What Is Indiana Deferred Compensation? Hoosier START Plans and Taxes

Indiana deferred compensation is a voluntary, tax-advantaged retirement savings program for state and local government workers, offered through the state’s Hoosier START program. It pairs a 457(b) salary-deferral plan with a 401(a) plan, sits on top of your regular pension, and for 2026 lets you defer up to $24,500 of pay before taxes, with higher ceilings if you are closer to retirement.

Who Can Participate

Indiana law authorizes the state and any political subdivision to offer deferred compensation plans to their employees.¹ That covers state agency staff, county and city workers, public school employees, university staff, and workers at other governmental entities. The Indiana Public Retirement System (INPRS) oversees retirement programs for these employees, and Hoosier START is the state’s deferred compensation vehicle.²

Eligibility details depend on the employer. Some local governments open their plans to all employees from day one; others impose a short waiting period or limit participation to full-time staff. If you work for a political subdivision, ask HR which plans your employer sponsors and whether a waiting period applies.

Automatic Enrollment for State Employees

If you became a state employee after June 30, 2007, you are automatically enrolled in the deferred compensation plan on your 31st day of employment.³ Payroll deductions begin unless you opt out. If you were auto-enrolled and never picked a contribution rate, confirm on your pay stub how much is being deferred and whether that amount matches what you actually want to save.

Local Government Employees

Automatic enrollment is a state-employee rule. If you work for a county, city, school corporation, or other local entity, your employer may or may not offer a deferred compensation plan, and enrollment is typically voluntary. Local employers that do participate generally coordinate through Hoosier START, but plan features depend on what each employer has adopted.

The Two Plans Inside Hoosier START

Hoosier START packages two different plan types, each playing a different role in your retirement.⁴

The 457(b) Plan

The 457(b) is the voluntary savings side. You choose how much of your paycheck to defer, within IRS limits, and the money goes into investment options you pick. Traditional contributions reduce your taxable income now; earnings grow tax-deferred until withdrawal.⁵ For state and local governments, the 457(b) fills roughly the role a 401(k) plays in private employment.⁶ It also carries a withdrawal advantage over 401(k)s and 403(b)s that becomes important if you leave government work before age 59½.

The 401(a) Plan

The 401(a) is a qualified plan structured by your employer, which can set it up with employer contributions, employee contributions, or both.⁷ Within Indiana’s PERF system, members contribute a mandatory 3% of gross wages into a defined contribution account that sits alongside the defined benefit pension.⁸ You do not choose the 401(a) contribution structure the way you do with the 457(b). The 2026 combined employer-and-employee ceiling for defined contribution plans under federal law is $72,000.⁹

The two plans have separate contribution limits. If your budget allows, you can max out both in the same year.

How Much You Can Contribute in 2026

The IRS adjusts 457(b) limits annually for inflation. For 2026:¹⁰

Standard limit: $24,500 per year in elective deferrals, or 100% of includible compensation, whichever is less.
Age-50 catch-up: an additional $8,000 if you turn 50 or older during the year, for a total of $32,500.¹¹
Special three-year catch-up: during the three years before you reach your plan’s normal retirement age, you may be able to defer up to double the standard limit ($49,000 in 2026), designed to let participants who undercontributed earlier make up ground.¹¹
Enhanced catch-up for ages 60 through 63: under SECURE 2.0, participants in this age band can make catch-up contributions of up to $11,250 (originally set for 2025 and subject to annual cost-of-living adjustments).

You can’t stack these. The age-50 catch-up and the special three-year catch-up cannot be used in the same year, and the enhanced 60-to-63 catch-up cannot be combined with the three-year catch-up either. You get whichever produces the higher limit for that year. For most people in their late 50s or early 60s, the three-year catch-up produces the largest number by a wide margin.

What You Save in Taxes

The tax advantages work on two levels, and they combine.

Federal Tax Deferral

Traditional 457(b) contributions are excluded from your federal taxable income the year you make them. Defer $10,000 on a $65,000 salary and your federal taxable wages drop to $55,000. Earnings inside the plan grow without annual capital gains or dividend tax.⁵ You pay ordinary income tax only on withdrawal, ideally in retirement when your bracket may be lower.

Indiana State Tax Savings

Indiana imposes a flat state income tax, and for 2026 the rate is 2.95%. Because traditional 457(b) contributions reduce your adjusted gross income, they also reduce your Indiana tax. On that same $10,000 deferral, you’d save roughly $295 in state tax for the year.

