COVID-19 and 457(b) Unforeseeable Emergency Distributions

Thanks to a provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), public employers may now allow their employees to access their retirement savings to help them cope with the financial impact of the COVID-19 pandemic.

Prior to the enactment of this emergency retirement plan distribution option under the CARES Act, working employees were unable to receive distributions from governmental 457(b) plans with a few exceptions, including a limited exception for an “unforeseeable emergency.”

While the existing rules for public employees to access their 457(b) accounts remain in place, the CARES Act provides more favorable distribution rules for employees impacted by coronavirus if allowed by their employers.

Under the CARES Act, public employees may make a withdrawal from their 457(b) account between January 1 – December 31, 2020, if a plan participant certifies that he or she:

  • Has been diagnosed with COVID-19;
  • Has a spouse or dependent diagnosed with COVID-19; or
  • Has suffered adverse financial consequences from being quarantined, furloughed, or laid off, or have had a reduction in work hours or been unable to work due to lack of childcare because of COVID-19.

Eligible employees can withdraw up to $100,000 from their 457(b) plans as well as any IRAs.  While taxable, these distributions qualify for special tax treatment under the CARES Act:

  • COVID-19-related distributions are not subject to the 10% early withdrawal penalty.
  • Distributions will be taxed over a three-year period unless the employee opts out of this treatment.
  • Tax payments may be made as a one-time lump sum or as a series of payments.
  • Tax withholding on a distribution may be waived by the recipient.
  • If COVID-19-related distributions are repaid via contributions to an eligible plan within three years of the distribution date, the repayments are treated as a tax-free rollover.

Although COVID-19-related distributions are now effective, public agencies will eventually need to amend affected retirement plans to comply with the CARES Act rules as well as future clarifying guidance.  Agencies have until 2024 to amend their plans to retroactively reflect these rule changes.

Having a team like the experienced benefits counsel at Hall Benefits Law on your side means having someone you can call for clarification on newly enacted rules and regulations. Call our team today at 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.
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