NAGDCA MEMBERS ONLY
Username/Email:
Password:

Forgot your password?

CLICK HERE

 
NAGDCA Notes

NAGDCA Note: Unforeseeable Emergencies and Hardship Withdrawals: What Every Plan Administrator Needs to Know

In today's economy an emergency or hardship withdrawal may be a last resort for a participant facing a tough financial situation. As a plan administrator, if your plan offers in-service withdrawals, it is important to remember that a withdrawal for an unforeseeable emergency under a section 457(b) plan has narrower circumstances than a hardship withdrawal under a 401(k) or 403(b) plan. 

The circumstances that constitute an unforeseeable emergency (UE) should be based on facts and made on a case by case basis. The IRS has not provided guidance on what is adequate documentation to validate the UE request and this has created some uncertainty among administrators about whether they are requiring enough documentation from plan participants who are applying for a UE. NAGDCA recently spoke with Cheryl Press, a Senior Counsel for Tax Exempt and Government Entities at Chief Counsel IRS, regarding the feasibility of using self-certification to satisfy the regulations regarding distributions from a section 457 plan for unforeseeable emergencies.
 
Press said that the regulations do not discuss self-certification, and that there is no guidance that has been issued on this topic. She said that, nevertheless, Section 457 does appear to set a higher standard for emergency distributions than exists in 401(k) and 403(b) plans. Therefore, the Service would be looking for practices and procedures to be in place to demonstrate that the emergency was indeed unforeseeable; as well as some paperwork with regard to the granting of an UE in a section 457 plan. 
 
For example, she indicated that merely relying on the statement of a participant (a self-certification) that they were going into foreclosure was insufficient. The Plan should at least have a foreclosure notice from the participant. She pointed out that under the regulations the UE must be limited to the amount needed to relieve the emergency, pointing out that without documentation this amount cannot be verified.
 
She also stated that while the Service is not looking for an overabundance of documentation (e.g., 10 years of prior tax returns), enough documentation must be available to show that the 457 plan is complying with the requirements of the 457 regulations, in accordance with its section 457 plan provision, and its own administrative practices and procedures.
 
Overview
 
457(b) Plan Unforeseeable Emergency Withdrawals
 
Under a 457(b) plan, a hardship distribution can only occur when the participant is faced with an unforeseeable emergency. An unforeseeable emergency is defined in the Internal Revenue Service Code 457 as a severe financial hardship resulting from a sudden and unexpected accident or illness of the participant or of a dependent of the participant.  It may be the loss of the participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances.  The loss must be as a result of events beyond the control of the participant.  According to the IRS, foreclosure or eviction, medical expenses, and funeral expenses for a family member may be, but are not necessarily always, unforeseeable emergencies. The IRS has stated that the purchase of a home and the payment of college tuition are not unforeseeable emergencies.
 
The participant cannot make a withdrawal if their emergency condition can be relieved by any of the following:
·         Reimbursement or compensation by insurance
·         Liquidation of the participant's assets as long as liquidation of these assets would not itself cause severe financial hardship
·         Stopping elective contributions or employee contributions under the plan
·         Other currently available distributions (such as plan loans) under plans maintained by the employer or by any other employer, or
·         Borrowing from commercial sources
 
The IRS requires that the determination be based on relevant facts and circumstances and be made on a case by case basis and cannot exceed the amount necessary to satisfy the emergency.  
 
401(k) and 403(b) Plan Hardship Withdrawals
 
IRS rules provide safe harbors for determining if a hardship distribution is due to (or caused by) an immediate and heavy financial need:
 
  • Certain medical expenses previously incurred by the employee, the employee's spouse, dependents or beneficiary
  • Costs directly related to the purchase of a principal residence (excluding mortgage payments)
  • Tuition, related educational fees and expenses
  • Payments necessary to prevent the eviction of the employee from the employee's principal residence or mortgage foreclosure
  • Funeral expenses for the employee, the employee's spouse, children, dependents, or beneficiary of the employee
  • Certain damage repair expenses for the employee's principal residence. 
A written statement from the participant can be sufficient proof that the financial need cannot be met any other way, except in cases where the administrator has actual knowledge that the needs can be relieved by any of the following:
 
·         Reimbursement or compensation by insurance
·         Liquidation of the participant's assets as long as liquidation of these assets would not itself cause severe financial hardship
·         Stopping elective contributions or employee contributions under the plan
·         Other currently available distributions (such as plan loans) under plans maintained by the employer or by any other employer, or
·         Borrowing from commercial sources
 
Under IRS rules, distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if all of the following requirements are satisfied:
 
  • The distribution is not larger than the amount of the employee's financial need (this amount can be increased to include any federal, state or local income taxes or penalties that are anticipated).
  • The employee has taken all nontaxable loans (if available) and obtained all distributions, other than hardship distributions, that are currently available. 
Employees who take a hardship distribution cannot repay it back to the plan and in most cases are not permitted to contribute to the plan for six months after the withdrawal. Hardship withdrawals are subject to income taxes and a 10% additional tax.
 
Additional information can be found on the NAGDCA website at:
 
Resources:
Retirement Plans FAQs regarding Hardship Distributionshttp://www.irs.gov/retirement/article/0,,id=162416,00.html
 
Section 457 Deferred Compensation Plans of State and Local Government and Tax– Exempt Employershttp://www.qai.irs.gov/pub/irs-utl/topic-m.pdf
 
457 Final Regulations http://www.irs.gov/pub/irs-regs/td9075.pdf 
 
Neither NAGDCA, nor its employees or agents, nor members of its Executive Board, provide tax, financial, accounting or legal advice. This memorandum should not be construed as tax, financial, accounting or legal advice; it is provided solely for informational purposes. NAGDCA members, both government and industry, are urged to consult with their own attorneys and/or tax advisors about the issues addressed herein.
 
 
 


201 East Main Street, Suite 1405
Lexington, Kentucky 40507
Phone: 859.514.9161
Email: nagdca@AMRms.com
Search

Copyright © 2017 National Association of Government Defined Contribution Administrators, Inc. NAGDCA
Site designed by AMR Management Services
Terms Of Use | Privacy Statement