If your work for state or local government or a tax-exempt organization, you may benefit from a 457 plan. This is a retirement savings plan that offers many of the same features as the 401(k) plan for private-sector employees. Distributions from a 457 are considered part of your compensation, and your employer reports them to the Internal Revenue Service accordingly.
Basic Reporting Requirements
Employers report any distribution from a 457 plan on Form W-2, the annual Wage and Tax Statement that arrives each January for payments made in the previous year. The amount of the distribution appears in Box 11, "Nonqualified Plans." The amount is also included in your gross wages that go in Box 1.
You should also expect to receive a statement of the distribution from this "non-qualified" plan from your employer's plan administrator. In IRS lingo non-qualified means the account doesn't have to "qualify" for favorable treatment of a distribution or contribution. The IRS will impose a 10 percent penalty on early withdrawals from a traditional IRA or 401(k), for example, but not a 457 plan, from which you can take penalty-free distributions beginning at retirement, no matter what your age. A 457 distribution is always taxable, with the IRS technically considering contributions to the plan as "deferred compensation." You can elect to cash out the plan, start a series of regular distributions or roll over the funds to another 457 plan.
The statement you receive should show the net amount of the distribution as well as the withholding, as the IRS requires. The withholding can be at whatever rate the employee has calculated on Form W-4 for regular wages or at a flat rate of 28 percent. Federal income tax withholding for the year is shown on Form W-2, Box 2. You report the distribution on Line 16a of Form 1040, your individual tax return, and the distribution becomes part of your adjusted gross income for the year.
If an employee covered by a 457 dies and payments are made to a beneficiary, then the employer reports those payments to the beneficiary on Form 1099-R, The IRS does not require income tax withholding on these payments, although they are subject to income tax.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.