Emergency Distributions Under 457 Plans

It’s hurricane season, which brings handling emergencies into sharper relief. Under a 457(b) plan, a hardship distribution can only occur when the participant is faced with an unforeseeable emergency. 

An unforeseeable emergency is a severe financial hardship resulting from an illness or accident, loss of property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or beneficiary. Examples of events that may be considered unforeseeable emergencies include: 
• imminent foreclosure on, or eviction from, the employee's home;
• medical expenses; and 
• funeral expenses. 

Generally, the purchase of a home and the payment of college tuition are not unforeseeable emergencies. 

Whether a participant or beneficiary is faced with an unforeseeable emergency depends on the facts and circumstances. However, a distribution is not on account of an unforeseeable emergency to the extent that the emergency can be relieved through reimbursement or compensation from insurance, liquidation of the participant's assets or cessation of deferrals under the plan.

A distribution due to an unforeseeable emergency must not exceed the amount reasonably necessary to satisfy the emergency need.

Generally, there are no special rules for hardship distributions due to hurricanes or other natural disasters. A plan sponsor and participant should follow the regular hardship distribution rules and the participant should show that he or she has an immediate and heavy financial need and, in some cases, has exhausted other resources. The plan should list the specific criteria it uses to determine if a participant is eligible for a hardship distribution. Expenses for repairing damage to an employee's principal residence may automatically qualify.

Occasionally, when a hurricane or other natural disaster is especially devastating, legislation is passed that provides for special plan distributions and loans that would otherwise not be available to employees. For example, in 2005 a law was passed to help individuals and businesses affected by Hurricane Katrina.