When The Leopard Changes Its Spots: An Employer's Change In Status Imperils Its Eligible 457(b) Plan

Imagine if a minor shift in your organization's status—something seemingly superficial, like the spots of a leopard—could lead to serious financial upheaval. For sponsors of eligible 457(b) plans, this scenario is all too real. If the employer-sponsor of an eligible 457(b) plan changes its status as a governmental or tax-exempt entity, the eligible 457(b) plan will become an ineligible 457(f) plan, with potentially drastic consequences for participants. An employer faced with a change in status must be alert to this problem and take action before the status change occurs.

Types of 457 Plans

Code sec. 457 covers two types of plans, eligible 457(b) plans and ineligible 457(f) plans. Code sec. 457(b) also divides eligible 457(b) plans into two types, eligible 457(b) plans sponsored by a governmental employer ("G-457(b) Plans") and eligible 457(b) plans sponsored by a tax-exempt employer ("TE-457(b) Plans").¹