Brian Gallagher

In-Service Withdrawals (under 59 1/2)

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Our current Prototype allows for in-service distributions under 59 1/2 for match and profit sharing. Is there any material out there that may discuss the pro's and cons of 1) actually choosing that option for a plan or 2) benefits/drawbacks for participants?

Your thoughts are appreciated.

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Tom Poje    218

can you say 10% early withdrawal penalty?

(Or maybe put another,

people grumbled

when the stock market tumbled

that 10% fee

looks like another loss to me)

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MGB    0

The only benefit I see is to increase participation (if that is a problem). It isn't a good way to do it, but might induce some to participate that otherwise wouldn't have.

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.

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I'm confused, I ordinarily only deal with retirement distributions not 401k administration, but......

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?

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Mary Kay:

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.

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401(k) contribs (aka elective deferrals) are not allowed to be withdrawn before 59 1/2 (with a couple of exceptions--hardship, corrective distrib), but other employer contribs (401(m), 401(a)) may be allowed, if the document so permits.

(safe harbor match or non-elective or QNEC/QMAC's are not)

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Guest Paul Kelly   
Guest Paul Kelly

Mary Kay -- As to the match and "regular" PS contribs by the ER, the plan must still have some strings attached to in-service withdrawals. This is because some of the orig 401(a) regs, older than dirt but still effective, require that a PS plan essentially be for the deferral of money for some years (plural) and the Service in RR's says that means at least two years' aging is required. The resulting evolution of that reg will have the plan doc requiring that those money sources (which are technically PS ER contribs, but not k-deferrals for this purpose) be at least two years old before withdrawing, or that the participant have been in the plan for at least five years.

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.

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Honestly,

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.

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KJohnson    7

Paul,

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

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Thanks to everyone who helped clear up my misunderstanding. You made it clear without treating me like a dummy! That shows you really know your stuff.

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