Welcome to May! I am a big fan of flowers, so I love May Day.

But besides flowers, if you work for a non-profit whose 457b cycle is on the half-year, then May Day also brings the start of a special benefit open enrollment period for highly compensated employees.

Wait a minute, did I just say highly compensated employees, and “benefit” in the same sentence? Yep. While in the for-profit world it’s often painful to be classified as a highly compensated employee, with caps on your 401k contribution well below the annual $19,500 (2020), in the non-profit world being classified as a highly compensated employee instead opens doors to new benefits.

That new benefit is the top-hat 457b. Not to be confused with the governmental (governmental hospital, other federal employee, or public school district employee) 457b, which is an even sweeter benefit. It’s a second $19,500 (2020; no catch-up contribution) amount you can set aside, in a tax advantaged way. That governmental 457b can be Roth or pre-tax, but the the non-profit 457b is pre-tax (aka traditional) only. It also doesn’t show up on your FAFSA. It’s money you got to put in pre-tax, and it’s growing tax-deferred, for the duration of your employment.

Pro tip: Usually you get to elect a flat percentage for each half of the year. Some people who are not only highly compensated employees, but also earn above the threshold of the Social Security, like to focus their annual 457b contributions in the 2nd half of the year, after they’ve already stopped having Social Security withheld. It smooths out some cash flow bumps that might otherwise occur in the 1st half of the year.

Now there are catches to this wonderful newly-available-to-you tax incentivized retirement vehicle.

• It takes time to get in. First you have to earn above the threshold in a year. Even if you’re a high earner, if you arrive at an institution part way through the year, the calendar year earnings requirement may not be met by you in that 1st partial year. Therefore you’d have to wait until year 2 to earn above the threshold. Then, some institutions don’t allow open enrollment for this benefit until late in Q2, for collection in Q3 and beyond. Therefore it can take up to 29 months from starting at an employer, at a high enough hourly rate, before you actually get to begin contributing.
• Once you make your election percentage, you’re stuck with it for a year. Even when there are crazinesses like COVID-19 pay cuts and furloughs: if you’d had plans to just barely max out your account that may no longer be happening, or you may wish you had the cash flow available instead. No changes allowed.
• You can’t touch the money until you separate from service, aka leave your employer, such as retirement or moved on.
• When you leave your employer, you can’t roll your top-hat 457b balance into a governmental 457b (which are even better), you can only roll them into a non-profit top-hat 457b (and in order to do that, you have to go to work for another non-profit with a top-hat 457b that you’re eligible for).
• You are limited to the distribution periods, and if you spent decades contributing and growing this money, depending on what you’re earning when you are also distributing that may then be a bigger tax hit than what you’d have paid initially.
• It’s vulnerable to seizure if your employer goes under, it’s not really “your” money until you get the distributions (despite the fact you paid FICA taxes on it when you first earned it).

If you’re maxing out your 403b ($19,500 or $26,000 in 2020) with extra savings capacity, you have enough safety cash buffer that you can afford to continue to not see that cash for the next year no matter what craziness happens, and you’re not worried about your employer’s vulnerability for the duration of your employment with them, then it may be time to go water your 457b garden.