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What is a 457f?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 04 November 2016
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A 457f plan is a method of deferred compensation used by companies or businesses as a way to keep their top executives from leaving to join other employers. When such a plan is utilized, the employer essentially contributes money to this plan but is still technically the possessor of the funds within it, thereby allowing the employee to defer the tax responsibilities of this money. At the time of the employee's retirement, he or she then takes possession of all of the funds within the 457f plan. United States tax laws stipulate that there must be a substantial risk of forfeiture for the plan to be legal, meaning that the employee would lose all funds in the plan if he or she departed for another job.

Top executives and management personnel are often in high demand, which means that their employers have to deal with the negative impact when one of those top employees departs. As such, companies need ways to keep such top-level 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 in case the employee does decide to leave.

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Funds in a 457f plan are technically the property of the employer as long as the account is in existence. This is how the employee is able to keep from paying taxes on the amount in the fund. The risk of this situation for the employee comes if the employer should ever go bankrupt, because the employee would have no claim on the lost funds.

By using a 457f fund, the employee is essentially getting another benefit or investment plan that is separate from his or her individual retirement account or 401K plan. These plans, as beneficial as they are to the employee, are usually reserved for highly paid executives or managers within a company. The money in the fund may be invested but cannot be claimed by the employee until a specified date, usually at the time of retirement. In the case of an employee's death or disability, the funds may also be transferred from the employer.

There must be a substantial risk of forfeiture for a 457f plan to be legal. This means that there has to be a solid chance that the employee might leave for another job before claiming the money within the fund. If this occurs, then the employee forfeits the fund, and it stays in the possession of the employer. The forfeiture stipulation assures that the money in the fund actually does belong to the employer until the time it is legally passed over.

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