3588 / When does a “severance from employment” occur under a Section 457(b) “eligible” nonqualified deferred compensation plan?

A severance from employment occurs when a participant ceases to be employed by the employer sponsoring the plan.¹ An employee will not experience a severance from employment merely because any portion of his benefit is transferred (other than by a rollover or elective transfer) from his former employer’s plan to the plan of his new employer.² This should be contrasted with the definition of separation of service for a 457(f) “ineligible” plan that is subject to Section 409A restrictive termination of employment definition. It should also be noted that unlike 457(b) “eligible” plans, roll-overs are not allowed for 457(f) “ineligible” plans.

Under the regulations for 457(b) plans, an independent contractor is considered to have separated from service upon an expiration of all contracts under which services are performed, if such expiration is considered a good faith and complete termination of the contractual relationship. Good faith is lacking where a renewal of the contractual relationship or the independent contractor becoming an employee is anticipated.³ Note the similarity of the definition used here in a 457(b) plan for independent contractors and for a 457(f) plan, which are subject to very similar rules covering a separation from service distribution for independent contractors under the Section 409A regulations.