Defining ‘Severance of Employment’ for 457(b) Plan Distributions

“I recently read your Ask the Experts column on the definition of ‘severance from employment’ for 403(b) and 401(a)/(k) plans. But what about 457(b) plans? Is the definition the same or different?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

The definition is generally the same, as Treas. Reg. § 1.457-6(b)(1) states the following:

(b)Severance from employment

(1)Employees.—

An employee has a severance from employment with the eligible employer if the employee dies, retires, or otherwise has a severance from employment with the eligible employer. See regulations under section 401(k) for additional guidance concerning severance from employment.

Thus, by referring to the 401(k) regulations, the 457(b) regulations are stating that the definition of severance from employment is the same as for 401(k) plans. So, in order to have a severance from employment in a 457(b) plan, you must no longer be employed by the employer maintaining the plan.

As stated in our prior Ask the Experts column, the employer would include all members of a controlled group under Code Section 414(c) (subject to a reasonable, good faith interpretation of these rules for governmental 457(b) plans, such as provided under IRS Notice 89-23). And note that the exception to the rule that applies to 403(b) plans, where an employee moves to an employer in a controlled group that is not eligible to sponsor a 403(b) plan and has thus incurred a severance from employment, does not apply to 457(b) plans. Thus, regardless of whether the controlled group member is eligible to sponsor a 457(b) plan or not, the employee will not have experienced a severance from employment for purposes of the 457(b) rules when he/she transfers employment between employers in the same controlled group.

However, there is one wrinkle that is unique to 457(b) plans, in that such plans are not limited to employees; independent contractors can be eligible for such plans as well. Since there is no employment relationship, an independent contractor experiences a severance from employment on the expiration of his or her contract or contracts under which he or she performs services for the eligible employer. However, if it can be reasonably anticipated that the contract will be renewed, no severance from employment has occurred.

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.