In-Service Withdrawals (under 59 1/2)
Posted 04 June 2003 - 09:59 AM
Your thoughts are appreciated.
Posted 04 June 2003 - 10:52 AM
(Or maybe put another,
when the stock market tumbled
that 10% fee
looks like another loss to me)
Posted 04 June 2003 - 10:59 AM
The person puts money in, gets a match, and then withdraws the match. It doesn't make any difference to that person that there is a 10% additional tax, because the other 90% is money they otherwise wouldn't have gotten.
Posted 04 June 2003 - 08:51 PM
Sec 401 (k)(2)(B)(i) says that employer contributions made pursuant to the employee's election may not be distributable earlier than age 59.5.
I thought that meant that the employee deferrals could be distributed as part of an in-service withdrawal but I thought that employer match and profit sharing could not.
Could someone please explain this?
Posted 05 June 2003 - 12:35 AM
That is a very common misunderstanding, attributable to the use of very unfortunate wording in Section 401(k).
Because the employee is not taxed on his or her Section 401(k) contributions; those amounts are treated as (and labeled) employer contributions.
Thus, the provision that you cited merely states that the employee deferrals cannot be distributed prior to age 59-1/2; it does not operate to be a limitation upon when matching and profit sharing contributions can be distributed.
Posted 05 June 2003 - 02:22 PM
(safe harbor match or non-elective or QNEC/QMAC's are not)
Posted 06 June 2003 - 01:49 AM
Brian -- I think MGB's point about increasing participation is most important. I'd take the consulting even further and suggest that all the in-service distribution features be considered together while mulling the plan design. E.g., They should be consulted about participant loan features (yes or no; how many loans; etc.) as part of that discussion. That plan feature speaks to availibility of money, too. And, of course, the immediate tax bite and the extra 10% problems as noted in Tom P.'s good point are not problems with many loans.
Also, the admin aspects of all the in-service access could be troubling. Which money sources are available for this; vesting schedules; loan maintenance?? I don't do that stuff, but I'll bet that lots of the folks here might report that the admin aspect is key.
Posted 06 June 2003 - 10:26 AM
I think the only reason this came up is because one of the partners in the company is having money problems. He maxed out hardships and loans and he's being a pain in the ass (pardon my French) about getting as much money as he can.
The PA was concerned mainly about fiduciary exposure of letting people take almost all of their money out whenever they wanted. I told him that as long as he is pretty much following 404c, he'd probably be okay.
Posted 06 June 2003 - 10:53 AM
For the 401(a) and 401(m) moneys if the plan provides for distribution at a "stated age" that is sufficient even if you have not satisfied the "seasoned money" requirement (2 years or more) or the five years of participation. Thus, I have had no problems with the IRS approving in-service distributions at age 35 or over as a design feature (admittedly not a design feature I would typically recommend). Arguably even more events than stated age, hardship, seasoned money or five years of participation could be allowed as permissible in-service events under 1.401-1(b)(1)(ii), but I don't think the IRS takes such a broad view. Rul 71-295, 73-553.
Edited by KJohnson, 06 June 2003 - 03:41 PM.
Posted 06 June 2003 - 03:22 PM