In-Service Distributions from Governmental 457(b)

An attorney & participant in a governmental 457(b) plan sent a vague email inquiry of statements related to distribution rules. The one that has me stumped is, "The SECURE Act of 2019 permitted in-service distributions from governmental 457(b) plans if the plan fails to offer a specific in-plan annuity option." My experience is mostly in the ERISA space, but I cannot find anything specific surrounding this statement in the original SECURE Act or other legislation. Ultimately, I believe he's fishing to take an in-service distribution.

The NRA is 65 and in-service distribution age is 70.5. (This individual is 58 and married.) The Adoption Agreement allows for life and joint life annuitization, so I believe it nullifies an in-service distribution "mandate," if you will, from any legislation. That said, the document language does not state if the annuitization option is available pre-70.5 for active employees.

If allowed, it also does not specify if he chooses to annuitize, could he:

1. Do a partial annuitization? (As he has a sizeable balance, over $500k.)
2. Continue to make elective deferrals?

If anyone has any insight or experience with similar scenarios, I'd love to hear some thoughts.
 

See...

Section 104 of the Bipartisan American Miners Act, part of the Secure Act, lowered the minimum age for in-service distributions in qualified pension and governmental 457(b) plans from age 62 to age 59-1/2.  Notice 2020-68 provides FAQs on this topic also (n-20-68.pdf).  The changes are optional.

Thank you, Artie. This plan sponsor did not choose to reduce the age for in-service distributions; however, I'm mostly curious about the in-plan annuity component of the statement and their current provisions. Any insight regarding the ability of an active individual under age 70.5 (in this plan) having the option to choose either a full or partial annuitization of their balance?

He is probably talking about the boldface below:

IRC 457:

...

(d)Distribution requirements

(1) In general. For purposes of subsection (b)(5), a plan meets the distribution requirements of this subsection if—

(A)under the plan amounts will not be made available to participants or beneficiaries earlier than—
(i) the calendar year in which the participant attains age 70½ (in the case of a plan maintained by an employer described in subsection (e)(1)(A), age 59½),
(ii) when the participant has a severance from employment with the employer,
(iii) when the participant is faced with an unforeseeable emergency (determined in the manner prescribed by the Secretary in regulations), or
(iv) except as may be otherwise provided by regulations, in the case of a plan maintained by an employer described in subsection (e)(1)(A), with respect to amounts invested in a lifetime income investment (as defined in section 401(a)(38)(B)(ii)), the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the plan,

...

The key to this early out is that it’s an involuntary distribution that results because the plan’s sponsor or fiduciary has removed the insurance contract from the plan’s investment alternatives.

Before SECURE, among the many challenges of including an in-plan annuity contract as a retirement plan’s investment alternative was what might have been the imprudence of allowing a participant to devote a portion of one’s retirement savings to a contract that might become stranded because the plan discontinues the contract as an investment alternative. And some worry that a desire not to discontinue an annuity contract might lead a fiduciary to continue service arrangements a prudent fiduciary ought to replace.

Before SECURE, many fiduciaries worried that allowing an annuity alternative impedes opportunities to select investment and service providers. For example, selecting a new recordkeeper might mean annuity contracts, especially guaranteed-lifetime-withdrawal-benefit or “GLWB” contracts, placed by a preceding recordkeeper or its affiliate will be discontinued. Many participants whose contracts are discontinued might feel their plan accounts were charged for insurance rights they never had an opportunity to use.

The 2019 Act coins a new term, a lifetime-income investment, and for it allows a way to get around a retirement plan’s restraints against a too-early payout or distribution. Congress’s hope is that the availability of these exit strategies might help persuade some plans’ sponsors to try allowing an annuity contract as a participant-directed investment alternative.

If a lifetime-income investment no longer is a plan’s investment alternative, the plan could allow:

a direct rollover of the annuity contract to another eligible retirement plan, which could include an Individual Retirement Annuity; or

a distribution of that lifetime-income investment as a qualified plan distribution annuity contract—one that preserves benefits and restrictions.

To get an exception from a plan’s restriction against a too-early distribution (or from an extra 10% tax on a too-early distribution), either kind of extraordinary distribution must be made within 90 days from when the lifetime-income investment no longer is allowed as the plan’s investment alternative.

I.R.C. (26 U.S.C.) § 401(a)(38); § 401(k)(2)(B)(i)(VI); § 402(c)(8)(B)(iii)-(vi); § 403(b)(11)(D); § 457(d)(1)(A)(iv).

This is not advice to anyone.