Section 409A contains a very strict set of times when a NQDC plan can make distributions. They are:

(i) separation from service as determined by the Secretary (except as provided in subparagraph (B)(i)),
(ii) the date the participant becomes disabled (within the meaning of subparagraph (C)),
(iii) death,
(iv) a specified time (or pursuant to a fixed schedule) specified under the plan at the date of the deferral of such compensation,
(v) to the extent provided by the Secretary, a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, or (vi) the occurrence of an unforeseeable emergency. Death (iii) and a specified time (iv) are not legally debatable; they simply are.Like other key provisions of 409(A), disabled is specifically defining in the statute:
(C) Disabled: For purposes of subparagraph (A)(ii), a participant shall be considered disabled if the participant–(i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or
(ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the participant’s employer.

This term is tightly written, offering lawyers little interpretative wiggle room. It’s obvious that a formal medical opinion (and probably a second) is required for the client file.

Finally, there is the unforeseen emergency:
The term “unforeseeable emergency” means a severe financial hardship to the participant resulting from an illness or accident of the participant, the participant’s spouse, or a dependent (as defined in section 152(a)) of the participant, loss of the participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant.

The terminology strongly implies the “fortuity” element in an insurance contract, strongly hinting that the insured does not have the ability to take preventative measures to avoid the event.  It’s also highly likely that a medical opinion will also be required.

Next, we’ll discuss the “separation from service” requirement.

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