New In-Service Distributions from 457(b) Plans

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with a financial advisor from North Carolina is representative of a common inquiry related to in-service distributions from retirement plans. The advisor asked:  “Can a governmental 457(b) plan permit participants to take plan withdrawals while they are still working?” 

Highlights of the Discussion

Yes, as a result of a law change, governmental 457(b) plans now have the ability to offer in-service distributions to participants starting at age 59 ½, if the sponsor has chosen to implement the provision.  

Allowing age-59 ½ distributions was a significant change brought about by the Setting Every Community Up for Retirement Enhancement (SECURE) Act for plan years beginning after December 31, 2019. [See Division M: Bipartisan American Miners Act (Section 104) of the Further Consolidated Appropriations Act, 2020) for authorizing language.]  

In the past, 457(b) plan participants could only access their plan assets upon 

• Reaching the age for required minimum distributions,  

• Severing employment, 

• Experiencing an unforeseeable emergency, 

• Qualifying for a one-time cash-out (i.e., the account balance was $5,000 or less, and there had been no employee contributions for at least two years), 

• Termination of the plan, or 

• Divorce, pursuant to a qualified domestic relations order. 

Sponsors who offer these withdrawals must amend their plan documents. Formal amendments to incorporate the age-59 ½ in-service distributions are due by the end of the 2024 plan year. 

Conclusion

The list of distributable events for governmental 457(b) plans now includes age 59 ½ in-service distributions for sponsors that choose to offer them.