3596 / Do any special rules regarding small distributions and transfers apply to Section 457(b) "eligible" nonqualified deferred compensation plans?
Yes. If a participant's total distribution is $5,000 or less, the participant may elect to receive such amount (or the Section 457(b) plan may provide for an involuntary cashout of such amount) if (1) no amount has been deferred by the participant during the two-year period ending on the date of distribution; and (2) there has been no prior distribution under this provision.1 Contrast this with the small amount distribution rules for 457(f) "ineligible" plans subject to 409A that permits distribution of the 402(g)(1)(b) amount ($24,500 in 2026).
Participants are permitted to make tax-free transfers between eligible Section 457(b) plans as long as the amounts transferred are not actually or constructively received prior to the transfer.2 But according to the regulations, plan-to-plan transfers must meet certain requirements and are permitted only from one governmental plan to another, or from one nongovernmental private tax-exempt plan to another, but not between a governmental plan and a nongovernmental private tax-exempt plan. In addition, no direct transfer may be made from a governmental plan to a qualified retirement plan except in the context of a service credit purchase, discussed in Q 3598. A tax-exempt plan may not directly transfer assets to a qualified retirement plan, and a qualified retirement plan may not directly transfer assets to either a governmental plan or a nongovernmental tax-exempt plan.3
Employees that deferred amounts to a Section 457(b) plan in which they were ineligible to participate cannot transfer such amounts, under IRC Section 457(e)(10), to a Section 457(b) plan in which they are eligible to participate.4