401k distributions during employment; who governs this directive?

[Guest phactor]

I know it's the norm to not allow it. By whom? The IRS? Is it the IRS that says "it is against the law to create a 401k plan that allows distribution during employment." ? What publication discusses that? Or is that determination made by the plan sponsor?

Can the company make that decision? If not, why not? Can my company (who will be switching sponsors soon) say to the new sponsor "in creation of our new 401k plan, you will allow distribution of funds to an employee at their request" ?

This all assumes that in doing so, the employees get all the education they need with respect to the penalties, withholding, and roll-over timeframes (and much more) that are not only required, but just plain common sense.

Thank you in advance - Phil

[Tom Poje]

It is the law, found in Code section 401(k)(2) and (10)

Basically, deferrals are not permitted to be 'withdrawn' unless one has a distributable event. Being active is not considered a distributable event.

Some plans will allow an option for a hardship withdrawal of deferrals, those are supposed to be limited to some type of financial hardship.( I know down here in Florida some people think just because the neighbor has gotten a new boat or pickup truck that an immediate financial need exists, but that is not the case)

It is possible that a plan could have an option for in-service distributions of match and profit sharing contributions after meeting certain conditions, but it is certainly not required a plan have this option for in service withdrawal. with the penalties involved it usually isn't worth it.

Remember, they are referred to as retirement plans, not credit union plans in which an individual has easy acess to the money.

[Guest phactor]

With your kind and clear direction, I was able to find this (thank you!):

http://www.fourmilab.ch/ustax/www/t26-A-1-D-I-A-401.html

Now, here's why I need to know... We're a small, 35-employee company about to dump our current 401k sponsor and create a new plan with a local fin rep. We're still in the planning stage. I want to roll all my 401k funds into a Traditional IRA for the purposes of then converting it into my existing Roth IRA. I converted my old Trad IRA to this Roth several years back. I want to do it again. Therefore:

1) Can a person roll 401k funds into a Traditional IRA upon plan termination and creation of another plan?

2) How many times can you convert one or more Traditional IRAs that you might currently own (or create in the future) to a new or existing Roth IRA? Where can I find sites / publications that cover repeated conversions (over several years and with several subsequent Traditional IRAs)? or is a Trad-IRA-to-Roth-IRA conversion a one-time only allowed event?

I'm also still wondering if while-employed normal (non-hardship, non-loan) distributions can be built into the plan if it is clearly stipulated that the only direction the employee can indicate is the new (target) qualified plan, and not have any means by which s/he can touch the funds (no "easy access" to the money). I'm guessing, based on this new information, the answer is still "no." Oh well...

[MoJo]

Under 401(k)(10)(a)(i), termination of a plan when a "successor plan" is established does not give rise to a distributable event (as referenced in 401(k)(2), as pointed out by Mr. Poje). In reality, you probably aren't even terminating the plan - you are simply changing service providers (i.e. the entity that provides recordkeeping and investment services is changing, the plan itself - as a separate legal entity - is not). Of course, as part of the conversion from one service provider to another, the plan may change - and even be restated using the new service provider's plan documents - but the plan itself isn't terminating. Even if it were, the establishment of the new plan would create a successor plan, and no distribution would be permitted by the old plan.

[Guest phactor]

This is good information. Thank you both very much. It's time to print this code out (Sec. 401.) and spend a little 'quality time' perusing it.

Essentially, if at all possible, I would like to roll my 401k funds into a new Traditional IRA, at least this one time, during our ending-of-the-old-sponsor and initiation-of-the-new-sponsor, while (and most importantly) removing employees' ability to "touch' the funds and risk the withholding, and tax consequences and penalties that are possible.

We are even willing to consider termination of the company's plan entirely (not just removing the old sponsor) and then a week later designing and creating a new one, if this would work. But then again, we'd be faced with employees' risks as stated above.

Thanks again very much to both of you.

[Guest Smitty848]

If you terminate the plan and set up another within a week, you're still bound by the successor plan rules as stated above. I think, and others can correct me if I'm off base on this, that the rule of thumb is that the plan has to be terminated for 12 months or longer to avoid the successor plan issues, and even then, it's subject to IRS/DOL interpretation as to the reason for the termination, and setting up the same plan later on.

[MoJo]

If another plan is established within a 24 month period beginning 12 months before the plan is terminated, and ending 12 months after the plan is terminated, it is a successor plan - and hence, no in-service distirbutions may be made from the terminating plan.