The biggest reason that a tax-exempt employer would offer a 457(b) plan is higher deferral limits. Without regard to catch-up limits, the most an individual can defer to a 401(k) plan in 2014 is $17,500. A 457(b) plan may allow the employee to defer an additional $17,500! This can be a real perk to higher paid employees of the tax-exempt organization.
A 457(b) plan is also a possible solution if the tax exempt’s 401(k) plan is failing the ADP or ACP test. For example, if the highly compensated employee (‘HCE’)s are limited to deferring just $5,000 to the 401(k) plan because of low participation by the non-highly compensated employees, a 457(b) plan would allow the HCEs additional tax deferral opportunities.
Other benefits include the following: Independent contractors can participate and no 10% penalty for withdrawals before age 59-1/2.