What is the primary function of Section 457 plans?

The primary function of Section 457 plans is to serve as pure deferred compensation plans or supplemental benefit plans. These plans are specifically designed to allow eligible employees, particularly those in government or non-profit sectors, to defer a portion of their salary into a tax-advantaged account.

Participants in Section 457 plans can make contributions on a pre-tax basis, which reduces their taxable income in the year the contributions are made. The funds in these plans can then grow tax-deferred until withdrawn, typically at retirement. This aspect of deferred compensation gives Section 457 plans their primary categorization as supplemental benefit plans, as they are intended to augment retirement savings beyond what is available through other retirement plans.

Unlike retirement income plans, Section 457 plans do not directly provide income in retirement but rather allow for the accumulation of savings to be accessed later. They are not health plans or investment plans solely for executives; instead, they are broadly available to eligible employees of the sponsoring organizations. This unique focus on deferred compensation highlights the importance of Section 457 plans in helping employees secure additional resources for retirement.