Is There a Small-Balance Cashout Provision for Active 457(b) Plan Participants?

Q: I am well aware of the small-balance cashout provisions that can apply to retirement plans, but I was informed recently that there is a small-balance cashout provision that can apply to active employees in a 457(b) plan. Is this correct?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Yes, Internal Revenue Code Section 457(e)(9) contains a de minimis distribution rule that can permit a distribution from a 457(b) plan for active employees. Although Section 457(e)(9) is seemingly limited to tax-exempt 457(b) plans, this distribution right is extended to governmental 457(b) plans through Section 457(d)(3).

Under the rule, a plan may make a distribution if: 1) the participant’s total benefit under the plan, excluding any rollover contributions, does not exceed the applicable dollar limit (currently $7,000); 2) no deferrals have been made for two years; and 3) the participant has not received a prior distribution under this provision.

A plan is not required to offer this de minimis distribution feature. Whether the feature is available, and how it operates, depends on the terms and administration of the particular plan. A plan may provide participants with the right to elect such a distribution, or it may permit the plan administrator to direct the distribution without the participant’s consent once the applicable requirements are satisfied.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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