FAQ - 457(b)

FAQs about 457 and YOU

Q: What is a Section 457 Plan?

A: A Section 457 Plan is a deferred compensation plan for employees of States, Counties, Municipalities and certain non- profit organizations whereby employees may set aside for retirement. This deferred income may be placed in annuities mutual funds, variable annuities, group variable annuities and insurance contracts, etc.

Q: Are there advantages to purchasing my life insurance/annuity in a Section 457 Plan compared to other tax shelters?

A: Absolutely, it's why Congress authorized the opportunity. If you purchase life insurance in your 457 plan and plan to keep it into your retirement years, you will have the benefit of tax sheltering your premiums (see advantage of pre-tax on front page link). There is a tremendous advantage to you personally to pay for your life insurance or annuity with pre-tax dollars.   This stretches your purchasing power from 30-50% more than after tax plans.  Any distribution from your insurance or annuity values prior to age 59 1/2 will not be subject to the 10% pre-mature distribution penalty now imposed on many tax shelters.

Q: What is the role of Bank of the Ozarks, IRC Section 457 TFAQrust, with my plan?

A:  In 1996 Congress passed the Small Business Job Protection Act which included language that requires all governmental 457(b) plans (your plan) to hold the assets in either a custodial account or a trust for the exclusive benefit of plan participants and their beneficiaries.  This was to protect your money and benefits for retirement.  A trust is the stronger of the two options and Pro Benefits fulfills the requirement for you and your school by providing a trust for these requirements.  Your school was required to establish either a custodial account, or have a trust to hold assets.  In the case of annuities, insurance companies may act as custodian.  THE TRUST IS NOT INVOLVED IN PRODUCT SELECTIONS OR ACCOUNT ACTIVITY - LIMITED TO ADMINISTRATIVE FUNCTION.

Q: Is Life Insurance Protection an investment?

A:  No, Life insurance is just that, protection.  The type of life insurance offered in your 457 Plan builds substantial cash values over a lifetime, but it is not an investment.  The cash value is an added benefit.  Life insurance wears many different hats in someone's life, if done correctly.  Today it may provide for the replacement of income, college for children in the event of your death or just the completion of your financial dreams.  Tomorrow, it may provide for income replacement after retirement.  It is an excellent way to leverage a few dollars into thousands.

Q: What is the difference between Universal Life insurance, Whole Life insurance and an Indexed Universal Life Insurance and an Annuity?

A: Universal Life Insurance is a life insurance product that provides valuable life insurance protection as well as cash values. The cost for life insurance comes out of each premium you pay through your deferrals.   The IRS classifies Universal Life insurance as term insurance with a savings element.  Whole Life Insurance is a life insurance policy where the insurance companies investments pay dividends against future cost of insurance or add dividends to your policy values.  Whole Life Insurance is the most conservative insurance program with excellent guaranteed benefits. Indexed Universal Life Insurance works similar to Universal Life, but the interest earning element is tied to the gains of a stock index allowing the "potential" for a slightly higher gain in cash value that the other two permanent plans of life insurance.  An annuity is a contract with an insurance company in which no life insurance benefit is provided, though your are fully protected for your cash value in the event of death. An annuity contract provides for a stream of income payments to be made to you in return for premium deposits made. The account earns interest and is tax sheltered until such time as a distribution is made.  Additional options are allowed than simply an income. 

Q: Should I participate if I am unsure about my commitment?

A: ABSOLUTELY NOT! Planning for retirement is a sober and serious decision requiring commitment. We do not recommend that you participate in an available plan without being certain that you are committed. We want clients that are well informed and understand the benefits of providing for a lifetime of protection or savings.

 Q:  I've been told that my death benefits are taxable, is that true?

A:  Chances are you heard this from someone wanting you to change your plan.  Remember, they are working for a commission and may be putting their interest ahead of yours.  Your life insurance death benefits are taxable while working since you have not had to pay any Federal or State Income Tax on your premiums.  When you retire, you will receive a 1099(r) for reportable income on the surrender value of your policy.  You can take money from the cash value you have been earning interest on over your career and pay the taxes due and from that point on, your death benefits are tax free.  Basically, you get the tax shelter during your building years when you need all income possible and get a tax free death benefit at the time most of us may face death.

Q: What are the effects on income tax?

A: Money set aside in a Section 457 Plan will have no Federal or State income tax due until a distribution is made from the plan. All FICA and Social Security taxes will be paid at the time the income is earned and will not be due at retirement.

Q: What will my check stub indicate?

A: Your check stub will show the total amount of deferral, but the net effect on your take home pay will be less due to the pre-tax advantage permitted under Section 457. It is possible that even though you purchased a life insurance policy, your stub may indicate annuity in a block provided by your employer.

Q: How are distributions made?

A: Distributions are made "ONLY" under four conditions: At Retirement, At Death, Upon becoming disabled, and upon a separation from Service of the employee.

Q: Can I borrow from my account or take a hardship withdrawal?

A:  Under certain circumstances: As described by the IRS - You must be in a hardship situation that a normally prudent person could not have planned for. Loans for college and home purchase are specifically disallowed by the IRS. In addition, you must provide proof of the hardship and borrow no more than the extent of the hardship. All loans must be repaid within 5 years with after tax dollars.  The hardship must be medical for an immediate family member, death of an immediate family member or a catastrophic event i.e.. hurricane, tornado or flood etc.  Keep in mind that a 457 plan is a "retirement planning vehicle".

Q: What happens when I leave my employer?

A: Pro Benefits Group, provides the majority of information and management tools and currently provides the expense for maintaining the trustee relationship on behalf of your employer, but reserves the right to stop providing a trust based on a working relationship with your school . Employers are responsible for scheduling the annual staff meetings (not to exceed 15 minutes in length), reporting on contributions and any legal distribution.  They are also responsible for keeping the plan up to date.   Generally, if a distribution occurs while in service, the distributions are reported on a 1099r by the trustee for income tax purposes.  Our sister company Advanced Consulting Group offers full Plan Administration for schools that choose to ask for assistance at no fee to the school.

Q: What are the reporting requirements and tax consequences of loans on my policy?

A: There are no current reporting requirements as with 401(k) and cafeteria plans. Distributions must however be reported and loans must be repaid as prescribed by IRS Code 72P.  If a loan is made against your plan, an agreement must be entered into allowing for both repayment and interest.  This is an IRS requirement.  All payments must be paid on time and the entire loan must be repaid within 60 months or a 1099r will be issued for the full amount taxable.

Legal Disclaimer - We do not give tax or legal advise. If you have question regarding specific tax or legal issues we recommend you contact your tax advisor or counsel. Section 457 PBGroup,Inc. 09/01/11