Why Your 457 Plan Might Be a Contingent Asset in a Florida Divorce, and What that Means for You
For physicians, executives, and professionals working in government or the non-profit sector, a 457 deferred compensation plan often plays a key role in long-term financial security. These plans carry unique protections—and can contain unique risks—that require special attention during divorce.
In Florida, a 457 plan is considered a marital asset to the extent contributions occurred during the marriage, plus or minus passive gains or losses. But not all 457 plans are created equal. Whether your plan is governmental or non-governmental, 457(b) or 457(f), affects how it’s classified for division and what options are available to you.
Doctors and Non-Profit Executives Should Known: What Makes a 457 Plan Different?
A 457 plan is a type of deferred compensation plan that allows you to save for retirement. Unlike a 401(k) or IRA, ownership of the funds works differently depending on the type of employer and plan:
- Governmental 457(b) Plans: Offered by state and local governments, these plans are held in trust or custodial accounts for the exclusive benefit of employees. This means they are protected from the employer’s creditors and are generally considered vested assets for purposes of divorce.
- Non-Governmental 457(b) Plans: Offered by large non-profits—such as hospital systems or private universities—these plans are not held in trust. Instead, the assets remain part of the employer’s general funds until distribution, making them vulnerable to the employer’s creditors. These are considered contingent assets because your right to receive the funds depends on the employer’s financial health.
- 457(f) Plans: These are often offered to highly compensated executives as “top-hat” plans. Unlike 457(b) plans, employees must meet specific conditions (like staying with the employer for a certain period) for the money to vest and for the employee to become eligible to receive the funds. If you don’t satisfy those conditions, you forfeit the balance. This makes 457(f) plans even more contingent and subject to greater discounts in divorce valuation.
To understand the key differences between these plans outside of the divorce context, learn more about 457 plans from Dr. Jim Dahle at the White Coat Investor here.
Why Both Types Are Marital Assets
Even though a non-governmental 457(b) or a 457(f) remains the employer’s property until payout, Florida law treats any marital contributions and their growth as divisible property. This is the same, for example, if you earned a bonus during your marriage, but your employer did not pay the bonus until after the divorce. Because the bonus was earned using marital efforts, it is marital regardless of when it is paid out. Similarly, your spouse may be entitled to half of the marital portion of your 457 plan when funds are distributed, whether directly or rolled into another account.
For governmental 457(b)s, division of the marital portion is often more straightforward since the funds are secure and essentially “owned” by the employee. Non-governmental plans and 457(f)s require closer scrutiny due to their contingent nature.
Options for Dividing a 457 Plan
Collaborative Divorce gives you and your spouse the flexibility to design a tailored solution for dividing a 457 plan:
- Immediate Division: Generally, 457(b) plans can be divided without tax penalties or early withdrawal fees through a Qualified Domestic Relations Order (“QDRO”) or a similar court-approved order. However, it’s important to understand that not all plans operate the same way. The specifics of your plan will need to be carefully reviewed to determine whether an immediate division is possible and, if so, how to structure it in a tax-efficient manner.
- Deferred Division: For plans that don’t permit immediate division (common with 457(f)s and certain non-governmental 457(b)s), the spouses may agree to split distributions if and when they occur. This requires detailed language in the marital settlement agreement to ensure the non-employee spouse receives their fair share.
- Buyouts: The employee spouse may prefer to “buy out” the other spouse’s interest. This means providing other marital assets of equivalent value in exchange for keeping the 457 intact. This can be done during the divorce process, or in one lump sum after the divorce, or via a payment plan, though oftentimes there will be interest applied to a payment plan.
Valuing 457 Plans and Applying Discounts for Risk
When valuing a buyout, the type of 457 plan matters:
- Governmental 457(b) Plan: Since the funds are held in trust and carry minimal risk, little or no discount is typically applied.
- Non-Governmental 457(b) Plan: These plans may warrant a discount to reflect the possibility that the employee never receives the funds (for example, if the employer becomes insolvent).
- 457(f) Plan: These plans often carry the highest risk because the employee must meet specific requirements to vest. The discount for these plans can be significant due to the real possibility of forfeiture.
For example, if you’re a hospitalist with a non-governmental 457(b) plan at a financially stable health system, the discount might be modest, if any discount is applied at all. But if you’re an executive with a 457(f) plan that requires you to remain employed another five years to vest, the discount could be steep to reflect the possibility that you might be terminated or need to seek a different job in another location, for example, to take care of an elderly parent.
How a Financial Neutral in a Collaborative Divorce Can Help
A key benefit of Collaborative Divorce is access to a Financial Neutral—an expert who works with both spouses to analyze financial issues. When dealing with a 457 plan, depending on the background of the professional (whether accountant or financial planner), this team member can:
- Evaluate the plan’s terms and identify whether it’s governmental or non-governmental, 457(b) or 457(f).
- Project future distributions and growth.
- Assess risks and calculate appropriate discounts for buyouts.
- Model creative financial options that meet both spouses’ needs considering future taxes and expenses.
This team approach avoids the need for dueling experts and keeps the process efficient and respectful.
Example: Structuring a Buyout
Imagine Dr. Smith, a hospitalist with a non-governmental 457(b) plan accumulated during her marriage. She and her spouse agree in the Collaborative Process that her husband is entitled to 50% of the marital portion. However, Dr. Smith wants to keep her 457 intact.
The Financial Neutral calculates the present value of the husband’s interest, applies a reasonable discount for the contingent nature of the plan based on agreement of Dr. Smith and her husband, and they agree he will receive a larger share of other marital assets (such as a brokerage account) to offset his share of the 457.
For executives with 457(f) plans, buyouts can be more complex and require careful projections of whether the plan is likely to vest.
Why Work With an Experienced Collaborative Attorney
As a leading Florida Collaborative Family Law attorney, Adam B. Cordover and our team have helped many doctors, executives, and professionals navigate divorces involving complex retirement assets like 457 plans and other types of deferred compensation. We understand the nuances of these plans and work closely with financial neutrals to craft solutions that protect your financial future.
As a co-author of an American Bar Association book on Collaborative Divorce, Adam brings extensive experience and national leadership in resolving high-asset divorces outside the courtroom.
When your financial future is at stake, experience matters.
Protect Your Privacy and Your Future
If you’re facing divorce and have a 457 plan, Collaborative Divorce can help you preserve privacy, minimize conflict, and craft a creative settlement.
Contact Family Diplomacy: A Collaborative Law Firm today and schedule a consultation.
You are not alone. We can help.
We represent doctors, executives, and other professionals and their spouses throughout the State of Florida via Zoom and other technologies. We also have offices by appointment in Tampa, Saint Petersburg, and Sarasota.
