In Employee Plans News (December 17, 2010), the Internal Revenue Service (“IRS”) provides guidance on the circumstances which constitute an unforseeable emergency, allowing a distribution from a 457(b) plan.
According to the IRS, in general, a 457(b) plan may permit distributions in the event of unforeseeable emergencies, if specific requirements are met. Revenue Ruling 2010-27 (the “Ruling”) contains the following examples of expenses, losses or circumstances that may be eligible for this type of distribution:
–an illness or accident of the participant, the participant’s beneficiary, or the participant’s or beneficiary’s spouse or dependent;
–property loss caused by casualty (for example, damage from a flood or other natural disaster not covered by homeowner’s insurance) of the participant or beneficiary (the cost of repairing significant water damage to the participant’s principal residence, when not covered by insurance, is an unforseeable emergency, because this is an extraordinary and unforeseeable circumstance and is substantially similar to a natural disaster);
–funeral expenses of the participant’s spouse, dependent or non-dependent child; and
–other similar, extraordinary and unforeseeable circumstances resulting from events beyond the control of the participant or his or her beneficiary (for example, imminent foreclosure or eviction from a primary residence, or to pay for medical expenses or prescription drug medication).
Accumulated credit card debt would not be an unforseeable emergency. The participant seeking the distribution must show that the emergency expenses are not otherwise be covered by insurance, liquidation of the participant’s assets or cessation of deferrals under the 457(b) plan.
Importantly, the above examples and related rules can be used to determine when an emergency distribution may be taken from a plan subject to Internal Revenue Code Section 409A.