IRS Issues Guidance on Unforeseeable Emergency Distributions Under 457(b) Plans

IRS Issues Guidance on Unforeseeable Emergency Distributions Under 457(b) Plans

In Revenue Ruling 2010-27 issued November 8, 2010, in Internal Revenue Bulletin No. 2010-45 (see page 620 of the bulletin), the Internal Revenue Service provides guidance on whether an eligible deferred compensation plan under Section 457(b) of the Internal Revenue Code (Code) may make an unforeseeable emergency distribution to a participant under certain circumstances. The IRS also applies the same analysis to distributions from a nonqualified deferred compensation plan subject to Code Section 409A.

Using examples, the Revenue Ruling describes a hypothetical 457(b) plan which has provisions governing unforeseeable emergency distributions. The plan language describing unforeseeable emergency distributions is substantially similar to the language in Section 5.10 of the Model Amendment contained in the Appendix to Revenue Procedure 2004-56. Consistent with the Model Amendment, the hypothetical plan defines an unforeseeable emergency as a severe financial hardship of the participant resulting from the following:

an illness or accident of the participant, the participant's spouse, or the participant's dependent (as defined in Code Section 152[a]);
loss of the participant's property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by homeowner's insurance, e.g., as a result of a natural disaster);
the need to pay for the funeral expenses of the participant's spouse or dependent (as defined in Code Section 152[a]); or
other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant.

The Revenue Ruling goes on to provide examples of three different situations under which participants request unforeseeable emergency distributions from the hypothetical 457(b) plan. In situation 1, participant A requests an unforeseeable emergency distribution from the 457(b) plan to pay for the cost of repairing A's principal residence after significant water damage from a water leak was found in the basement. In situation 2, participant B requests an unforeseeable emergency distribution from the 457(b) plan to pay for funeral expenses for B's adult son who is not a dependent (as defined in Code Section 152[a]). In situation 3, participant C requests an unforeseeable emergency distribution from the plan to pay credit card debt, which is not due to any extraordinary events or unforeseeable circumstances arising from events beyond C's control.

Pursuant to the distribution requirements of Code Section 457(d) (which a plan must satisfy to be an eligible deferred compensation 457[b] plan) and Treasury Regulations § 1.457-6(c), the IRS concludes in the Revenue Ruling that, in situation 1 and situation 2, the hypothetical 457(b) plan is permitted to provide unforeseeable emergency distributions to participant A and participant B under Code Section 457(d)(1)(A)(iii). Both the need to repair a principal residence due to significant water damage and the need to pay for funeral expenses of a non-dependent adult son are extraordinary and unforeseeable circumstances that arise as a result of events beyond the control of the participants. Both needs are also substantially similar to the specific examples included in the unforeseeable emergency definition under Treas. Reg. 1.457-6(c)(2). On the other hand, the IRS concluded that the hypothetical 457(b) plan may not provide an unforeseeable emergency distribution to participant C under situation 3. The facts of situation 3 do not fit within any specific examples under the regulations, and they do not indicate that an extraordinary and unforeseeable circumstance has occurred due to events beyond the control of the participant. The Revenue Ruling also explains that this same analysis applies to amounts deferred under a nonqualified deferred compensation plan subject to Code Section 409A.

For more information about Revenue Ruling 2010-27, the unforeseeable emergency distribution rules, and how they impact your 457(b) plan, contact Terry Mumford, Mary Beth Braitman, Katrina Clingerman, or the Ice Miller Employee Benefits attorney with whom you work.