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Learn About the 457(b)

Frequently Asked Questions

Employee and Retiree Service Center (ERSC)

Phone: 301-517-8100
Email: ERSC@mcpsmd.org

Plan Administrators
John Kevin
Dodi Lambert

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Printer-friendly version of this page (PDF) What are the advantages of a 457(b) over other investments? How much can be contributed to a 457(b)? Is there a catch up for those ages 50 and over? What is the Final Three-Year Catch-up? Should I contribute a dollar amount or percentage of salary? What investment products are available in a 457(b) plan? What companies/vendors can I invest with? What should I know before opening a 457(b)? What does it cost to invest in a 457(b)? Do I need an agent or advisor to start a 457(b)? Can I change companies/vendors? Can I change the amount I am contributing? Can I stop contributing? When am I eligible for a distribution from my 457(b)? When must I withdraw money from my 457(b)? Can I borrow money from my 457(b)? May unforeseen emergency withdrawals be made from a 457(b)? What happens to my 457(b) if I leave MCPS? What happens to my 457(b) if I become disabled? What happens to my 457(b) in the event of a divorce? What happens to my 457(b) in the event of death? What happens to my 457(b) at retirement? Upon retirement can I defer unused sick leave (to a 457(b) plan)? Can I purchase pension-service credit with 457(b) dollars? Can I contribute to a 457(b) and a 403(b)? Can I transfer 457(b) money to a 403(b)? How is 457(b) different from a 403(b)? How is a 457(b) different from the Maryland State Teachers Pension plan or the MCPS Employees Pension system? How is a 457(b) different from a 401(k)? Can I contribute to a 457(b) and a Roth IRA? Does MCPS contribute to my 457(b)? How are contributions made? What are the advantages of a 457(b) over other investments? The 457(b) is a deferred compensation savings plan funded through the convenience of payroll deductions. In addition to reducing taxable income, all earnings grow tax deferred. This tax-deferred compounding permits an account to grow faster than an account without these features. Unlike the 403(b), there is no federal 10 percent premature distribution penalty imposed withdrawals from a 457(b). back to top How much can be contributed to a 457(b)? For 2009, participants are permitted to contribute up to $16,500. Additionally there is an Age 50 "catch-up" for those participants that will be age 50 or older by December 31, 2009. back to top Is there a catch up for those ages 50 and over? Yes. Participants age 50 or older at any time during calendar year are eligible to contribute an additional $5,500 to their 457(b), raising their combined contribution amount to $22,000 for 2009. This is known as the Age 50 Catch-up provision. back to top What is the Final Three-Year Catch-up? This optional plan provision was eliminated beginning January 1, 2009. back to top Should I contribute a dollar amount or percentage of salary? Employees have the option of contributing either a fixed dollar amount or a percentage of salary as long as either option does not exceed the maximum contribution amount allowed. The benefit of choosing to contribute a percentage of salary is that as an employee's salary rises, so too will the 457(b) contribution without further action by the employee. Note that if you contribute to both a 403(b) and a 457(b), you must choose the same contribution method (dollar amount or percentage of salary) for each plan. back to top What investment products are available in a 457(b) plan? Annuity Products An annuity is a contract with an insurance company. There are two kinds of annuities: fixed and variable. Fixed Annuities Fixed annuities operate much like certificates of deposit but are not insured by the Federal Deposit Insurance Company (FDIC). Generally, investors are given two interest rates: the current rate and the guaranteed rate. The current rate is the return that the insurance company promises to pay for a set period of time, typically between one and five years. The guaranteed rate, usually lower, is the minimum rate that investors will receive after the current rate expires, regardless of market conditions. Variable Annuities A variable annuity offers a range of investment options — typically mutual funds that invest in stocks, bonds, short-term money-market instruments, or some combination of the three. These investments options are referred to as the subaccount. The value of the investment will vary depending on the performance of the investments in the subaccount. There is usually a death benefit that will pay a beneficiary the greater of the account value or a guaranteed minimum amount, such as total purchase payments. Variable annuities are securities regulated by the Securities and Exchange Commission (SEC). Mutual Funds A mutual fund is an investment that pools money from many A mutual fund is an investment that pools money from many participants and invests in stocks, bonds, short-term money-market instruments, or some combination of the three. The combined holdings of stocks, bonds, or other assets that the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings. There are two kinds of mutual funds: loaded mutual funds and no-load mutual funds. Note: MCPS does not permit contributions to load mutual funds. A load is a commission the investor must pay in order to purchase/sell that fund. All mutual funds have operating costs. Mutual funds are securities regulated by the SEC but are not guaranteed or insured by the FDIC or