How to Handle a 457 Unforeseeable Emergency

A 457 deferred compensation plan is a retirement savings vehicle typically offered by state and local governments and some non-profit organizations. It allows employees to contribute a portion of their salary on a pre-tax basis, where it can grow tax-deferred until retirement. While these funds are intended for long-term savings, plan rules include a provision for an “unforeseeable emergency.” This allows a participant to access their savings before retirement if they experience a severe financial crisis that meets a strict set of criteria defined by the Internal Revenue Service (IRS).

Defining an Unforeseeable Emergency

The term “unforeseeable emergency” is strictly defined under Treasury Regulation §1.457-6 as a “severe financial hardship” resulting from events beyond a participant’s control. The plan document specifies what constitutes such an emergency, but the guidelines are rooted in federal tax law.

To qualify, the financial hardship must be immediate and substantial. Events that meet this standard include a sudden illness or accident affecting the participant, their spouse, or a dependent as defined under Internal Revenue Code Section 152. Another qualifying event is the loss of property due to a casualty, such as a fire or flood, when costs are not covered by insurance. Other similar circumstances could include imminent foreclosure, eviction, or paying for a family member’s funeral expenses.

The purchase of a home or payment of college tuition are explicitly cited as events that do not constitute an unforeseeable emergency. These are considered predictable life expenses rather than sudden crises. The hardship must be a direct result of an event that could not have been reasonably anticipated.

A plan administrator evaluates the individual facts and circumstances of each case. The burden of proof is on the participant to demonstrate that their situation aligns with the definitions set by the IRS and their specific plan.

Information and Documentation Required for a Withdrawal Request

Before a withdrawal can be approved, the participant must demonstrate that the financial need cannot be met through other means. The participant must show that the hardship cannot be relieved by insurance reimbursements, liquidating other assets, or stopping deferrals into the 457 plan. If liquidating other assets would cause a severe financial hardship, that may be taken into account.

The evidence must prove the nature of the emergency and the exact dollar amount needed. Required documentation may include:

• Copies of medical bills and insurance explanation of benefits (EOB) statements for a medical emergency.
• Repair estimates from contractors and insurance claim forms for property loss.
• Notices from a lender or landlord for an imminent foreclosure or eviction.
• A loan denial letter as evidence that other financial avenues have been exhausted.

The plan will have a specific application form that must be filled out completely. While recent changes under the SECURE 2.0 Act may allow for self-certification in some plans, the IRS can still request full documentation, so retaining all records is important.

The Withdrawal Application Process

Once all necessary documentation is gathered, the completed application is submitted to the plan administrator. The administrator then evaluates the request against the standards set by the plan’s rules and IRS regulations, verifying that a legitimate emergency has occurred.

The timeline for a decision can vary, but a response can be expected within a few weeks. The request may be approved, denied if it fails to meet the definition of an emergency, or result in a request for additional information.

Financial and Tax Implications of the Withdrawal

An approved withdrawal from a 457 plan has significant tax consequences. The distribution is strictly limited to the amount reasonably necessary to satisfy the emergency need. This amount can be grossed up to include any federal, state, or local income taxes anticipated from the distribution.

When the funds are distributed, they are considered taxable income. The withdrawal must be included in the participant’s gross income for the tax year it is received and will be taxed at their ordinary income tax rate.

Unlike distributions from 401(k)s or IRAs, distributions from a 457(b) plan due to an unforeseeable emergency are not subject to the 10% early withdrawal penalty. This exemption applies regardless of the participant’s age.