457 Plan Distributions

A deferred compensation plan known as a government or 457 plan must meet certain minimum distribution requirements. In general, a 457 plan participant cannot receive a distribution from the plan until one of the following conditions are met:

• the participant separates from the employer due to retirement, death, disability or termination.
• the participant is faced with an unforeseeable emergency eligible for hardship withdrawal
• the participant attains the age of 70-1/2

Distributions involving an unforeseeable emergency are a bit tricky and are frequently misunderstood. An emergency distribution from a 457 plan is not like a hardship distribution from a 401(k) plan. For 457 plan distributions, an unforeseen emergency includes any of the following:

• severe financial hardship to the participant or the participant's dependent resulting from a sudden and unexpected illness or accident
• loss of the participant's property due to casualty
• other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant

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

• through insurance or similar reimbursement or compensation
• through liquidating the participant's own assets, provided liquidation doesn't itself cause severe financial hardship
• by stopping deferrals to the 457 plan

Distributions under divorce decree. Early distributions from 457 plans are allowed if made under a qualified domestic relations order (QDRO). A QDRO is defined as any judgment, decree, or order (including approval of a property settlement agreement) 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)

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

Inclusion of income rules. A participant is taxed on distributions from a 457 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. Otherwise, the inclusion-in-income rules for deferrals depend on who your employer is.

Amounts deferred under a 457 plan sponsored by a state or local government are includible only when the amounts are actually paid. This is a break from the previous requirement that provided for inclusion when amounts were paid or otherwise made available to a participant.

On the other hand, employees of tax-exempt employers are once again at a disadvantage compared to government employees when it comes to 457 plans. Unlike government employees, employees of a tax-exempt organization must include a 457 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 way the 457 is set up.

Financial Calculators Use this savings calculator to check out the benefits of tax deferral. A 457 retirement savings plan can serve as a tool for building a secure retirement. It provides you with two important financial advantages. First, all contributions and earnings to your 457 are tax deferred. You only pay taxes on contributions and earnings when the money is withdrawn. Second, many employers provide matching contributions to your 457 account, which can range from 0% to 100% of your contributions.

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