Inservice withdrawals 2 year/ 5 year aged money rule

[ccassetty]

Our ERISA attorney insists that this rule applies to employer money for all in service withdrawals, including hardship, regardless of any other requirements. So, every plan we have says that hardship and age 59 1/2 withdrawals are subject to this rule. We need to get him convinced before the EGTRRA restatement that this is only required when you don't have an age or hardship requirement.

I think when we add this to plans that have never had this requirement before it is a protected benefit issue. He says no because it's required so that is how the plan has had to operate.

I found some published guidance a few weeks ago that literally said that this rule only applies when there are no other requirements such as 59 1/2 or hardship. Now I can't find it (no snide remarks please, I'm already kicking myself for not making a note, copying it etc). Can anyone give me a cite? He won't accept the "interpretations" in the Pension Answer Book or The ERISA Outline Book. I need to quote him chapter and verse.

TIA!!!

[Kirk Maldonado]

I hate to ask an obvious question, but why don't you get yourself another ERISA attorney?

[MWeddell]

Rev. Ruling 71-224 might convince him.

[ccassetty]

Thanks, but it doesn't specifically say that the aged money rule doesn't apply, so I don't think it will work. What I had found before specifically said that when you have a hardship or age 59 1/2 requirement, the aged money rule does not apply and I think that is the only thing that will convince him. I hope someone out there can point me to it.

[QDROphile]

I agree with Mr. Maldonado. This is too basic to tolerate.

[MWeddell]

You're asking me (although it's not really you, but the attorney) to prove a negative, and I can't do that. I produced a Revenue Ruling that says one can withdraw employer contributions to a profit-sharing plan upon the occurence of a hardship with no mention of the 2-year or 5-year withdrawal rules. The reason the Revenue Ruling doesn't mention the 2-year or 5-year rules is because they don't apply. If your attorney thinks they do apply, they he ought to obligated to come up with a cite showing they do apply.

Here's another attempt. Treas. Reg. 1.401-1(b)(1)(ii)(2nd sentence) says that profit-sharing plan assets may be distributed "after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment." The 2-year and 5-year rules interpret what it means to allow distribution "after a fixed number of years" but due to the use of the word "or" don't affect distributions upon financial hardship, with is an "occurrence of some event."

I agree with the others about obtaining a new attorney, if that's within your power. It's not that bad to me that he came up with the wrong answer. It's that he refuses to reconsider his opinion and research it more carefully even when you show him reputable secondary sources showing he's wrong.

[four01kman]

1. Kirk, as always, you are the best.

2. In answer to the question, if the attorney looks at the rules for 401k hardship withdrawals, there is not additional requirement other than that in the rules. Once again, some attorneys (not you Kirk) have a tendency to "finger read".

[KJohnson]

From the 1.401-1

(ii) A profit-sharing plan is a plan established and maintained by

an employer to provide for the participation in his profits by his

employees or their beneficiaries. The plan must provide a definite

predetermined formula for allocating the contributions made to the plan

among the participants and for distributing the funds accumulated under

the plan after a fixed number of years, the attainment of a stated age,

or upon the prior occurrence of some event such as layoff, illness,

disability, retirement, death, or severance of employment. A formula for

allocating the contributions among the participants is definite if, for

example, it provides for an allocation in proportion to the basic

compensation of each participant. A plan (whether or not it contains a

definite predetermined formula for determining the profits to be shared

with the employees) does not qualify under section 401(a) if the

contributions to the plan are made at such times or in such amounts that

the plan in operation discriminates in favor of officers, shareholders,

persons whose principal duties consist in supervising the work of other

employees, or highly compensated employees. For the rules with respect

to discrimination, see Sec. Sec. 1.401-3 and 1.401-4. A profit-sharing

plan within the meaning of section 401 is primarily a plan of deferred

compensation, but the amounts allocated to the account of a participant

may be used to provide for him or his family incidental life or accident

or health insurance.

[MWeddell]

Four01kman,

The regulations that provide under what conditions a plan may pay a hardship distribution on 401(k) elective contributions are not relevant regarding under what conditions a plan may distribute other types of employer contributions.

[Kirk Maldonado]

MWeddell:

The original post said:

Our ERISA attorney insists that this rule applies to employer money for all in service withdrawals, including hardship, regardless of any other requirements.

[MWeddell]

Okay, let's clarify the original question. In the sentence that Kirk just quoted, does "employer money" refer to employee pre-tax elective contributions (technically employer contributions under the Code) or does the question refer to other types of employer contributions? Up until this post, I've been assuming that we were talking about other types of employer contributions.

If the attorney said one must comply with the 2-year or 5-year withdrawal rules for hardship withdrawals and age 59-1/2 withdrawals of elective contributions, that's really ignorant.

[ccassetty]

He is saying that this rule applies only to non-deferral type employer contributions. Our attorney has conceded that the aged money rule goes away for inservice withdrawals after NRA.

[MWeddell]

In that case, my posts apply to your situation. The hardship withdrawal portion of the 401(k) regulations won't change his mind at all because they apply to only elective contributions.

[R. Butler]

See Rev. Rul. 71-224

http://taxlinks.com/rulings/1971/revrul71-224.htm

[R. Butler]

I didn't seem MWeddel's message above. Forget my post.

[R. Butler]

Thanks, but it doesn't specifically say that the aged money rule doesn't apply, so I don't think it will work. What I had found before specifically said that when you have a hardship or age 59 1/2 requirement, the aged money rule does not apply and I think that is the only thing that will convince him. I hope someone out there can point me to it.

Did you actually try Rev. Rul. 71-224? Why don't you think the Rev. Rul. states the aged money rule doesn't apply? The Rev. Rul. states as follows:

Section 1.401-1(b)(1)(ii) of the Income Tax Regulations provides that a profit-sharing plan must provide, among other things, for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurance of some event such as layoff, illness, disability, retirement, death, or severance of employment.

The distribution of a part or all of an employee's vested interest because of the existence of bona fide hardship is an event within the ambit of section 1.401-1(b)(1)(ii) of the regulations

The word "or" is key. The distribution can be due any of the following:

1. Fixed number of years.

2. Attaiment of age, or

3. Stated event. (The Rev. Rul. says the hardship is a stated event).

[ccassetty]

We are going to try it the next time we meet with him, but I was hoping that in the meantime someone could point me to whatever it was I was looking at before.