any other government agency. back to top What companies/vendors can I invest with? A list of vendors that MCPS employees may invest with is found in the Vendors section of this web site. back to top What should I know before opening a 457(b)? Fees, operating rules, and investment objectives can vary greatly among vendors and across investments. Therefore, it is important to understand all of these before you begin contributing to any investment. Additionally, some investments impose surrender charges. This is a penalty some companies charge to withdraw or transfer money. Find out if there are surrender charges before investing. All mutual funds and variable annuities are required to produce a document called a prospectus, which details specific information about investment cost, objective, risk, performance, and operating rules. Ask to see the prospectus before contributing to a variable annuity or a mutual fund. Fixed-annuity products do not have a prospectus. Instead, they have a contract that details operation of the annuity. Ask to see the contract before investing in a fixed annuity. For more information on general investing principles and terms, see the Investment Reference section. For more information on the impact of investment fees on return, estimation of future savings growth, impact on paycheck of a 403(b) and/or 457(b) contribution, and exploration of various distribution scenarios see the Calculators section. back to top What does it cost to invest in a 457(b)? Fees vary greatly among vendors and across investments; what follows are general guidelines. Fixed Annuities There is no separate fee for a fixed annuity. Similar to the way in which a bank makes money on a certificate of deposit, annuity fees are built into the product. For example, an annuity company may believe it can earn X percent on an investment, so it will pay an investor Y percent. The company makes its money on the difference, or spread. Generally this spread is between 1 and 2 percent annually. For specific information on fees, consult the contract provided by the company offering the fixed-annuity before you begin making contributions. Variable Annuities Variable annuities charge on average 2.25 percent a year, according to fund tracker Morningstar Inc. For specific information on fees, consult the prospectus for the variable annuity before you begin making contributions. Mutual Funds Mutual funds charge on average 1.4 percent a year according to fund tracker Morningstar Inc. For specific information on fees, consult the prospectus of the mutual fund before you begin making contributions. back to top Do I need an agent or advisor to start a 457(b)? No. You are free to invest on your own. You may also use the services of a vendor representative or independent financial advisor. Financial representatives can provide valuable services to their clients. These services can include retirement planning, information about state retirement plans, and analysis of other financial needs. Annuity and variable-annuity products are often sold by vendor representatives who are also referred to as agents. All financial professionals charge a fee for their services. In order to determine the value of the service, it is important to know exactly what services are being provided and exactly what fees are being charged. back to top Can I change companies/vendors? Yes, the IRS and MCPS allow participants to change vendors, however it is important for employees to work with both their existing and prospective vendor, in addition to informing MCPS of any changes to your account. MCPS permits exchanges of existing account balances between vendors approved to receive payroll contributions and only to available investment products. Contact your existing provider to find out if any fees may apply. Investments may charge surrender fees, lasting up to ten years. Be aware of all surrender charges before initiating a transfer. If charges do exist you have two choices; pay the fees and transfer the assets or only transfer any assets that are not subject to the fees. Employees do have the option to keep the investments with the current provider while directing future investments to a new provider. As the surrender charges decline or expire, employees may move assets that will not be charged a surrender fee. Complete the exchange documents and submit them to your new provider. Inform MCPS that you are stopping contributions to your current provider and starting contributions to a new provider through a new Salary Deferral Agreement (PDF) form. back to top Can I change the amount I am contributing? Yes, changes can include change of dollar amount or percentages contributed, and change of vendor. Complete another Salary Deferral Agreement (PDF) indicating desired change and send through the PONY or mail to the Employee and Retiree Service, Attn.: Transaction Unit, 7361 Calhoun Place, Suite 190, Rockville, Maryland 20855. back to top Can I stop contributing? Yes. You retain the right to stop contributing at any time. Complete another Salary Deferral Agreement (PDF) indicating this change and send through the PONY or mail to the Employee and Retiree Service, Attn.: Transaction Unit, 7361 Calhoun Place, Suite 190, Rockville, Maryland 20855. back to top When am I eligible for a distribution from my 457(b)?
	Upon severance of employment with MCPS
	Attain age 70-1/2
	After retirement under the plan (please note, if you are employed by MCPS, in any capacity, after retirement you are INELIGIBLE to take distribution from the 457(b) based on retirement or separation of service).
