457 Retirement Plan Distribution Rules

A 457 retire­ment plan, a type of retire­ment plan offered by gov­ern­ments and gov­ern­men­tal enti­ties, must meet cer­tain min­i­mum dis­tri­b­u­tion require­ments as do qual­i­fied plans. A 457 retire­ment plan par­tic­i­pant can­not receive a dis­tri­b­u­tion from the plan until one of the fol­low­ing con­di­tions are met:

  • the cal­en­dar year in which the par­tic­i­pant attains age 70.5
  • the par­tic­i­pant sep­a­rates from the employer due to death, ter­mi­na­tion, retire­ment, etc. 
  • the par­tic­i­pant is faced with an unfore­see­able emer­gency

Note that these rules are the same for 401k plans. How­ever, 401k plans have addi­tional flex­i­bil­ity in that they allow in-service dis­tri­b­u­tions (dis­tri­b­u­tions while the employee is still employed).

Dis­tri­b­u­tions involv­ing an emer­gency are dif­fer­ent than hard­ship dis­tri­b­u­tions from 401k plans . An emer­gency dis­tri­b­u­tion from a 457 retire­ment plan includes any of the fol­low­ing:

  • severe finan­cial hard­ship to the par­tic­i­pant or the participant’s depen­dent due to an unex­pected ill­ness or acci­dent
  • loss of the participant’s prop­erty due to casu­alty
  • sim­i­lar unfore­see­able cir­cum­stances aris­ing as a result of events beyond the con­trol of the par­tic­i­pant

The cir­cum­stances that make up an unfore­seen emer­gency depend on each case. The gen­eral rule of thumb is that if you can fore­see the expense, you can­not get a 457 retire­ment plan dis­tri­b­u­tion for it. Dis­tri­b­u­tions for unfore­seen emer­gen­cies also can­not be made if the hard­ship can be reversed by any of these meth­ods:

  • through insur­ance or sim­i­lar reim­burse­ment or com­pen­sa­tion
  • through use of the employee’s non-457 retire­ment plan assets
    by stop­ping defer­rals to the 457 retire­ment plan 

In other words, an emer­gency dis­tri­b­u­tion would require that the employee has no other assets out­side the 457 retire­ment plan.

Early dis­tri­b­u­tions from 457 retire­ment plans are allowed if made under a qual­i­fied domes­tic rela­tions order (QDRO). A QDRO is defined as any judg­ment, decree, or order that sat­is­fies these two require­ments:

relates to the pro­vi­sion of child sup­port, alimony pay­ments, or mar­i­tal prop­erty rights to a spouse, for­mer spouse, child, or other depen­dent of a par­tic­i­pant
is made pur­suant to a state domes­tic rela­tions law (includ­ing a com­mu­nity prop­erty law) 

Dis­tri­b­u­tions will be tax­able to the plan par­tic­i­pant if the alter­nate payee is not the plan participant’s spouse or for­mer spouse. Dis­tri­b­u­tions will also be tax­able to the plan par­tic­i­pant, rather than the alter­nate payee, if the dis­tri­b­u­tion order does not sat­isfy the spe­cific QDRO require­ments.

Employ­ees are taxed on dis­tri­b­u­tions from a 457 retire­ment plan if the dis­tri­b­u­tions are includi­ble in the participant’s income. A dis­tri­b­u­tion is not included in income, and there­fore taxed, if a tax-free rollover is made (for exam­ple, into an IRA). Amounts deferred under a 457 retire­ment plan spon­sored by a state or local gov­ern­ment are includi­ble only when the amounts are actu­ally paid. 

On the other hand, employ­ees of tax-exempt non-government employ­ers have a dis­ad­van­tage com­pared to gov­ern­ment employ­ees when it comes to 457 retire­ment plan dis­tri­b­u­tions. Unlike gov­ern­ment employ­ees, employ­ees of a tax-exempt orga­ni­za­tion must include a 457 retire­ment plan defer­ral in income when paid or oth­er­wise made avail­able to the employee or other ben­e­fi­ciary. The “oth­er­wise made avail­able” require­ment means that an employee may inad­ver­tently and pre­ma­turely have to pay tax on a defer­ral, even if a dis­tri­b­u­tion is not made, because of an error in the 457 retire­ment plan word­ing or struc­ture.