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.