December 30, 2010
IRS has released Revenue Ruling 2010-27, which contains examples of expenses
that may be eligible for an unforeseeable emergency distribution from deferred
compensation plans that are subject to Section 409A or Section 457(b) of the
Internal Revenue Code.
And, no, Virginia, the ruling does not permit distributions to pay off
holiday credit card bills.
For many years, employers and plan administrators have been able to rely on
comprehensive regulations, including “safe harbors,” for hardship withdrawals
from 401(k) plans. However, the IRS guidance on distributions from other types
of deferred compensation plans that are due to unforeseeable emergencies has
been more limited.
Revenue Ruling 2010-27 contains examples of expenses that may be eligible for
an unforeseeable emergency distribution from deferred compensation plans that
are subject to Section 409A or 457(b) of the Internal Revenue Code (the Code).
Section 409A covers many types of nonqualified deferred compensation plans.
Code Section 457(b) applies to certain defined contribution, deferred
compensation plans that may be sponsored by state and local governments and
Generally, 409A and 457(b) plans may permit hardship distributions for
unforeseeable emergencies if specific requirements are met.
Plan Provisions Governing Unforeseeable Emergency Distributions
Under current Treasury regulations, 409A and 457(b) plans may be designed to
permit distributions that are based on an unforeseeable emergency for:
- An illness or accident of the participant, the participant’s
beneficiary, or the participant’s or beneficiary’s spouse or dependents.
- Property loss caused by casualty (for example, damage from a natural
disaster not covered by homeowner’s insurance) of the participant or
- Funeral expenses of the participant’s spouse or dependent.
- Other similar extraordinary and unforeseeable circumstances resulting
from events beyond the control of the participant or his or her beneficiary
(for example, to avoid imminent foreclosure or eviction from a primary
residence or to pay for medical expenses or prescription drug medication).
The participant seeking the distribution must show that the emergency
expenses could not otherwise be met by insurance, liquidation of the
participant’s assets (to the extent that the liquidation would not, itself,
create severe financial hardship), or cessation of deferrals under the deferred
compensation plan. Further, the amount of the distribution must be limited to
the amount needed to satisfy the emergency, plus applicable taxes.
Examples of Requests for Emergency Distributions
Revenue Ruling 2010-27 expands on the guidance in the regulations by
analyzing three specific participant requests for emergency distributions from
plans that are subject to the rules of Code Section 457(b):
- Payment for repairs due to significant water damage to the
participant’s principal residence that is not covered by insurance – The
distribution is permissible because the damage to the participant’s primary
residence is an extraordinary and unforeseeable circumstance, and is
substantially similar to the need to pay for damage to a home from a natural
- Payment for funeral expenses of the participant’s non-dependent adult
son – The distribution is permissible because it is for an extraordinary
and unforeseeable circumstance, and is substantially similar to the need to
pay for funeral expenses of a dependent.
- Payment for credit card debt – The distribution is impermissible
because it is not due to an extraordinary and unforeseeable circumstance,
nor is it the result of events beyond the participant’s control.
The ruling notes that, although a 457(b) plan is not subject to Section 409A,
the definition of “unforeseeable emergency” in the Section 409A regulations is
substantially similar to the definition of this term in the Section 457(b)
regulations. Accordingly, IRS has concluded that the principles in the ruling
apply as well to whether a distribution may be made from a 409A plan on account
of an unforeseeable emergency.
For further information on Revenue Ruling 2010-27, please contact the authors
or any member of the McGuireWoods