What constitutes an unforeseeable emergency?

[katieinny]

A participant in a 409(A) plan is seeking distribution from the plan under the unforeseeable emergency definition. He's bankrupt, has tax liens and numerous health problems. He's still collecting his pay check.

It seems to us that the bankruptcy and tax liens satisfies the definition, but I would like to get some input from others who deal with this on a regular basis.

[JanetM]

Here is what the non-qual deferred comp answer book says.

Under new Code Section 409A, the plan still may provide for payment of benefits in the case of an unforseeable emergency. This term is defined as a severe financial hardship to the participant resulting from illness or accident of the participant, the participant's spouse or a dependent, or loss of the participant's property due to casualty or other similar extraordinary unforeseeable circumstances arising as a result of events beyond the control of the participant, and the distribution amount may not exceed the amount necessary to satisfy the emergency and pay taxes, after taking into account the extent to which the hardship is or may be relieved through reimbursement or compensation by insurance or by liquidation of the participant assets.

IMHO I don't view bankruptcy and tax leins as unforseeable ........... now of course if they are caused by the health problems. But really, to get to bankruptcy and leins they had to have happened a while ago.

Just my two cents.

[katieinny]

It's our understanding that the health problems were the cause of his downward spiral.

[JanetM]

The IRS will look at facts and circumstances to. If it were me, I would want advice from legal counsel based on the facts.

My view, the health problems may have been the root cause, but this person must be well paid (to have 409A benefits) and have health insurance. Tax leins don't happen immediately nor does bankruptcy. I would be very careful.