Guidance on unforeseeable emergency distributions.

• Author: Beavers, James A.

The IRS ruled on whether a Sec. 457 government retirement plan or a nonqualified deferred compensation plan could make an unforeseeable emergency distribution to a plan participant in three situations.

Law

In order to be an eligible deferred compensation plan under Sec. 457(b), a plan may allow distributions to be made available only in certain events, including unforeseeable emergencies. An unforeseeable emergency is defined in the regulations as 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 caused by 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 regulations provide a number of examples of what may be considered an unforeseeable emergency. The imminent foreclosure on or eviction from the participant's or beneficiary's primary residence may be an unforeseeable emergency. In addition, the need to pay for medical expenses, including nonrefundable deductibles, as well as for the cost of prescription drug medication may be an unforeseeable emergency. Finally, the need to pay for the funeral expenses of a spouse or a dependent (as defined in Sec. 152(a)) may also be an unforeseeable emergency.

Whether a participant or beneficiary faces an unforeseeable emergency permitting a distribution is determined based on the relevant facts and circumstances of each case. In any event, however, a distribution on account of an unforeseeable emergency may not be made to the extent that the emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the participant's assets (to the extent the liquidation of such assets would not itself cause severe financial hardship), or by cessation of deferrals under the plan. A distribution due to an unforeseeable emergency must be limited to the amount reasonably necessary to satisfy the emergency. However, the distribution may include any amount necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the...