Guidance on "distributable events"

[Guest bmurphy]

Have a client who is in a non-ERISA 403b. She is looking to see if (& how) she can get her funds. Here's the facts:

1. She has congestive heart failure but is still employed (albeit in a very limited capacity).

2. She declared bankruptcy a year or so ago.

3. She is 55 years of age

Questions are as follows:

1. Does she qualify for a distribution due to disability? I know the IRS guidelines state that person must be "unable to engage in any substantial gainful activity". Because she is working only a few hours per week does that disqualify her. It's interesting that the custodian sponsoring the 403b only requires a physicians statement that the person is or will be disabled for 12 months or longer. I'm always inclined to caution clients if they don't follow the full IRS definition.

2. If she can't take funds due to disability how about finc'l hardship? I know bankruptcy in & of itself doesn't qualify unless you meet one of the 4 IRS criteria. 3. I went over this info with the employer - they really want to help this person out. They brought up this idea: what if they let the person go (in which case they've separated from service & could take a distribution) & then hired them back a few months later? I don't believe 403b's have any break in service requirements that a qualified plan might have. Never heard of this being done before.

4. Because this is a non-ERISA plan what liablity might the employer have if the employee takes a distribution that possibly is later found through an audit to have been done impropoerly? I know that the employee is on the hook for penalties but am not sure about the employer. How about the custodian (especially under the disability distribution where the physicians statement does not follow the IRS definition).

Thanks!

[joel]

What does she need the money for? Based on this answer she will satisfy the requirements for an in-service withdrawal on account of financial hardship.

[QDROphile]

Don't fall for the temptation of a sham termination.

[mbozek]

Some non ERISA 403(b) plans permit distributions of retirement annuities at any time. Need to find out the withdrawal rules. Or she could take out a loan which would not be treated as a distribution (But loan would have to be paid back). Finally if permitted under the plan, she could elect to take a distribution of substatially equal payments which would be exempt from the 10% penalty. worst case scenario is for her to terminate for health reasons and take a distribution. To limit audit risk why not permit a distribution on account of disability if the custodian gets a Dr statement conforming to the requirement of IRC 72(m)(7) that she is unable to engage in substantial gainful activity, since a 403(b) plan is not required to be administered in accodance with plan terms?