The pandemic has had a wide range of effects on employee benefits and those who provide and administer plans. A recent blog entry discusses the effects regarding nongovernmental 457(b) plans.
In “Answering Questions About COVID-19 and your Nongovernmental 457(b) Plans,” Fulcrum Partners LLC provides answers to questions concerning running and participating in a 457(b) during challenging times.
Highlights of the discussion include the following.
Highlights of the discussion include the following.
Deferral Elections
Deferral elections in a 457(b) plan can increased, reduced or cancelled. They can be changed monthly. Elections are effective for compensation paid the month after they are made.
Unforseeable Emergencies
If the design of the 457(b) allows distributions when an unforeseeable emergency happens, a participant may apply to the plan’s administrative committee and ask for a distribution because such an event has taken place. In addition, a plan may be amended to add unforeseeable emergencies as an event for which a distribution is permissible after proper documentation is submitted.
Unforseeable emergencies include:
- a severe financial hardship the participant or beneficiary experiences due to illness or an accident suffered by the participant, beneficiary or their spouses or dependents; or
- a loss of property a participant suffers due to casualty or other similar extraordinary and unforeseeable circumstances that take place due to factors beyond the control of the participant or a beneficiary.
Regulations limit distributions due to an unforeseeable emergency to amounts that cannot be relieved through:
- insurance;
- liquidation of assets that would not cause severe financial hardship; or
- cessation of deferrals.
A distribution due to an unforeseen emergency must be limited to the amount necessary to satisfy the need it created —plus the amount necessary to pay the tax on it, since such distributions are subject to income tax.
Employer Match
The ability to reduce or end an employer match depends on the plan design and plan document.
Plan Termination
If a 457(b) plan is terminated, balances in participants’ accounts can be distributed to participants and beneficiaries. Those distributions are subject to income tax.
Staff Changes
If there are staff cuts, individuals who are no longer employees may be due a distribution from the plan.
Employees on military leave, sick leave, or another bona fide leave of absence are considered to be employees if: (1) the period of leave does not exceed six months, or (2) if longer than six months, as long as law or contract provide for a right to reemployment.
If an employee’s shifts or pay are reduced, participant deferral elections may be adjusted after the month in which the change takes place.
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