"Unforeseeable Emergency" Examples under 457(b) and 409A
11.10.10

Cox Smith Employee Benefits E-Alert

"Unforeseeable Emergency" Examples under 457(b) and 409A

The IRS has recently released Revenue Ruling 2010-27, providing helpful examples for events considered to be "unforeseeable emergency" distribution events from an Internal Revenue Code section 457(b) or section 409A plan.

Code section 457(b) "eligible deferred compensation plans" of state and local governments and tax-exempt organizations and nonqualified deferred compensation arrangements that are subject to section 409A may permit a distribution in the event of a participant’s "unforeseeable emergency." Treasury Regulations provide the required definition of "unforeseeable emergencies" for both types of plan, as well as examples of events that would likely be considered unforeseeable emergencies. An unforeseeable emergency must be 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 (as defined in section 152, without regard to ineligibility due to the participant’s being another’s dependent, the dependent’s filing of a joint return rule or the dependent’s gross income exceeding a certain amount),
  • 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 that is the result of 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. Examples include the need to pay for medical expenses, non-refundable deductibles, or prescription drug medication; expenses of the imminent foreclosure of or eviction from the participant’s or beneficiary’s primary residence; and the need to pay funeral expenses of a spouse or dependent.

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

The Revenue Ruling provides some additional guidance for the catch-all rule by analyzing three situations, in each of which a participant requests a distribution that does not fit within any of the safe harbor "unforeseeable emergencies." The Ruling considers whether each qualifies as an "other similar extraordinary and unforeseeable circumstance." The examples and results are as follows:

  • Payment of costs to repair significant and uninsured water damage caused by a leak at participant’s principal residence qualifies as an unforeseeable emergency. This event is considered substantially similar to repairing damage to the principal residence after a natural disaster.
  • Payment of funeral expenses for an adult son who is not a Code section 152(a) dependent qualifies as an unforeseeable emergency. These expenses are considered substantially similar to paying for funeral expenses of a dependent.
  • Payment of accumulated credit card debt arising from expenditures other than extraordinary and unforeseeable circumstances does not qualify as an unforeseeable emergency. Such debt is not considered to arise from circumstances beyond the control of the participant and therefore could not fall within the "other similar extraordinary and unforeseeable circumstances" category.

If you have questions or would like us to add language to your plan documents or summary plan descriptions for 457(b) or 409A plans, please contact any one of the attorneys listed.

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William M. Fisher
Katherine Patton Noll
Mary M. Potter
Joshua A. Sutin
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