Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.
Loans are an important feature in a 403(b) plan because, under the Internal Revenue Code and regulations, restricted 403(b) account values are not permitted to be withdrawn before age 59½ without a qualifying event such as death, disability, a qualifying hardship, or severance from service from the plan sponsor. However, because final 403(b) regulations make employers responsible for coordinating and monitoring loans for all of their plans, it is possible that some employers will not permit loans from their 403(b) plans.
It is important to know whether a specific employer’s plan does or does not include the loan feature. It is also important to determine if the annuity contract or custodial account holding a participant’s 403(b) plan assets permits loans. Not all investment options offer loans under their contracts. Final regulations for 457(b) plans also provide clarity for loans from 457(b) governmental plans, and it is possible that many 457(b) governmental plans will include loan features. Like 403(b) plans, 457(b) plans also must restrict in-service access to account values.
For example, 457(b) participants may not access their account values until the participant attains age 70½, severs service with the sponsor, experiences an unforeseeable emergency or has an account value under $5,000 with no contributions having been made for the prior two years.
Note that 457(b) plans sponsored by non-governmental employers are not permitted to offer loans. Loans from both a 403(b) plan and a governmental 457(b) plan must meet a facts-and-circumstances standard in addition to the requirements of Internal Revenue Code Section 72(p).
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