retention or recruiting incentive. The combined design should be reviewed by counsel and a compensation consultant for consistency with the organization’s overall compensation philosophy.
Is a 457(f) plan taxable at vesting?
Generally, yes. With a 457(f), the deferred amount becomes taxable to the employee in the year the substantial risk of forfeiture lapses, that is, when it vests, regardless of when the cash is actually paid. This differs from a 457(b), where the tax applies at distribution. Employers often structure a 457(f) plan payout to occur at vesting so the employee has cash on hand to cover the tax.
Can a 457(b) plan be rolled into an IRA?
No. Distributions from a 457(b) at a tax-exempt employer cannot be rolled into an IRA and are taxed as ordinary income in the year they are received. Because a lump sum in a single year can create a large tax event, many plans allow installment distributions that spread the income over several years, although this is not always the case.
Are 457(b) and 457(f) plan assets protected from creditors?
No. Both plans are unfunded, so the deferred amounts remain assets of the organization and are subject to the claims of general creditors until distribution. Even assets set aside in a rabbi trust remain subject to creditors. This credit risk is a defining feature of nonqualified deferred compensation at tax-exempt employers.
What is a substantial risk of forfeiture in a 457(f) plan?
A substantial risk of forfeiture is a condition the employee must satisfy to earn the deferred compensation, usually continued service through a stated date or the achievement of stated performance goals. It is what allows the compensation to stay out of taxable income during the deferral period. If the condition is too easy to satisfy, the IRS may treat the award as already vested and accelerate the tax.
Dennis Gogarty, CFP®
President & Co-Founder
Dennis Gogarty, CFP® is President and Co-Founder of Raffa Investment Advisers, a firm he purpose-built to serve nonprofit organizations and membership associations. For more than 20 years, he has advised nonprofits and associations on fiduciary-focused reserve strategy, investment policy development, asset allocation, and governance best practices. Raffa currently serves more than 174 nonprofit clients nationwide (as of December 31, 2025). Dennis is a frequent speaker for nonprofit and association audiences and has presented for numerous organizations including the Council on Foundations, AICPA, BoardSource, and the American Society of Association Executives (ASAE).
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