During the Coronavirus emergency, it may make sense for state and local governments that sponsor 457(b) plans to allow their employees to access the monies in their accounts as unforeseeable emergency distributions. Not all governmental 457(b) plans provide for these types of distributions. However, it is a relatively easy process for a governmental 457(b) plan sponsor to amend its plan to activate this feature.
These types of distributions have not been used very much in the past because of their restrictive and limited nature. In general, 457(b) plans cannot make distributions while an employee is still working. There are exceptions for in-service distributions after attaining a certain age (previously 70½, but now being lowered to 59½ under the Setting Every Community Up for Retirement Enhancement Act of 2019) and for plan loans (if authorized by the plan). The other significant exception, assuming the plan allows it, is for a distribution to address an “unforeseeable emergency.” If a 457(b) plan distribution meets the rules, it is not subject to 10 percent early-distribution excise tax that currently applies to 401(k) plans and IRAs. (Note that pending legislative proposals to address the pandemic may suspend this penalty for 401(k)s and IRAs as well). It also does not need to be repaid like a plan loan – good in a real emergency.
According to regulations and guidance, an unforeseeable emergency is a severe financial hardship of the participant or beneficiary resulting from:
- An illness or accident of the participant or beneficiary, the participant’s or beneficiary’s spouse, or the participant’s or beneficiary’s dependent;
- Loss of the participant’s or beneficiary’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by homeowner’s insurance, such as damage that is the result of a natural disaster) or
- Other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or the beneficiary.
The guidance states that the imminent foreclosure of or eviction from the participant’s or beneficiary’s primary residence may constitute an unforeseeable emergency. In addition, the need to pay for medical expenses, including non-refundable deductibles, as well as for the cost of prescription drug medication, may constitute an unforeseeable emergency. Finally, the need to pay for the funeral expenses of a spouse or a dependent of a participant or beneficiary may also constitute an unforeseeable emergency.
To make these distributions, the plan administrator must first determine on a case-by-case basis:
- That the participant or beneficiary is, in fact, faced with an unforeseeable emergency permitting the distribution;
- That the underlying emergency cannot be relieved by insurance or otherwise, by liquidation of the participant’s assets or by cessation of deferrals under the plan and
- The amount of the distribution is limited to the amount reasonably needed to satisfy the emergency need.
Before authorizing any unforeseeable emergency distributions, employers must amend their 457(b) plan documents to allow for these in-service distributions. In addition, employers considering this amendment must also adopt appropriate unforeseeable emergency hardship distribution policies, develop internal procedures and request forms.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at email@example.com or (916) 329-3685.