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457 Neophyte Questions

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I have done independent contracting with a hospital for greater than 10 years on a fee for service model. Recently I was asked whether I would be interested in putting my pay in a 457 account deferring payment until later and not receive a separate paycheck a couple times a year as I do now. One of the things mentioned was that I may be asked to wait for a "vesting" period of 5 - 10 years with the 457. My earnings are around the $15500 range but may look to expand to greater in the next few years. One of my questions is the idea of this "vesting" period. Is that a standard or common thing with these accounts? What real advantages would a 457 account have for me as I have already maxed my 15% retirement account? What benefit does this have to the hospital rather than giving me a paycheck as they do now?

 

I appreciate the education.

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I have done independent contracting with a hospital for greater than 10 years on a fee for service model. Recently I was asked whether I would be interested in putting my pay in a 457 account deferring payment until later and not receive a separate paycheck a couple times a year as I do now. One of the things mentioned was that I may be asked to wait for a "vesting" period of 5 - 10 years with the 457. My earnings are around the $15500 range but may look to expand to greater in the next few years. One of my questions is the idea of this "vesting" period. Is that a standard or common thing with these accounts? What real advantages would a 457 account have for me as I have already maxed my 15% retirement account? What benefit does this have to the hospital rather than giving me a paycheck as they do now?

 

I appreciate the education.

 

Your employer hospital is referring to making an employer contribution to your 457 account. That is why the term "vesting" came up. An employee is fully and immediately vested in his own contributions. It is quite common to have a vesting schedule which over the adopted time frame increases your ownership in the employer's contributions from let's say 20 percent the first year to 100 percent by the seventh year. I feel this is a great deal. Note: If you contribute from your paycheck let's say $5000.00 then the hospital can contribute no more than $10,500.

 

Are you compelled to contribute in order get the employer's contribution (match)?

 

I trust I have assisted you.

 

Peace and hope,

Joel L. Frank

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Is the hospital government run, or is it a nonprofit - 501(c )(3)?

 

Interesting. Yes, independent contractors are allowed to participate in 457(b) plans - I know of no other qualified type of plan that allows that. So, your participation in the plan, even though you are not an employee, appears to be just fine. I am not versed regarding 457(f) plans and the related 409A regulations - these are nonqualified deferred compensation plans - BUT the type of plan you are mentioning might be a 457(f) plan instead. I'll explain further down.

 

If they are really talking about a 457(b), then the vesting concerns me. Any amounts contributed are not counted against the 457(b) limit unless (or until) the year in which they become vested. So, for example, if $4,000 is not vested this year, another $4,000 the next year, and so on for 4 years, with earnings, then in the 5th year when that all becomes vested, you may be over the 457(b) limit during that 5th year. Because of that, it is risky, and thus unusual, to have anything other than immediate vesting in a 457(b) plan.

 

If this is a 457(f) plan, then the amounts deferred and the amounts contributed MUST be subject to some type of vesting in order to be deferred from taxation, and 457(f) plans do not have limits. In a 457(f) plan, as soon as the amount is no longer subject to a substantial risk of forfeiture, then it becomes taxable. Again, 457(f) is not my strong area, but I think that's how 457(f) plans work. I do not know if independent contractors can participate in a 457(f) plan anyway.

 

What real advantages would a 457 account have for me as I have already maxed my 15% retirement account?

Under a 457(b) account, the amount out into the 457(b) plan would reduce your taxable income by that amount. Essentially, your 1099-MISC would be lowered by whatever amount was put into the 457(b) (perhaps you would get no 1099-MISC if all of it goes into the 457(b) plan). 457(b) plans are not subject to a 10% penalty if you become eligible for a payment before age 59.5. When you sever your contracts with the hospital, you can defer the payment from the plan to a later date.

 

What benefit does this have to the hospital rather than giving me a paycheck as they do now?

Well, that depends, if they offer some additional "matching", then it is not to their benefit, and it's unlikely that they offer a match (very rare). Since they have a plan, and they've indicated that you are eligible, then it does not appear that they are "benefitting" from this, but if you are eligible, they need to tell you about the plan.

 

If this hospital is a nonprofit entity, not a government entity, then let us know, because there is more you need to know.

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Ask them to allow vested salary reduction contributions. If it's a 457(f)/409A, they'll say no. If it's a 457(b), they'll say sure, here's the form.

 

As a side note, church-related qualified plans and 403(b)s can have non-employee participants.

 

Tom Geer

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