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457 Discrimination Testing?

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Almost, but not exactly.


A 457(b) sponsored by a government employer has no discrimination testing requirement.


A 457(b) sponsored by a tax-exempt (non-profit) corporation must discriminate. That's right, must. Such a 457(b) plan must be a "top hat" plan, meaning it must "primarily" cover upper management and highly compensated employees. The term 'primarily' is up for interpretation of course, and sometimes the IRS disagrees with employers whose 457(b) plans were trying to cover too many employees who are not upper management and who are not highly compensated. The money in this type of 457(b) is not protected against creditors and cannot be in a trust. All funds are still employer assets, even if the employee elected to make the deferral from their own pay. If the employer goes broke, the employees who are owed money from the 457(b) will stand in line with all the other lien holders. With that in mind, maybe it's a good thing it's primarily only for HCEs and upper management.

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