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Elimination of In-service Withdrawals


Guest lforesz
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Guest lforesz

Hi,

As a result of the GUST restatement process, we have quite a few employers deciding that they want to eliminate pre-59 1/2 in-service withdrawals and hardship withdrawals of profit sharing money and retain this feature only for 401(k) monies (for the hardship only).

We're not sure if this is a 411(d)(6) right that needs to protected for accrued balances. Any ideas?

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Guest Rae

Philip,

My understanding is the same as yours--i.e. the relief only applies to the elimination of extended benefit payment options like annuities and installments. As far as I know, the right to in-service withdrawals (non-hardship) is a protected form of benefit, and the 411(d)(6) relief doesn't apply to the timing of when the benefit is available for payment.

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If you are referring to section (e) of Q&A 2 I think it is because you would not be making an "otherwise identical" lump sum available. For example, you could have a plan that has an in-service installment and in-service lump sum distribution provisions. You could eliminate the installment because the lump sum would be "otherwise identical". However, while you can change the form of the benefit to a lump sum, you generally cannot change the timing of the commencement of a benefit under the 411.(d)(4) regs.

Of course there are exceptions to this rule which include 401(k) hardships, 70 1/2 distributions for non-5% owners and certain deminimus changes.

In other words, to eliminate an optional form under section (e) of Q&A 2 it is my understanding that you have to have a lump sum available on the same date that the eliminated optional form would have commenced.

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I agree with kjohnson. Although I may have missed something, my reading of 1.411(d)-4 does not indicate that the timing of a right to receive an optional benefit can be reduced or eliminated, except as provided. There's an example in Q&A 2 which allows only a de minimis change in the timing, and specifically mentions in-service withdrawals.

We're treating in-service withdrawals as a protected benefit, which cannot be eliminated (except for benefits accrued after the amendment, of course)

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Guest Remysis

I agree with kjohnson as well. Another way of looking at it is that subsection (e) of Q&A 2 permits you to eliminate alternative forms for taking a distribution (as long as you provide a lump sum and adequate notice of the change), but it doesn't permit you to eliminate the right to take that distribution. Hence, subsection (e) of Q&A 2 would not itself permit you to eliminate an in-service withdrawal right and, in fact, is probably never relevant to in-service withdrawals, since they are generally only available as lumpsums anyway.

Separately, subsection (B)(2) describes instances in which you can actually eliminate the right to take a distribution. Subsection (B)(2)(x) of Q&A 2 permits you to eliminate the right to take hardship withdrawals. (This reg makes clear you can eliminate hardships not only from 401(k) moneys but also from profit sharing sources.) Notably, eliminating options under this subsection is not subject to the 90-day notice requirement that applies under subsection (e). I think you are generally out of luck if you want to eliminate in-service withdrawals other than hardships.

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