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In-Service Withdrawal Violation


Dougsbpc

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We took over the administration of a 20 participant 401(k) plan about 6 months ago.

The plan usesĀ one of the popular investment platforms. It works very well for the 401(k) plan. Apparently, over the past 3 years up to 10 participants (all under age 59 1/2) have taken in-service distributions of all sources (including salary deferrals). They claim they all wanted to move the accounts to their IRAs that are invested only in no load funds and have no fees. We did notice two participants took lump sums and did not directly transfer to IRAs.

Could this be corrected under VCP? If all just transferred to IRAs perhaps the fix would have been moving the amounts back to the plan (with earnings/losses). However, the lump sums pose a problem. Any thoughts?

Thanks.

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I do have plans that permit in-service distributions prior to age 59 1/2, as long as certain criteria (not very stringent) are satisfied. Like the funds have been aged 2 years or more. Are we to assume that your document has no such permissions? Although admittedly the salary deferral part of it is a problem.

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There are only very limited circumstances in which deferrals can be withdrawn - attainment of age 59-1/2, termination of employment, financial hardship, or termination of the plan. If none of those have occurred then you have an operational failure. If the failure is significant (sound like it is to me) then you would have to correct under VCP since it is more than 2 years after the failure. The correction will likely be to have the employees return the overpayments to the plan. For payments that have already been taxed, return of the payment will create after-tax basis in the plan.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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