Inservice W/D prior to age 59 1/2

[Guest S FISCHER]

Can a 401(k) plan document include inservice withdrawals at age 55? If so and a participant rolls to an IRA is there a penalty?

[Appleby]

A 401(k) plan can include an in-service withdrawal at any age prior to the retirement age as stated in the plan.

If the amount is rolled to an IRA and then disturbed, the 10 percent early withdrawal penalty rules will apply.

Note however, that some plans may restrict the in-service withdrawal to hardship. If this is the case, the amount is not rollover eligible, to the extent that it includes elective deferrals ( i.e. hardship withdrawals of elective deferrals are not rollover eligible)

Effective 2002- all hardship withdrawals will be non-rollover eligible.

[KJohnson]

For pure 401(k) amounts, hardship is the only permitted "in-service" distribution for individuals under 59 1/2 pursuant to 401(k)(2)(B).

As Appleby points out, hardships from 401(k) Plans are no longer elgible rollover distributions. Although this change in the law was effective in 1999, the IRS allowed transitional relief for that year so Plans were not forced to comply until 2000.

Many 401(k) Plans also have matching 401(m) and regular 401(a) profit sharing contribuitons. The rules on in-service distributions from these "parts" of the Plan are different. Generally, an in-service distribution will be allowed for these contributions at a stated age(even prior to 59 1/2), on account of hardshp, after five years of participation, or for money that has been "seasoned" for two or more years. Of course, your plan must contain provisions that allow such in-service distributions. You generally should be able to roll over these in-service distributions.

[MWeddell]

KJohnson's summary is accurate, but perhaps the rollover treatment of hardship withdrawals should be clarified, not that it directly relates to the original question.

Effective sometime between 1/1/1999 and 1/1/2000, plan administrators were required to treat hardship distributions of elective deferrals as not eligible for rollover. The new tax law would make all hardship distributions not eligible for rollover. The new law is scheduled to become effective 1/1/2002 although the conference committee report pretty much invites the Secretary of the Treasury to delay the effective date, so we might see that happen again.