Note that withdrawals will be taxed as ordinary income. See information on Loans, Unforeseen Emergency Withdrawal, Changing Employers, Becoming Disabled, Divorce, Death, and Retirement for more information on accessing 457(b) money. back to top When must I withdraw money from my 457(b)? Generally, you must begin to take withdrawals from your 457(b) no later than April 1 of the year following the year in which you turn age 70-1/2. If you are still working, you can delay withdrawal from your 457(b) until April 1 following the year in which you retire. back to top Can I borrow money from my 457(b)? Yes, but not all providers permit loans from 457(b) accounts. Contact your provider for availability. Plan loans are convenient, but they are not always the right solution. Consider both the positive and negative repercussions to determine if a plan loan is right for you. And, always compare the overall cost of a plan loan with other sources of funds. The true cost of the loan is more then just interest paid; it also includes the lost interest earned and/or growth from market returns. back to top May unforeseen emergency withdrawals be made from a 457(b)? Yes. Unforeseen emergency withdrawals are permitted from your 457(b) account if the employee is under severe financial distress. The IRS definition of what qualifies as an unforeseen emergency is very specific and harder to qualify for than those for the 403(b) plan. The emergency must be unexpected and unanticipated. Furthermore, the employee must have no other resources available to alleviate the stress, such as selling assets or obtaining a loan from a financial institution. Payments may not be made to the extent that the unforeseen emergency is or may be relieved by:
	Reimbursement or compensation by insurance or otherwise;
	Liquidation of the Participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or
	By cessation of deferrals under the Plan [need further explanation of this].
The following events may constitute a severe financial hardship:
	Imminent foreclosure of or eviction from the participant's or beneficiary's primary residence;
	Payment for medical expenses, including non-refundable deductibles and the cost of prescription medication; and
	The need to pay for the funeral expense of a family member.
Unforeseen emergencies will not be granted for financial situations that could be anticipated, for example paying past due taxes, tuition, or child support. You may only withdraw the amount needed to meet your hardship, plus an amount to cover any applicable taxes that will apply. MCPS will require proof of the unforeseen emergency prior to approving the withdrawal. Note: If an employee takes a hardship withdrawal from a 403(b) account IRS guidelines require a six-month suspension of contributions to a 457(b) plan as well. back to top What happens to my 457(b) if I leave MCPS?
	Assets can be transferred to your new employer's defined contribution plan — 401(k), 403(b), 401(a), or 457(b) plan — if permitted. Check with your new employer. This will allow the participant to continue to enjoy tax-deferred growth.
	Leave the money in the plan and continue to enjoy the tax-deferred growth.
	Take a distribution(s). Unlike the 403(b) there is no 10 percent early withdrawal penalty for withdrawing 457(b) upon separation of service. Withdrawals will be taxed as ordinary income.
	Assets may be moved to a Rollover Individual Retirement Account (IRA). This will permit the money to continue to grow tax deferred. Check with the institution currently holding the assets and the institution you wish to transfer to for more details.
back to top What happens to my 457(b) if I become disabled? Unlike the 403(b), disability itself is not a distributable event. However, it may be considered an unforeseeable event and you may be able to withdraw money, subject to certain rules and restrictions. back to top What happens to my 457(b) in the event of a divorce? Some or all of the balance in your 457(b) account may be transferred. Distribution to an alternate payee will be permitted if it is made pursuant to a qualified domestic relations order (QDRO). This is a decree, judgment, or order that meets the qualification requirements of the Internal Revenue Code. Those requirements include the following:
	The order must have been issued under a state's community property or other domestic relations law.
	It must relate to the provision of alimony, child support, or the property rights of a spouse, former spouse, child, or other dependent (alternate payee).
	It must assign to the alternate payee the right to receive all or a portion of the participant's plan benefits.
	It must clearly specify (1) the names and addresses of each alternate payee, (2) the amount or percentage of the participant's benefit to be paid to each alternate payee, (3) the period of time over which the order applies, and (4) each plan to which the order applies.
If a distribution is made to a spouse or former spouse under a QDRO, the distribution may be rolled into a qualified plan or IRA that the spouse or former spouse has. Distribution to any other alternate payee is not eligible for rollover. It is highly recommended that individuals seek the counsel of a qualified attorney in the event of divorce. It may also be necessary to speak with a tax or financial professional. Your vendor should also be able to provide information. Participants should review beneficiary designations annually and update as necessary through the 457(b) provider. back to top What happens to my 457(b) in the event of death? Death benefits are paid to beneficiaries on file with the vendor. How the proceeds are distributed depends upon the age of the participant upon death. Participants should review beneficiary designations annually and update as necessary through the 457(b) provider. back to top What happens to my 457(b) at retirement?