The Roth Option

Governmental 457(b) plans are permitted to offer a designated Roth contribution option.⁵ With Roth contributions, you pay tax on the money going in, but qualified withdrawals in retirement, including all growth, come out tax-free. Whether your employer’s plan actually includes a Roth option depends on how the plan was set up; check with your plan administrator. For younger workers who expect higher tax brackets later, Roth is often the better long-term call.

Getting Money Out

This is where the 457(b) genuinely stands apart from other retirement accounts.

No 10% Early Withdrawal Penalty

If you leave your government job at any age, you can take distributions from your 457(b) without the 10% early withdrawal penalty that applies to 401(k)s, 403(b)s, and traditional IRAs.¹² Regular income tax still applies, but losing that extra 10% hit matters for anyone retiring before 59½ or leaving public work for any other reason.

One catch: if you rolled money into your 457(b) from a 401(k) or IRA, distributions of those rolled-in amounts are still subject to the 10% penalty if taken before 59½.¹² Keep that in mind if you’re consolidating accounts.

Unforeseeable Emergency Withdrawals While Still Working

While you’re still employed, 457(b) plans do not allow 401(k)-style hardship distributions. They permit withdrawals only for an “unforeseeable emergency,” meaning severe financial hardship from illness, accident, casualty property loss, or similar extraordinary circumstances beyond your control. Imminent foreclosure, major medical expenses, or funeral costs can qualify. Buying a home or paying college tuition generally does not. The distribution can’t exceed what’s needed to cover the emergency, and you must first exhaust other resources such as insurance.¹³

How the 401(a) Side Differs

The 401(a) within INPRS follows its own rules. For PERF members, the defined contribution balance becomes available on separation from employment.⁸ Under the PERF My Choice plan, vesting in employer contributions follows a five-year schedule: 20% after one year, 40% after two, and full vesting at five. Early 401(a) distributions before 59½ can trigger the 10% penalty, so timing matters more than it does with the 457(b).

When You Leave: Rollover Choices

At separation, you have options beyond simply drawing the balance down. A governmental 457(b) can be rolled to a traditional IRA, a Roth IRA (with income tax due on the conversion), another governmental 457(b), a 401(k), or a 403(b).¹⁴

Think twice before rolling 457(b) money into a 401(k) or traditional IRA. Once it lands there, it becomes subject to the 10% early withdrawal penalty before age 59½. If there’s any chance you’ll need the funds before then, keeping them in the 457(b), or rolling to another governmental 457(b), preserves penalty-free access.

Required Minimum Distributions

Tax deferral eventually ends. Under SECURE 2.0, required minimum distributions (RMDs) from your 457(b) and 401(a) accounts begin based on your birth year:¹⁵

Born 1951 through 1959: RMDs must begin by age 73.
Born 1960 or later: RMDs must begin by age 75.

Your first RMD is due by April 1 of the year after you reach the applicable age. Each later RMD is due by December 31. Delaying your first distribution to the April 1 deadline means taking two RMDs in the same calendar year, which can push you into a higher tax bracket. Most planners suggest taking that first distribution in the year you actually reach the RMD age to avoid doubling up.

If you’re still working for your Indiana government employer past your RMD age, some plans allow you to delay RMDs until you actually retire. Check your plan document or ask your plan administrator whether this still-working exception applies to you.

1
Indiana General Assembly. Indiana Code 5-10-1.1-1 – Nonqualified Deferred Compensation
2
Indiana Public Retirement System. Indiana Public Retirement System
3
Indiana General Assembly. Indiana Code 5-10-1.1-3.5 – Deferred Compensation Plan Enrollment
4
Indiana State Personnel Department. Onboarding – Deferred Compensation (Hoosier START)
5
Internal Revenue Service. IRC 457(b) Deferred Compensation Plans
6
Internal Revenue Service. 457(b) Plans for State or Local Governments Key Characteristics
7
Internal Revenue Service. Governmental Plans Under Internal Revenue Code Section 401(a)
8
Indiana Public Retirement System. Public Employees – INPRS
9
Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
10
Internal Revenue Service. Retirement Topics – Contributions
11
MissionSquare. 2026 Retirement Plan Contribution Limits
12
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
13
Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions
14
Internal Revenue Service. Rollover Chart
15
Congress.gov. Required Minimum Distribution (RMD) Rules for Original Owners