Unforeseeable Emergency Distribution

[Guest mbw]

To receive an unforeseeable emergency distribution, does the participant have to elect this distribution event at the time of deferral? I do not believe so but others I have discussed this with disagree. They ask, "Show me where in the rules you can avoid the election." They have a somewhat good point, I believe, by saying that the regs require an initial deferral election, which includes an election as to the time of payment.

I realize the final regs explain that the employee can retain discretion whether to apply for such a distribution but it does not directly address the issue. Anyone have any thoughts or language in the final regs I can use to support my position?

[Steelerfan]

How can you elect a time for distribution at the time of deferral for an unforseen event? Since they are by definition unexpected it would be pretty interesting to see how the IRS could require an election at the time of deferral.

Plans can provide for these withdrawals as exceptions to the prohibition on acceleration if provided for in the plan.

[Chaz]

The final regs say that "a service provider who has experienced an unforeseeable emergency will not be treated as making a subsequent deferral election under 1.409A-2(b) (subsequent deferral election rules) if the service provider does not apply for or elect to receive a payment available under the plan."

I read that as saying that if a service provider DID apply for or elect to receive a payment, absent an initial election, it WOULD be a subsequent deferral election, which would require the election not be effective for 12 months. As such, I think those who say that an initial election (e.g., "first to occur of an unforeseeable emergency or termination of employment") have a strong argument.

[Guest mbw]

How can you elect a time for distribution at the time of deferral for an unforseen event? Since they are by definition unexpected it would be pretty interesting to see how the IRS could require an election at the time of deferral.

Plans can provide for these withdrawals as exceptions to the prohibition on acceleration if provided for in the plan.

The argument goes that you must elect to receive this type of distribution to apply for it IF you have any unforeseeable emergency. If you have an unforeseeable emergency, you don't have to necessarily take the distribution but if you want the distribution you would have had to have elected it at the time of deferral.

I think it's a crazy argument but it seems that a technical reading of the regs requires it. I was hoping someone would give me some language in the regs or otherwise that suggested you could get an unforeseeable emergency distribution if you have an emergency regardless of your initial deferral election as to the time of payment.

[Steelerfan]

I think that thinking of this as an elective deferral/distribution is incorrect. A plan that allows for distribution upon unforseeable emergency (UE) will generally provide that payment will be made upon the earlier of several events, one of which is UE. In that case, the payment event (unforseeable emergency) is set in advance and you have the choice to take it or not if an UE occurs. There is no need for an election at the time of deferral. The regs provide that you will not be in violation of the anti-acceleration rule or the subsequent election rules.

In addition, the regs allow a plan to provide for cancellation of initial elections when you elect to receive a distribution on UE. Thus, it makes no matter what your initial election were anyway.

Chaz: In your post, that statement from the regs is protective. It means that if you elect not to receive payment on an UE, such "election" is not a subsequent deferral or a "redeferral" that would be a violation. the final regs give as much flexibility as can be given for this circumstance.

[jpod]

Chaz: IRS position (and the law) is that as long as the plan or agreement provides for hardship w/drawal availability at the option of the service provider who experiences a qualifying hardship (I intentionally am not using the word "election"), a service provider who later suffers a qualifying hardship will be able to take a withdrawal upon request, without that request being treated as an election (second or otherwise). Similarly, a service provider who later suffers a qualifying hardship but who does not request a distribution will not be treated as making an election (second or otherwise). There may be gaps or gliches in the regs., but any other application of the hardship rules would be completely inconsistent with what the Congress and the IRS are trying to accomplish via 409A.

[Steelerfan]

In fact, the rules are so liberal in this area that the preamble to the regs provides that you can add to your plans at any time provisions for distribution on death, disability and unforseeable emergency. pp. 19269.

There is nothing to worry about with regard to "elections" in this arena.

[Chaz]

[WRITTEN BEFORE STEELERFAN'S 3:20 POST]

jpod - I agree that the result may be inconsistent with 409A's intent, but I can't find anything in the regs to support the first two sentences of your post. Not to say that there isn't anything there; I just can't find it

steelerfan - I think the clause I quoted can be read as protecting a service provider who (i) elects to receive a distribution upon the first to occur of an UE or termination, etc. (ii) experiences a UE, and (iii) chooses not to receive the distribution at that time.

1.409A-2(b)(2)(ii) requires that in the event of a subsequent deferral election OTHER than for death, disability, or UE, requires at least a five year deferral period. 1.490A-2(b)(i) requires all subsequent elections to be effective for 12 months without mention of any exceptions.