In-Service distributioin

[Santo Gold]

Can a profit sharing plan have an in-service distribution age requirement of age 21? I know it sounds absurd, but from what I read, the age for in-service w/d can be any age prior to NRA. Does this sound OK?

[Guest Pensions in Paradise]

Can you do it? Yes

Should you do it? No

[Santo Gold]

I assume the "should" part is NO since people are going to be taking money out of this plan left and right, and it operating not really like a retirement plan? Any other drawbacks you can think of?

[david rigby]

Seems likely the IRS will treat this as a compensation program, rather than a qualified plan. Thus, they will expect amount to be subject to FICA tax and not eligible for rollover.

[Santo Gold]

It's a bad idea. Thanks for the comments

[Belgarath]

It may be a bad idea from an administrative viewpoint, but I don't necessarily agree that there's automatically a compliance issue such as Pax raises. The plans I have seen utilizing this provision are drafted to comply with the "2 year/5 year" rule of Revenue Rulings 71-295 and 68-24. The IRS routinely approves plans with this provision.

That said, most employers who allow it regret it! Causes far more trouble than it is worth, and they find it out too late.

[Santo Gold]

The employer wants to move ahead with this. From what I've researched, in-service withdrawals can have an age restriction only (on PS money). There does not have to be a service requirement (i.e., 2 years of seasoned money before a participant can take it out. Is this correct?

[jpod]

I haven't read the old revenue rulings in many years. I suggest you read them carefully, word by word, to make sure that the age contingency is permissible in all events and without any reservation by the IRS of the right to challenge a ridiculously young age (like 21) on the grounds that such a young age takes the plan out of the realm of 401(a).

[Belgarath]

I agree that according to 1.401-1(b)(1)(ii) this could be permissible. However, in this circumstance with essentially no restriction whatsoever (age 21) I share Pax's concern. Granted that I have no idea what the IRS would use for their basis in making this assertion, it does make me squeamish. I'd certainly recommend that they check with ERISA counsel first.

Why in the world does the employer want to do this? I hope you at least charge extra for distribution work/reporting!

[John Feldt ERPA CPC QPA]

This is an old thread, but there was some discussion about this last week at IRS DC Q&A session.

Isn't there a requirement that a tax-qualified profit sharing plan must be a deferred compensation plan, so the accounts are not just readily accessible to be withdrawn as soon as the funds are contributed? If that's a requirement, would a vesting schedule be enough to still allow a low age like 21 to be utilized as the criteria for in-service eligibility?

Any other thoughts on this out there?