	You are free to begin penalty-free withdrawals upon retirement. Withdrawals cannot begin until separation of service, and they will be taxed as ordinary income.
	You may leave the money where it is, especially if you like your investment choices. The money will continue to grow tax-deferred until age 70-1/2 when you must begin to make withdrawals.
	You are also permitted to move 457(b) money into a rollover IRA with a financial institution of your choice. This will delay taxes until you begin making withdrawals.
Please note: If you are employed by MCPS, in any capacity, after retirement you are INELIGIBLE to take distribution from the 457(b) based on retirement or separation of service. back to top Upon retirement can I defer unused sick leave (to a 457(b) plan)? Yes, thirty days prior to your retirement date you must submit the required paperwork to MCPS [Salary Deferral Agreement — Leave Payout Request (PDF)]. You may rollover a payout of your earned sick pay into your 457(b) account, up to the annual IRS contribution limit. If you are opening a new 457(b) account to receive this payout, you must follow the standard new account procedures detailed below and start the process early enough to accommodate paperwork processing both by MCPS and your 457(b) provider. back to top Can I purchase pension-service credit with 457(b) dollars? Contact the Maryland State Retirement System (800-492-5909) or MCPS (301-517-8100) for details. back to top Can I contribute to a 457(b) and a 403(b)? Yes. You are eligible to contribute the maximum allowable to each plan. See 403(b) FAQs for information on the 403(b) plan. back to top Can I transfer 457(b) money to a 403(b)? No. back to top How is 457(b) different from a 403(b)? 457(b) and 403(b) plans have similarities. For example, both plans allow employees of educational institutions to save money for retirement on a tax-deferred basis. You may choose to contribute to either or both plans. Contribution amounts, including the age 50 Catch-up provision, are the same. But there are differences, which include:
	Assets in a 403(b) are held directly by the employee, while 457(b) assets are held in a trust for the benefit of employees.
	There is no federal 10 percent premature distribution penalty imposed on withdrawals from a 457(b) plan.
	Different rules apply for hardship withdrawals. See 403(b) hardship withdrawal information and 457(b) hardship withdrawal information.
back to top How is a 457(b) different from the Maryland State Teachers Pension plan or the MCPS Employees Pension system? The Maryland State Teachers Pension plan and the MCPS Employees Pension system are defined benefit plans (also know as DB plans) for MCPS school personnel. Employees are automatically enrolled upon employment in one of these two plans based on job classification. Generally, employees who work directly with students are enrolled in the state plan, while employees who do not are enrolled in the county plan. Human resources will determine your status upon employment. Both plans have the same features and provide the same benefits. Employees automatically contribute a percentage of their salary pre-tax to the plan they are enrolled in. Currently employees contribute 5.5 percent of their salary. The county also makes a contribution on behalf of the employee. In general, pension plans provide an income in retirement based on years of service, a retirement factor determined by the plan administrators, and average final salary. A 457(b) plan is a defined contribution (also known as a DC plan). Enrollment in a 457(b) plan is voluntary. Benefits are determined by the amount accumulated by the individual. back to top How is a 457(b) different from a 401(k)? A 401(k) is tax-deferred retirement savings plan offered by private employers. A 457(b) is a tax-deferred retirement savings plan for employees of state and local government agencies, including public school employees. back to top Can I contribute to a 457(b) and a Roth IRA? Yes, subject to adjusted gross income (AGI) limits. The Roth IRA presents another way to save for retirement. Contributions to a Roth IRA do not reduce taxable income, but withdrawals, subject to certain rules, are never taxed. Single workers earning up to $95,000 AGI are eligible to contribute to a Roth IRA. Eligibility for singles phases out at $110,000 AGI. Those married (filing jointly) and earning up to $150,000 AGI are also eligible to contribute. Eligibility for the married phases out at $160,000 AGI. Further details on the Roth IRA can be found in IRS Publication 590, Individual Retirement Arrangements (PDF). This publication may be downloaded from the Internal Revenue Service (IRS). It may also be obtained by calling 1-800-TAX-FORMS. back to top Does MCPS contribute to my 457(b)? No. MCPS provides retirement benefits through a pension plan. back to top How are contributions made? The IRS requires contributions be made via salary deferral in accordance with a written Salary Deferral Agreement (PDF) on file with MCPS. Lump sum contributions and retroactive contributions are not allowed. Twelve-month employees contribute equal amounts over 26 pay periods; ten-month employees contribute over 20 pay periods. Contributions can be set-up as a percentage of salary or dollar per pay period. back to top